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 2021
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").
19 May 2021
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 2021.
Financial Highlights
· NAV per share of $4.25 (FYE 29/02/20: $6.14)
· NAV of $329.5 million (FYE 29/02/20: $475.7 million)
Investment Policy and Liquidity
· Following the Company's losses in its real estate portfolio, the
shareholders adopted a new investment policy whereby the Company agreed to make
no further investments outside of its existing obligations or to the extent
which an investment may be made to support an existing portfolio company.
· The US and European micro-cap portfolios have continued to navigate well
through the Covid-19 pandemic, delivering a net increase of 8 and 6 cents per
share, respectively. However, lingering uncertainty in the market has delayed
realisations.
· 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 has
been arranged:
o The remaining balance of the Company's Senior Debt with Guggenheim was
acquired by clients and funds advised and sub-advised by Cohanzick Management,
LLC and CrossingBridge Advisors, LLC ("Cohanzick").
o Subsequently, in a signed amendment, dated 14th May 2021 (post-period end),
to the Senior Debt agreement, Cohanzick agreed with the Company that, subject
to the satisfaction of certain conditions precedent (including shareholder
approval) by 25 June 2021 of the $31.5 million facility with Jay Jordan and
David Zalaznick referred to below:
o the maturity date of the Senior Debt would be deferred by one year until 12
June 2022; and
o the Company would be permitted to redeem the CULS in full on their maturity
date of 30 July 2021 (albeit the CULS are a subordinate security to the Senior
Debt).
o On 14 May 2021 (post-period end), David Zalaznick and Jay Jordan (the "JZAI
Founders") signed an agreement to make available to the Company, directly or
through their affiliates, a facility of $31.5 million, bearing interest at 6%
(the same rate payable on the CULS), and maturing on 11 September 2022, which
is subject to shareholder approval.
o In addition, on 14 May 2021 (post-period end), the JZAI Founders agreed to
assume all of the Company's remaining commitments to Orangewood Partners II-A,
L.P. (the "Orangewood Fund") in the amount of US$12.35 million, and which is
also subject to shareholder approval.
Outlook
· The Board believes that, subject to shareholder approval, the
restructuring of JZCP's Senior Debt and liquidity facility agreed with the JZAI
Founders will significantly increase the Company's ability to execute its new
investment policy.
· However, JZCP's senior debt and the new liquidity facility mature prior
to the 1 October 2022 redemption date of the Company's zero dividend preference
shares. Unless these instruments are refinanced, extended, or, as realisations
permit, paid off, continued uncertainty will exist with regards to their
redemption. As a result of JZCP's potential inability to redeem its debt on its
stated maturities, the Directors' report accompanying these results disclose a
material uncertainty as to the Company's ability to continue as a going
concern.
· Several realisations are expected during the coming financial year;
however, the Board remains cautious as uncertainties related to Covid-19 are
still prevalent in the market, the realisation of assets in the Company's
co-investment portfolio is controlled by third parties and certain portfolio
investments may require more time to achieve their maximum realisable values.
· That being said, the Board would like shareholders and the market to be
aware that it understands conditional agreement subject to closing has been
reached in relation to the sale of one of its portfolio companies which would,
if its conditions are satisfied, result in the Company receiving consideration
of approximately US$40 million and which reflects a premium to carrying asset
value.
David Macfarlane, Chairman of JZCP, said: "We continue to remain focused on
executing the new Investment Policy, with the intention of realising the
maximum value of the Company's investments and, after repaying its debt
obligations, returning capital to shareholders.
However, the successful execution of the new Investment Policy remains
dependent upon the timing, quantum and ultimate success of future realisations.
Further time is needed to maximise the value of these realisations, which
contributes to uncertainty regarding the Company's ability to meet its debt
maturities. However, the Board firmly believes that the extension of the
Company's Senior Debt, the new facility from the JZAI Founders, and the
assumption of the Company's remaining commitment to the Orangewood Fund go a
long way in buying the time for the Company to maximise the value of its
portfolio.
The Board and the Investment Adviser are optimistic that the Company is set to
continue on a positive trajectory over the coming year and that its obligations
will be repaid in full, with a significant amount of capital ultimately
returned to shareholders."
Listing Rule 9.6.11R(3) disclosure:
In accordance with Listing Rule 9.6.11(3), JZCP announces a change to Ms Sharon
Parr's director responsibilities, having been appointed as a member of JZCP's
Disclosure Team.
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.
Sam Walden
+44 (0)
1481 745385
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 to selectively supporting 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
2021, which show that the Company's NAV fell from $4.60 at 31 August 2020 (the
half-year end) to $4.25 at 28 February 2021 (as a further comparison, the
Company's NAV at 29 February 2020 was $6.14).
As announced in the Interim Results, the reduction in NAV during the first six
months of the financial year was mainly due to large losses in the real estate
portfolio. The much smaller write-down during the second six- month period of
the financial year is primarily attributable to the Company recognizing its
last remaining losses in the real estate portfolio, offset partially by strong
performance in certain US and European micro-cap investments.
Investment Policy and Liquidity
Following the Company's losses in its real estate portfolio, the shareholders
adopted a new investment policy whereby the Company agreed to make no further
investments outside of its existing obligations or to the extent which an
investment may be made to support an existing portfolio company. The intention
of this policy change was for the Company to realise the maximum value of its
investments and, after repaying its debt obligations, to return capital to
shareholders.
As of 28 February 2021, the Company's debt obligations are: (i) senior debt
("Senior Debt") of $68.5m (originally due 12 June 2021); (ii) Convertible
Unsecured Loan Stock ("CULS") of £38.9m ($54.1m) due 30 July 2021; and (iii)
Zero Dividend Preference Shares ("ZDPs") of £57.6m ($80.2m) (due 1 October
2022).
While our US and European micro-cap portfolios have continued to navigate well
through the COVID-19 pandemic, as we foreshadowed in the Interim Results,
lingering uncertainty in the market has delayed realisations. 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 has been
arranged:
· The remaining balance of the Company's Senior Debt with Guggenheim was
acquired by clients and funds advised and sub-advised by Cohanzick Management,
LLC and CrossingBridge Advisors, LLC ("Cohanzick"); and
· Subsequently, in a signed amendment, dated 14 May 2021 and announced to
the market on 17 May 2021, to the Senior Debt agreement, Cohanzick agreed with
the Company that, subject to the satisfaction of certain conditions precedent
(including shareholder approval by 25 June 2021 of the $31.5 million facility
with Jay Jordan and David Zalaznick referred to below):
· the maturity date of the Senior Debt would be deferred by one year until
12 June 2022; and
· the Company would be permitted to redeem the CULS in full on their
maturity date of 30 July 2021 (albeit the CULS are a subordinate security to
the Senior Debt).
Although this amendment with Cohanzick comes at an increased interest cost, it
is one that the Investment Adviser and Board believe to be compensated by the
additional time afforded to maximise the value of the portfolio.
In addition, Jay Jordan and David Zalaznick signed an agreement, dated 14 May
2021 which was also announced to the market on 17 May 2021, to make available
to the Company, directly or through their affiliates, a facility of $31.5
million, bearing interest at 6% (the same rate payable on the CULS), and
maturing on 11 September 2022. As a related party transaction, this facility
will require shareholder approval, following a circular, to be posted to
shareholders before no later than early June, setting out the particulars of
the transaction. Contemplated within this circular will be another proposal for
Jay Jordan and David Zalaznick (or their affiliates) to relieve the Company of
its remaining $12.35 million commitment to the Orangewood Fund (approximately
$2.99 million of this commitment is "funded" and approximately $9.36 million is
"unfunded").
Further details of these plans were set out in an announcement issued by the
Company on 17 May 2021. The Board believes that these plans significantly
increase the Company's ability to execute its new investment policy. However,
the Senior Debt and new facility from Jay Jordan and David Zalaznick mature
prior to the 1 October 2022 redemption date of the ZDPs. Unless these three
instruments are refinanced, extended, or, as realisations permit, paid off,
continued uncertainty will exist with regards to their redemption. As a result
of the Company's potential inability to redeem its debt on its stated
maturities, the Directors' report accompanying these results disclose 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 portfolio companies have continued to perform
well throughout the COVID-19 pandemic and our expectation remains that no
lasting damage will have been done to any of these businesses.
Although certain portfolio investments have been set back temporarily, others,
including Felix Storch, have experienced record performance (the Company
remains interested in Felix Storch through its Special LP interest in the
Secondary Fund). During the second half of the financial year, the Company
realised its interest in Eliantus, a build-up of solar power plants in Spain,
at a 2.0x gross multiple of invested capital. As previously reported, the
Company also partially realised six US micro-cap portfolio assets through the
secondary sale in December 2020 and remains invested in the continuing
performance of these assets through the Company's Special LP interest in the
Secondary Fund.
Several realisations are expected during the coming financial year; however,
the Board remains cautious as uncertainties related to COVID-19 are still
prevalent in the market, the realisation of assets in the Company's
co-investment portfolio is controlled by third parties and certain portfolio
investments may require more time to achieve their maximum realisable values.
That being said, the Board would like shareholders and the market to be aware
that it understands conditional agreement subject to closing has been reached
in relation to the sale of one of its portfolio companies which would, if its
conditions are satisfied, result in the Company receiving consideration of
approximately $40 million and which reflects a premium to carrying asset value.
The Company will of course make further announcements as required in relation
to the status of the transaction.
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.
Each asset continues to be held on the Company's balance sheet at the last
appraised value (i.e., as of 31 August 2020), which implies approximate equity
value to the Company of $22.5 million in aggregate. The difference from the
real estate equity value of $47.4 million on the Company's balance sheet at 31
August 2020 is largely due to the sale of the Greenpoint asset and the full
write-down of two other properties.
With regards to Esperante, the Board is pleased to report that post year end
the Company closed a joint venture agreement with affiliates of the Related
Companies ("Related"); we believe that a partnership with Related will create
significant additional value for the Company at Esperante going forward. As
part of the joint venture, Related purchased approximately 49.9% of the equity
of Esperante while the current ownership (which includes the Company) retained
approximately 50.1% of the equity.
Outlook
The successful execution of the new Investment Policy remains dependent upon
the timing, quantum and ultimate success of future realisations. As stated
above, further time is needed to maximise the value of these realisations,
which contributes to uncertainty regarding the Company's ability to meet its
impending debt maturities. However, the Board firmly believes that the
extension of the Company's Senior Debt, the new facility from Jay Jordan and
David Zalaznick, and the relief of the Company's remaining commitment to the
Orangewood Fund go a long way in buying the time for the Company to maximise
the value of its portfolio. The Board remains optimistic that all the Company's
obligations will be repaid in full and that ultimately a significant amount of
capital will be returned to shareholders.
David Macfarlane
Chairman
18 May 2021
Investment Adviser's Report
Dear Fellow Shareholders,
We have made substantial progress towards our stated goal of realizing
investments to generate cash to pay debt, relieving JZCP of unfunded
commitments and supporting our existing portfolio to maximize returns to
shareholders. As you will read in the Chairman's Statement, we have amended our
credit agreement to extend its maturity in addition to personally extending
additional credit to JZCP to enable the Company to repay its CULS on time.
Specifically, we agreed the extension of JZCP's remaining senior debt through
June 2022 and agreed to provide a $31.5 million liquidity facility at 6.0%
interest to JZCP (i.e., at the same rate as the CULS), subject to shareholder
approval. These transactions will enable JZCP to pay off its CULS in full and
on their stated due date, affording us further time to maximize the value of
our portfolio as we approach the extended maturity of the balance of our senior
debt and the maturity of the ZDPs.
Our US and European micro-cap portfolios continue to perform solidly through
COVID-19, and, as previously announced, several of our assets have even
outperformed in the current climate, hitting record monthly sales and EBITDA
figures.
As discussed in the interim financials, most of our real estate portfolio was
in a precarious position pre- COVID-19 and has now been written down to zero.
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. As previously
reported, in October 2020, JZCP sold its investment in the Greenpoint property,
receiving approximately $13.6 million in sale proceeds.
With regards to Esperante, we are pleased to report that post-period we closed
a joint venture agreement with affiliates of the Related Companies ("Related");
we believe that a partnership with Related will create significant additional
value for JZCP at Esperante going forward. As part of the joint venture,
Related purchased approximately 49.9% of the equity of Esperante while the
current ownership (which includes JZCP) retained approximately 50.1% of the
equity. We look forward to reporting further on our progress with Related in
the coming months.
As of 28 February 2021, our US micro-cap portfolio consisted of 18 businesses,
which includes four 'verticals' and 10 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 decreased $1.89, or 30.8%, during the twelve-month period.
NAV per Ordinary share as of 1 March $6.14
2020
Change in NAV due to capital gains and accrued income
+ US micro-cap 0.08
+ European micro-cap 0.06
- Real estate (1.60)
Other increases/(decreases) in NAV
+ Change in CULS fair value 0.02
- Foreign exchange effect (0.03)
- Finance costs (0.23)
- Expenses (0.19)
NAV per Ordinary share as of 28 $4.25
February 2021
The US micro-cap portfolio navigated the COVID-19 environment well during the
twelve-month period, delivering a net increase of 8 cents per share. This was
primarily due to net accrued income of 8 cents, increased earnings at Felix
Storch (10 cents, prior to being sold into the Secondary Fund) and co-
investments Salter (26 cents) and New Vitality (3 cents). We also received 1
cent of escrow payments during the year.
Offsetting these increases were decreases at Nationwide (5 cents),
co-investments Igloo, Suzo Happ and Vitalyst (2 cents, 16 cents and 3 cents,
respectively), an aggregate write-down upon the sale of JZCP's interest in
three Orangewood assets (K2 II, Taco Bell and George) of 3 cents and the net
write down of 11 cents on the sale of six US microcap assets into the Secondary
Fund (as previously reported, JZCP experienced a 52 cent write down upon
finalizing the secondary sale in December 2020. At 28 February 2021, the assets
within the Secondary Fund have been written up, with JZCP's special limited
partnership interest increasing in value by 41 cents per share to JZCP).
Our European portfolio also performed well through COVID-19 during the year,
posting a net increase of 6 cents, primarily due to net accrued income of 4
cent and net write-ups at European portfolio companies of 2 cents.
The real estate portfolio experienced a net decrease of $1.60, due to the
write-off of large portions of our Brooklyn portfolio and a significant portion
of our Wynwood 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.
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.
28.2.2021 31.8.2020 29.2.2020 28.2.2018 29.2.2016
Share price (in GBP) £0.78 £0.89 £2.58 £4.51 £3.97
NAV per share (in USD) $4.25 $4.60 $6.14 $9.98 $10.15
NAV to market price discount 74.3% 74.1% 46.3% 37.7% 45.5%
6 month 1 year 3 year 5 year
return return return return
Dividends paid (in USD) - - - $0.305
Total Shareholders' return (GBP)1 (12.36%) (69.77%) (82.71%) (79.33%)
Total NAV return per share (USD)1 (7.61%) (30.78%) (57.41%) (56.87%)
Adjusted NAV return per share (USD) (7.61%) (30.78%) (58.18%) (57.64%)
1,2
1Total returns are cumulative and assume that dividends were reinvested.
2Adjusted NAV returns reflect the return per share before the subsequent
appreciation from the buyback of ordinary shares at a discount .
Portfolio Summary
Our portfolio is well-diversified by asset type and geography, with 35 US and
European micro-cap investments across eleven industries. The European portfolio
itself is well-diversified geographically across Spain, Italy, Portugal,
Luxembourg, Scandinavia and the UK.
Below is a summary of JZCP's assets and liabilities at 28 February 2021 as
compared to 29 February 2020. An explanation of the changes in the portfolio
follows:
28.2.2021 29.2.2020
US$'000 US$'000
US micro-cap portfolio 299,339 404,880
European micro-cap portfolio 117,781 102,591
Real estate portfolio 23,376 158,712
Other investments 23,147 22,603
Total Private Investments 463,643 688,786
Treasury bills 3,394 3,386
Cash and cash equivalents 59,784 52,912
Total Listed Investments and Cash 63,178 56,298
Other assets 22 119
Total Assets 526,843 745,203
Zero Dividend Preferred shares 74,303 64,510
Convertible Unsecured Loan Stock 52,430 49,886
Loans payable 68,694 150,362
Other liabilities 1,857 4,711
Total Liabilities 197,284 269,469
Total Net Assets 329,559 475,734
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 limited partnership 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 navigated the COVID-19 environment well during the
twelve-month period, delivering a net increase of 8 cents per share. This was
primarily due to net accrued income of 8 cents, increased earnings at Felix
Storch (10 cents, prior to being sold into the Secondary Fund) and
co-investments Salter (26 cents) and New Vitality (3 cents). We also received 1
cent of escrow payments during the year.
Offsetting these increases were decreases at Nationwide (5 cents),
co-investments Igloo, Suzo Happ and Vitalyst (2 cents, 16 cents and 3 cents,
respectively), an aggregate write-down upon the sale of JZCP's interest in
three Orangewood assets (K2 II, Taco Bell and George) of 3 cents and the net
write down of 11 cents on the sale of six US microcap assets into the Secondary
Fund (as previously reported, JZCP experienced a 52 cent write down upon
finalizing the secondary sale in December 2020. At 28 February 2021, the assets
within the Secondary Fund have been written up, with JZCP's special limited
partnership interest increasing in value by 41 cents per share to JZCP).
European Micro-Cap Portfolio
Our European portfolio also performed well through COVID-19 during the year,
posting a net increase of 6 cents, primarily due to net accrued income of 4
cent and net write-ups at European portfolio companies of 2 cents.
JZCP invests in the European micro-cap sector through its approximately 18.8%
ownership of Fund III. As of 28 February 2021, 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 outstanding team with over fifteen
years of experience investing together in European micro-cap deals.
During the year, JZCP received distributions totaling approximately ?8.0
million (approximately $9.4 million) from the refinancing and sale of Fund III
portfolio company Eliantus (see below).
In April 2020, JZCP received ?2.7 million in proceeds from the refinancing of
Fund III portfolio company, Eliantus, which issued its second project bond
backed by solar power plants in Spain. In September 2020, JZCP received a
further ?5.3 million in proceeds from the sale of Eliantus to Sonnedix, an
independent solar power producer which develops, builds, owns and operates
solar power plants globally, including in Italy, France, Spain, USA/Puerto
Rico, Chile, South Africa and Japan. Including previously distributed proceeds
and future escrows/earn-outs, Fund III has realized a gross multiple of
invested capital ("MOIC") of approximately 2.0x.
In May 2021 (post year-end), JZCP received approximately $2.3 million in
deferred gross proceeds from its sale of Factor Energia in November 2017.
Real estate Portfolio
As discussed in the interim financials, most of our real estate portfolio was
in a precarious position pre-COVID-19 and has now been written down to zero.
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. As previously
reported, in October 2020, JZCP sold its investment in the Greenpoint property,
receiving approximately $13.6 million in sale proceeds.
With regards to Esperante, we are pleased to report that post-period we closed
a joint venture agreement with affiliates of the Related Companies ("Related");
we believe that a partnership with Related will create significant additional
value for JZCP at Esperante going forward. As part of the joint venture,
Related purchased approximately 49.9% of the equity of Esperante while the
current ownership (which includes JZCP) retained approximately 50.1% of the
equity. We look forward to reporting further on our progress with Related 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 last fiscal year, Spruceview received a commitment of $124 million,
the first tranche of an anticipated total additional commitment of $800
million, for a portfolio of alternative private equity investments for a
Mexican trust (or "CERPI"). In addition, the firm launched a third private
markets fund, focused on co-investment opportunities in the US, with current
commitments of $49 million. The firm also received additional commitments to
its second private markets fund, as well as additional contributions to the
pension plans to which it provides advisory services.
During the period, 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, a
European private credit fund-of-funds, and a US middle market private equity
fund-of-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 17 investment, business and product
development, legal and operations professionals.
Realisations
Secondary Sale
On December 4, 2020, JZCP closed the sale of its interests in certain US
microcap portfolio companies (the "Secondary Sale") to a secondary fund led by
Hamilton Lane Advisors, LLC. ("Hamilton Lane"), one of the world's largest
asset management firms.
The Secondary Sale marked a significant milestone towards the delivery of the
Company's previously announced strategy of realizing value from its investment
portfolio and paying down a substantial portion of its senior debt.
The US microcap assets sold as part of the Secondary Sale include JZCP's
interests in each of Flex Pack, Flow Controls, Testing Services, Felix Storch,
Peaceable and TierPoint (together, the "US Microcap Portfolio Companies"). In
return, JZCP received aggregate consideration of: (i) $90 million in cash (less
fees and expenses) and (ii) a special limited partner interest in the Secondary
Fund. After Hamilton Lane receives a 1.4x preferred return on its invested
capital, JZCP's special limited partner interest entitles JZCP to receive (i)
95% of all distributions until receiving an additional $67.6 million in
proceeds and (ii) 37.5% of any upside thereafter.
The full potential commitment by the Secondary Investors to the Secondary Fund
is $110 million in aggregate. Of this $110 million commitment, $90 million was
funded at close in December 2020 to facilitate the Secondary Fund's acquisition
of the US Microcap Portfolio Companies from JZCP.
As the balance of the $20 million in remaining committed capital is deployed to
execute the respective acquisition strategies of the US Microcap Portfolio
Companies, JZCP expects that the value of its special limited partner interest
should increase in the near to medium term. As mentioned above, once Hamilton
Lane's preferred return of 1.4x is met, 95% of all value (up to $67.6 million
in additional proceeds) accrues to JZCP. Thereafter, the Company continues to
benefit by sharing in 37.5% of any remaining upside.
K2 II and ABTB (Taco Bell)
In June 2020, JZCP sold its interests in K2 II and ABTB at approximately NAV,
receiving approximately $18.6 million in net proceeds.
Orangewood Fund
During the year and post year-end, JZCP was relieved of $11.65 million of its
original $24 million commitment to the Orangewood Fund. JZCP received
approximately $6.9 million in proceeds from selling down the "funded portion"
of this $11.65 million commitment as well as from investor re-allocations from
the final close of the Orangewood Fund (the $6.9 million represents a portion
of JZCP's funded cost plus 8.0% "cost to carry"). Subject to shareholder
approval, JZCP intends to sell down in full its remaining $12.35 million
commitment to the Orangewood Fund in the very near term.
CERPI
In August 2020, JZCP received approximately $1.3 million in proceeds from
selling its interest in the CERPI, a fund managed by Spruceview. In addition to
having received back its approximate cost in the CERPI, JZCP was relieved of up
to approximately $7.3 million in unfunded commitments and potential future
commitments to the CERPI.
Salter Labs
In September 2020, JZCP received a $4.4 million distribution of refinancing
proceeds from Salter.
Eliantus
During the year, JZCP received distributions totaling approximately ?8.0
million (approximately $9.4 million) from the refinancing and sale of Fund III
portfolio company Eliantus (see below).
In April 2020, JZCP received ?2.7 million in proceeds from the refinancing of
Fund III portfolio company, Eliantus, which issued its second project bond
backed by solar power plants in Spain. In September 2020, JZCP received a
further ?5.3 million in proceeds from the sale of Eliantus to Sonnedix, an
independent solar power producer which develops, builds, owns and operates
solar power plants globally, including in Italy, France, Spain, USA/Puerto
Rico, Chile, South Africa and Japan. Including previously distributed proceeds
and future escrows/earn-outs, Fund III has realized a gross multiple of
invested capital ("MOIC") of approximately 2.0x.
Greenpoint
In October 2020, JZCP sold its investment in the Greenpoint property, receiving
approximately $13.6 million in sale proceeds.
George Industries
In April 2021, JZCP sold its investment in George, receiving approximately $9.5
million in sale proceeds.
Factor Energia
In May 2021 (post year-end), JZCP received approximately $2.3 million in
deferred gross proceeds from its sale of Factor Energia in November 2017.
Outlook
While it has been a challenging year, especially for the real estate portfolio,
we believe that JZCP's outlook has improved significantly and will continue to
get better over the course of 2021. The US and European microcap portfolios
have performed well and our expectation is that they will continue to
contribute to NAV growth.
We have restructured JZCP's senior debt to allow for the repayment of the CULS.
This was accomplished by extending the maturity of our senior loan by one year
and by affiliates of the Investment Adviser making available a $31.5 million
credit facility at 6.0% interest (i.e., the same rate as the CULS) to the
Company. This facility matures behind the extended senior debt and in front of
the ZDPs.
We see significant value to be realized from our US and European microcap
portfolios and will continue to selectively invest in these portfolios, 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 announcements regarding these potentially significant
liquidity events in the near future.
Thank you again for your continued support through a difficult period. We
remain dedicated to maximizing value for our fellow ordinary shareholders.
Yours faithfully,
Jordan/Zalaznick Advisers, Inc.
18 May 2021
Investment Review
The following investment review focuses on JZCP's largest investments (by
value) in the US micro-cap and also provides further analysis of the European
micro-cap and real estate portfolios.
US MICRO-CAP
Industrial Service Solutions ("ISS")
Portfolio: US Micro-cap (Vertical)
Date of Initial Investment: June 2011
Website: www.iss-na.com
Cost 28.2.2021 $48.2 million
Valuation 28.2.2021 $95.9 million
The investment strategy for Industrial Service Solutions ("ISS") is to build a
uniquely positioned industrial repair, service and manufacturing holding
company with multiple value propositions across diversified industries.
ISS provides a broad set of services to critical-to-process equipment. These
services include: on-site mechanical and repair, regionally based shop
services, quality assurance and quality control inspection, testing, and parts
supply, rental and remanufacturing. The company also sells parts and supplies
for the products it services.
ISS serves a wide variety of industries, such as pulp and paper; petrochemical;
tire and rubber; oil and gas; power generation; cement; metals and mining;
water and waste water; and other industrial and commercial markets.
With hundreds of dedicated and skilled technicians, machinists, craftsmen,
project leaders and application engineers, ISS has the experience and talent to
deliver high-quality work on schedule and on budget. The increasing complexity
of equipment in industrial settings, along with fewer maintenance staff at
these plants, should encourage growth in ISS' customers' needs. This large and
very fragmented industry is well suited for a consolidation strategy.
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 limited partner 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 $72.2 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.
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.
Further information can be found at www.peaceablestreet.com
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
JZHL Secondary Fund Valuation As At 28 February 2021:
JZHL JZHL
Cost1 Valuation
US Micro-Cap Investments $'000s $'000s
ACW Flex Pack 11,205 10,000
Felix Storch 24,500 72,000
Flow Control 15,115 16,679
Peaceable Street Capital 36,541 36,541
Testing Services 23,426 30,000
Tierpoint 46,813 46,813
Total 157,600 212,033
Less interests of Hamilton Lane and other secondary investors (139,879)
JZCP's interest in the Secondary Fund 72,154
1The cost of the JZHL's investments represent the agreed transfer value from
JZCP to JZHL.
Deflecto
Portfolio: US Micro-cap (Co-investments)
Sector: Consumer Products
Acquisition Date: July 2018
Website: www.deflecto.com
Cost 28.2.2021 $40.1 million
Valuation 28.2.2021 $39.9 million
Deflecto is a diversified designer, distributor and manufacturer of consumer
and commercial products operating across five industry segments. The company's
customers include major retailers, wholesalers and OEMs including major big box
and online retailers.
Deflecto is the world's largest chair mat, bicycle reflector and dryer venting
manufacturer and a global leader in sign and literature holders and office
workspace accessories.
Added value is expected from the implementation of business processes to
simplify operations and improve profitability. Increased revenues and lower
costs are expected by focusing on largest customers and most popular products.
In 2018, Deflecto completed the acquisition of Evriholder Products which is
currently run as a standalone operating company. Evriholder has expertise in
managing retail relationships, new product introductions and has an
international supply chain.
Salter Labs (incorporating SunMed)
Portfolio: US Micro-cap (Co-investments)
Sector: Respiratory medical products
Acquisition Date: October 2010
Website: salterlabs.com, sun-med.com
Cost 28.2.2021 $12.4 million
Valuation 28.2.2021 $37.6 million
Salter Labs (incorporating SunMed) is a manufacturer and distributor of high
quality medical devices for use in hospitals and healthcare facilities
worldwide. SunMed's products includes airway management, anaesthesia,
respiratory, resuscitation/ ventilation, diagnostics, oxygen delivery and
surgical care products. In addition to the SunMed brand, Ventlab and Ethox
Medical branded products are part of the product range.
The company's headquarters in West Michigan, include a warehouse and
distribution center, production space, cleanroom, and administrative offices
for over 140 staff. Its overseas facility is their manufacturing hub featuring
even greater capacity. The company is rapidly growing with new, innovative
products that promote better patient care, and serves the healthcare industry
in over 40 countries.
Business Update
During a successful 2020 for Salter Labs, total value of sales increased by
approx. 47% from 2019 and adjusted EBITDA by approx. 36%.
EUROPEAN MICRO-CAP
JZCP currently invests in the European micro-cap sector through its 18.75%
stake in JZI Fund III, which completed its final fund raising in December 2015.
Previously, JZCP's investments were made through EuroMicrocap Fund 2010, L.P.
The European investment team has worked together for over ten years and has a
proprietary network of intermediaries to deliver micro-cap buy-and-build
opportunities throughout the continent.
As at 28 February 2021, JZI Fund III was invested in 13 European micro-cap
companies. The portfolio has five investments in Spain, two in Scandinavia, UK
and Italy and one each in PortugaI and Luxembourg.
Summary of JZCP's investments in JZI Fund III's Investment Portfolio at 28
February 2021
Cost Valuation1 Valuation1
Company Industry 28.2.2021 28.2.2021 28.2.2021
Euro'000 Euro'000 US$'000
S.A.C S.A.C is an operational van leasing company 3,487 7,536 9,147
in Denmark, specialising in providing vans on
operational lease contracts to large
engineering companies.
Fincontinuo Fincontinuo is an Italian provider of 5,438 8,625 10,469
Cessione del Quinto ("CdQ") personal loans.
CDQ loans are salary-backed and are a
uniquely low risk market niche.
Collingwood A niche UK motor insurer with operations in 3,015 2,912 3,534
Newcastle and Gibraltar.
myLender myLender is a Finnish provider of unsecured 4,857 4,500 5,462
personal lending products.
Alianzas en Alianzas is a specialised steel service 3,938 3,975 4,825
Aceros centre business in Spain. The company is
unique due to its combination of strategic
asset acquisitions at a discount, its low
cost structure and the management's
extensive know-how/industry relationships.
ERSI ERSI operates within the reinforced steel 8,492 2,456 2,981
sector. It provides an integrated solution
to contractors, which encompasses the
entire value chain of reinforced steel used
in concrete structures.
Treee Comprised of six Italian companies, Treee 3,159 8,550 10,378
is a leading business in the treatment and
recycling of electronic goods across Italy.
Factor Factor Energia is a leading independent 3,653 10,031 12,176
Energia supplier of electricity in Spain. The
company is focused on the highly profitable
SME segment.
BlueSites Fund III has entered into a transaction 2,485 3,638 4,415
with an experienced management team to
execute a build-up strategy to acquire cell
tower land leases in Portugal.
Luxida Luxida is a build-up in the Spanish 2,667 3,938 4,779
last-mile energy distribution sector,
presenting the opportunity to acquire
high-quality assets with long-term
regulated revenues at attractive entry
multiples.
Karium Karium has a buy-and- build strategy of 4,321 11,097 13,470
consumer brands in the UK and European
personal care sector.
Union Union Financiera Asturiana ("UFASA") is a 3,174 3,720 4,515
Financiera leading independent consumer lender in Spain.
Asturiana
Guanche Guanche is a build-up in the Spanish retail 1,904 1,904 2,311
petrol station market.
Other net liabilities (7,773)
Total valuation of JZI Fund III 80,689
1JZCP's 18.75% share of Fund III gross investment valuation.
Fund III realisation - Eliantus Energy
During Q3 2020, Fund III realised its portfolio company, Eliantus, to Sonnedix,
a leading independent Solar Power Producer. The management team managed to
acquire enough small individually owned solar power producing plants to create
a portfolio of 22 ground mounted solar plants with a combined 74.7 Megawatts.
The Company received realisation proceeds of ?8.0 million, which represents a
gross multiple on invested capital of approximately 2.0x.
European Micro-Cap Debt Investments
The Company has invested in the debt of European micro-cap companies. The total
valuation of these investments at 28 February 2021 are $33.8 million.
REAL ESTATE
JZCP invests in properties through JZCP Realty Fund, a wholly owned subsidiary.
At the year-end, JZCP owns two properties with equity value, being:
Bedford Ave, Williamsburg
JZ Realty's first acquisition. A prime retail asset in northern Brooklyn. In
2016, Apple opened its first Brooklyn store occupying the prime corner retail
unit.
Esperante, West Palm Beach Florida
Esperante Corporate Center is an iconic building on the downtown West Palm
Beach skyline. The building is approximately 85% leased and the intention is to
market this property in the near/medium future.
At 28 February 2021, JZCP's real estate portfolio was valued at $23.4 million
(29 February 2020: $158.7 million).
Cost1 JZCP Property Valuation
Equity % Value2 of JZCP's
Equity3
28.2.2021 28.2.2021 28.2.2021 28.2.2021
US$'000 US$'000 US$'000
Bedford Ave, Williamsburg 17,717 59.0% 42,000 7,241
Esperante, Palm Beach Florida 14,158 59.7% 139,000 16,361
Other net liabilities (226)
Total valuation of JZ Realty 23,376
1Cost represents JZCP Realty's initial investment plus follow-on property
additions and development costs.
2Year-end valuations are based on property appraisals dated 31 August 2020,
rather than the usual 31 December date. The Board, commissioned updated
appraisals in order to take into account the effect of COVID-19 whilst
releasing the interim results. Subsequent discussions with appraisers indicate
there would be no significant change in property values between 31 August 2020
and 28 February 2021.
3Third party debt is deducted to arrive at the fair value of JZCP's equity
interests.
Investment Portfolio
28 February 2021 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:
ACW Flex Pack, LLC, Flow Controls Holding,
LLC, Testing Services Holdings, LLC3, Felix
Storch Holdings, LLC, Peaceable Street
Capital, LLC and TierPoint LLC3 (See
Investment Review for further information)
Total JZHL Secondary Fund L.P. valuation 40,965 72,154 15.4
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 48,250 95,889 20.5
valuation
US Micro-cap (Co-investments)
DEFLECTO 40,112 39,934 8.6
Deflecto designs, manufactures and sells
innovative plastic products to multiple
industry segments
GEORGE INDUSTRIES 12,179 10,635 2.3
Manufacturer of highly engineered, complex
and high tolerance products for the
aerospace, transportation, military and
other industrial markets
IGLOO3 6,040 329 0.1
Designer, manufacturer and marketer of
coolers and outdoor products
NEW VITALITY3 3,354 11,620 2.5
Direct-to-consumer provider of nutritional
supplements and personal care products
ORANGEWOOD PARTNERS II-A LP 6,070 6,070 1.3
Private fund managed by Orangewood Partners
currently invested in K2 Towers II and Exer
Urgent Care an urgent care operator
ORIZON 3,899 7,000 1.5
Manufacturer of high precision machine
parts and tools for aerospace and defence
industries
SALTER LABS3 12,362 37,640 8.1
Developer and manufacturer of respiratory
medical products and equipment for the
homecare, hospital, and sleep disorder
markets
SLOAN LED3 6,030 - -
Designer and manufacturer of LED lights and
lighting systems
VITALYST3 9,020 6,192 1.3
Provider of outsourced IT support and
training services
Total US Micro-cap (Co-investments) 99,066 119,420 25.7
US Micro-cap (Other)
AVANTE HEALTH SOLUTIONS 7,823 10,876 2.3
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 11,876 2.5
Total US Micro-cap portfolio 240,064 299,339 64.1
European Micro-cap portfolio
EUROMICROCAP FUND 2010, L.P. 169 3,279 0.7
Invested in European Micro-cap entities
JZI FUND III, L.P. 48,523 80,689 17.3
At 28 February 2021, was invested in thirteen
companies in the European micro-cap sector:
Fincontinuo, S.A.C, Collingwood, My Lender,
Alianzas en Aceros, ERSI, Treee, Factor Energia,
BlueSites, Luxida, Karium, UFASA and Guanche
(See Investment Review for further information)
Total European Micro-cap (measured at Fair 48,692 83,968 18.0
Value)
Debt Investments
DOCOUT 2,777 4,228 0.9
Provider of digitalisation, document
processing and storage services
OMBUDS 17,198 - -
Provider of personal security, asset protection and
facilities management services
TORO FINANCE 21,619 26,671 5.7
Provides short term receivables finance to
the suppliers of major Spanish companies
XACOM 2,055 2,914 0.6
Supplier of telecom products and
technologies
Debt Investments (classified at amortised 43,649 33,813 7.2
cost)
Total European Micro-cap portfolio 92,341 117,781 25.2
Real Estate portfolio
JZCP REALTY4 109,928 23,376 5.0
Facilitates JZCP's investment in US real
estate
Total Real Estate portfolio 109,928 23,376 5.0
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 31,955 21,938 4.7
Asset management company focusing primarily
on managing endowments and pension funds
Total Other investments 38,070 23,147 5.0
Listed investments
U.S. Treasury Bill - Maturity 7 October 3,393 3,394 0.7
2021
Total Listed investments 3,393 3,394 0.7
Total - portfolio 483,796 467,037 100.0
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 23).
4 JZCP invests in real estate indirectly through its investments in JZCP Realty
Ltd. JZCP owns 100% of the shares and voting rights of JZCP Realty, Ltd.
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 as 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. Ashley 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. Ashley 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. Ashley 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.
Tanja Tibaldi
Ms Tibaldi resigned from the Board on 12 August 2020.
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 2021.
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, Zero
Dividend Preference ("ZDP") shares and Convertible Unsecured Loan Stock
("CULS"). The Company's Ordinary shares, ZDP Shares and CULS are traded on the
London Stock Exchange's Specialist Fund Segment.
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:
(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 interests.
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 loss attributable to Ordinary shareholders for the year
ended 28 February 2021 was $146,175,000 (year ended 29 February 2020: loss of
$304,549,000). The net asset value ("NAV") of the Company at the year end was
$329,559,000 (29 February 2020: $475,734,000) equal to $4.25 (29 February 2020:
$6.14) per Ordinary share. The losses recorded for the years ended 28 February
2021 and 29 February 2020 are 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 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. The Board considers
this illiquidity when planning to meet its future obligations, whether
committed investments or the repayment of the debt facility or the future
repayment of CULS and 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.
COVID-19
Whilst reporting its annual results for the year ended 29 February 2020 the
Board disclosed in its Going Concern Assessment that the market conditions
generated by COVID-19 had resulted in uncertainties that, at that juncture cast
significant doubt on the Company's ability to continue as a going concern and
that they were unable to estimate the full extent and duration of the impact on
the Company.
The Board are now able to better assess how COVID-19 has impacted the Company's
investment portfolio and to assess the risks and uncertainties that the
pandemic still poses. The Board are pleased that the Company's micro-cap
portfolios have generally continued to perform well throughout the year. This
encouraging performance in the face of unprecedented circumstances gives the
Board confidence in the valuation of the portfolios and the potential for
growth and future valuation uplifts. The Real Estate portfolio has seen further
significant write downs in value in the year which can be attributed in the
main to the challenges retail real estate has faced resulting from the
pandemic.
The Board has confidence that the micro-cap portfolios will continue to perform
robustly but are mindful that prevailing market conditions may delay the
timeframe for realisations.
NAV Factors
(i) Macroeconomic Risks
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 25% (29 February 2020: 15%) of the
Company's investments are denominated in non-US dollar currencies, primarily
the euro. Also, the Company has issued debt denominated in sterling.
Fluctuations to these exchange rates will affect the NAV of the Company.
(ii) Underlying Investment Performance
The Company is reliant on the Investment Adviser to support the Company's
investment portfolio by executing suitable investment opportunities. The
Investment Adviser provides to the Board an explanation of all investment
decisions and also 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.
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.
Gearing and Financing Costs in the Real Estate Portfolio
The cost of servicing debt in the underlying real estate structures may impact
the net valuation of the real estate portfolio and subsequently the Company's
NAV. Gearing in the underlying real estate structures will increase any losses
arising from a downturn in property valuations.
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 wish 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 $23.4
million (29 February 2020: $158.7 million) now reflects the majority of write
downs that could be generated by the gearing structure and costs incurred; and
· The effect of COVID-19 on market conditions means that there are
challenges to completing corporate transactions and planned realisations may be
delayed. However, the impact of COVID-19 on the valuation of the Company's
investment portfolio valuation and the related loan covenants is considered
less of a future risk than at this juncture at the prior year end.
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 outstanding debt on maturity, including the redemption of its ZDP
shares (due 1 October 2022), nor be able to restructure/extend the debt for
redemption beyond the going concern period, 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
2021 have been prepared on a going concern basis given the Board's assessment
set out below and as the Board, with recommendation from the Audit Committee,
have a reasonable expectation that the Company has adequate resources to
continue in operational existence for the foreseeable future.
In reaching its conclusion, the Board have considered the risks that could
impact the Company's liquidity over the period to 1 October 2022. This period,
which is longer than the required period of 12 months, has been considered to
be relevant due to the repayment date for the Company's ZDP shares being
approximately 4 months after the 12-month period.
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 1
October 2022 or failing to do so can implement an alternative debt
restructuring plan that will enable the Company to repay all of its debt
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
Update on material liabilities due for settlement and post year-end restructure
The Company's material debt obligations and cash and cash equivalents at the
year end, prior year end and a forecasted position post the proposed debt
restructure (detailed below) are as follows:
31.7.20211 28.2.2021 29.2.2020
$'000 $'000 $'000
ZDP Shares - maturity date 1 October 2022 - redemption 80,527 80,527 73,569
amount of £57.6 million2
Loan Notes - maturity date 11 September 2022 31,500 - -
Senior Debt Facility - extended maturity date 12 June 2022 68,694 - -
CULS - maturity date 30 July 2021 - redemption amount of £ - 54,332 49,637
38.9 million
Senior Debt Facility - current interim maturity date 25 - 68,694 150,362
June 2021
180,721 203,553 273,568
Cash and cash equivalents held 36,600 63,178 56,298
1Forecast cash position assumes no material realisation proceeds received prior
to the CULS redemption.
2Forecast ZDP maturity Dollar amount translated using the 28.2.2021 year end
rate being £1/$1.3981.
During the year ended 28 February 2021, the Company had realisations of
investments totalling $139.5 million, this included $87.7 million from the
successfully concluded Secondary Sale of interests in certain US microcap
portfolio companies. Following these investment realisations, the Company has
repaid a total of $82.9 million of the senior debt's outstanding principal
amount.
On 23 October 2020, the Company announced that it had agreed with its senior
lenders, Guggenheim Partners (the "Original lenders") amended terms of the
senior debt facility. Under the terms of those amendments to the senior debt
facility, $40 million of the outstanding principal amount was assigned from the
original lenders to clients and funds advised by Cohanzick Management, LLC and
CrossingBridge Advisors, LLC (the "Replacement lenders"). As part of this
transaction, and at an increased interest cost, the Company secured more
advantageous covenant terms for itself, including the minimum asset coverage
covenant being reset (from not less than 4x to a lower requirement of 3.5x) and
a relaxation of rating requirements, removal of certain concentration limits,
updates to the use of proceeds requirements pertaining to asset sales to
preserve liquidity, and reduced requirements related to its real estate
collateral and reporting on investments. On 23 February 2021, the Company then
announced that the replacement lenders had acquired the remaining interest in
the Company's senior debt facility from the Original Lenders.
Post year end, the Company entered into an amendment agreement with its
replacement lenders to amend the terms of its senior debt facility which will,
among other things, extend (subject to certain conditions including shareholder
approval of the Loan Note proposal referred to below) the maturity date of the
senior debt facility by one year until 12 June 2022 and permit JZCP to repay
its CULS when they become due on their maturity date of 30 July 2021,
notwithstanding that the CULS are subordinated to the senior debt facility.
Post year end, the Company also 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. ("JZAI"),
pursuant to which they have agreed to purchase directly or through their
affiliates, subordinated, second lien loan notes totalling $31.5 million, with
an interest rate of 6 per cent. per annum and maturing on 11 September 2022
(the "Loan Notes").
Their purchase of the Loan Notes is subject to a number of conditions,
including shareholder approval of both the Loan Note proposal and a proposal
for Jay Jordan and David Zalaznick or their affiliates to assume the Company's
remaining commitment to the Orangewood Fund, with the latter also being a
requirement of the amendments to the senior debt facility.
The Board acknowledges that the new maturity date of the senior debt facility
and the Loan Notes still fall within the going concern period and therefore the
Company will still need to generate sufficient realisation proceeds, within the
period, to repay its debt obligations or make alternative debt arrangements
with lenders post 1 October 2022.
Considering the Company's projected cash position, ongoing operating costs and
the anticipated further investment required to support the Company's portfolio
the Board anticipate further proceeds of approx. $185 million are required from
the realisation of investments to enable the Company to settle its debts as
they fall due.
It is anticipated that the liquidity required to settle the debt obligations
mentioned above, and other ongoing obligations in 2022, will be generated from
realisations within the 16 month going concern period. The Company's investment
adviser, JZAI, is currently pursuing various opportunities to realise value,
these forecast realisations include several anticipated sales of micro-cap
companies. Total realisation proceeds of approximately $275 million are
forecast, over the going concern period, from the aforementioned events.
The Board continue 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 recognise, under current market conditions, the raising of the
required total realisation amount is a considerable task but remains confident
in the value of its underlying micro-cap investments and are buoyed by their
post COVID-19 performance.
The restructuring of the Company's debt structure, following satisfaction of
closing conditions, will enable the Company to realise investments in a
timeframe that will help maximise the portfolio's value. In the instance that
sufficient realisations proceeds are not raised, in the going concern period,
to meet the Company's debt liabilities, the Board are confident the Company can
work to ensure alternative financing plans are in place.
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
are 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
1 October 2022.
However, the Board have 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 1
October 2022 or failing to do so can implement an alternative debt
restructuring plan that will enable the Company to repay all of its debt
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,
the Board has carried out a robust review of the Company's principal risks and
uncertainties, as noted above, 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 29 February 2024.
As set out in the going concern statement, 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 ended 1 October 2022. 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 1
October 2022 or failing to do so can implement an alternative debt
restructuring plan that will enable the Company to repay all of its debt
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
The Directors have 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. 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) Recent Events
Reduction in Company's Net Asset Value
During the February 2021 fiscal year, the Company suffered valuation losses
with its NAV being decreased by approx. 31% (2020: 41%) over the year. This
reduction during the last two fiscal years has weakened the Company's balance
sheet and the Board have subsequently had to consider the impact on the
liquidity of the Company.
The NAV reduction noted above, was predominantly due to losses in the Company's
real estate portfolio. The Board have 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 are 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.
COVID-19
The Board and Investment Adviser are continuing to monitor the impact and
consequences of the virus on the Company and its investments. The Board are
pleased that the Company's micro-cap portfolios have generally continued to
perform well throughout the year. This encouraging performance in the face of
unprecedented circumstances gives 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 will continue to perform robustly
but are mindful that current market conditions may delay the timeframe for
realisations.
(ii) Financing obligations
Senior Debt Facility
The current debt facility has a maturity date of June 2021, the balance
outstanding at 28 February 2021 was approximately
$69 million. As noted in the 'Going Concern' section of the Report of the
Directors, lenders have agreed, subject to shareholder approval of the Loan
Note proposal (below), to amend the terms of its senior debt facility which
will, among other things, extend the maturity date of the senior debt facility
by one year until 12 June 2022. It is expected the extended debt facility will
be repaid from the proceeds of realisations and/or refinancing of investments.
Convertible Unsecured Loan Stock - Maturity date 30 July 2021
The Company will redeem CULS in July 2021 amounting to £38.9 million (approx.
$54 million at the year-end exchange rate). It is expected the redemption of
the CULS will be met from existing cash held and liquidity provided by the
proposed loan facility described below.
Loan Notes - Maturity date 11 September 2022
As noted in Subsequent Events (Note 31), 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 have agreed to purchase 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 (the
"Loan Notes"). 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 (est. $80.5 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.
Commitments
At 28 February 2021, JZCP had financial commitments of $31.9 million
outstanding in relation to fund investments.
(iii) 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 are 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
$124 million over the five years ending 28 February 2021. JZAI is currently
pursuing various opportunities to realise value, whilst COVID-19 has not
provided ideal market conditions and has delayed both the investment and
realisation activity, the Board have concluded that they have a reasonable
expectation that forecast realisations will be completed.
(iv) Loan covenants
At 28 February 2021, investments and cash valued at $504.9 million were held as
collateral on the senior debt facility. A covenant on the loan states the fair
value of the collateral must be 3.5x the loan value (which equates to
approximately $240 million at the year end) and the Company is also required to
hold a minimum cash balance of $15 million. The Board are confident the loan
covenants will not be breached.
(v) Mitigation of other risks as outlined in the Principal Risks and
Uncertainties above.
Conclusion
In concluding on the viability of the Company, the Directors 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 three
year period ended 29 February 2024, being the period of the assessment. They
consider 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 2021 and 29
February 2020.
Ongoing Charges
Ongoing charges for the years ended 28 February 2021 and 29 February 2020 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 2021 were 3.52% (29 February 2020: 2.71%).
Directors
The Directors listed below, who served on the Board during the year are all
deemed independent and non-executive, other than Tanja Tibaldi they 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 in Board of Directors.
David Macfarlane (Chairman)
James Jordan
Sharon Parr
Ashley Paxton (appointed 12 August 2020)
Tanja Tibaldi (resigned 12 August 2020)
Substantial Shareholders
As at 18 May 2021, 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 Partners 18,335,944 23.7%
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 year end, 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 shares at 28
1 March February
2020 2021
David Macfarlane 71,550 - - 71,550
James Jordan 39,124 - - 39,124
Tanja Tibaldi1 2,720 (see
below)
Sharon Parr - - - -
Ashley Paxton - - - -
113,394 - - 110,674
1Tanja Tibaldi held 2,720 shares at 1 March 2020 and on her retirement from the
board at 12 August 2020.
The beneficial interests of the Directors in the CULS of the Company are shown
at 28 February 2021 (no change from 29 February 2020 position):
Number of CULS
of £10 nominal
value
David Macfarlane 734
James Jordan -
Sharon Parr -
Ashley Paxton -
Tanja Tibaldi1 (see below)
734
1Tanja Tibaldi held 367 CULS at 1 March 2020 and on her retirement from the
board at 12 August 2020.
None of the Directors held any interest in the Zero Dividend Preference shares
during the year. There have been no changes in the Directors' interests of any
share class between 28 February 2021 and the date of this report.
Details of the ZDP shares and the Ordinary shares can be found in Notes 14 and
18. Details of the CULS can be found in Note 15.
Annual General Meeting
The Company's Annual General Meeting is due to be held on 6 July 2021.
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 Directors believe 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 believes 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 COVID-19,
shareholders should refer to the Notice of AGM for guidance on physical
attendance at this year's meeting.
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 are 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 look 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 18 May
2021.
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 is no longer a member of the AIC.
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 (see Corporate Governance).
- 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 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 (see Board Committees below).
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.
During the fiscal year, Tanja Tibaldi resigned from the Board and Ashley Paxton
was recruited.
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. In the 2019 Annual
Report, it was noted a substantial refreshment of the board was planned to take
place in 2021, including the appointment of a new Chairman. In the light of the
events of the last two fiscal years the Chairman will continue to oversee of
the stabilisation of the Company and will therefore continue to seek
re-election to the Board annually.
Proceedings of the Board
The Directors have 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 below.
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 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.
In August 2020, Ashley Paxton was appointed to the Board following a proposal
by the Nomination Committee. Ashley was recommended as a suitable candidate, by
an external consultant, due to his wealth of industry experience and his
demonstrable track record in advising closed-ended London listed boards and
their audit committees.
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 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 1 October 2022 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 29
February 2024.
The activities and responsibilities of the Audit Committee are further
described in 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
Board Ad Hoc Audit Nomination Management
Engagement
Main AGM Meetings Committee Committee Committee
Total number of meetings 4 1 18 7 1 1
David Macfarlane 4 1 18 7 1 1
James Jordan 4 1 17 7 1 1
Sharon Parr 4 1 17 7 1 1
Ashley Paxton (appointed 12 3 0 12 2 0 1
August 2021)
Tanja Tibaldi (resigned 12 1 0 6 4 1 0
August 2021)
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 Portfolio Manager. 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 as a whole 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 as a whole.
The Company's Articles state that Directors' remuneration payable in any
accounting year shall not exceed in the aggregate an annual sum of US$650,000.
Each Director is also entitled to reimbursement of their reasonable expenses.
There are no commission or profit sharing arrangements between the Company and
the Directors. Similarly, none of the Directors is entitled to pension,
retirement or similar benefits. No element of the Directors' remuneration is
performance related.
.
The remuneration policy set out above is the one applied for the year ended 28
February 2021 and is not expected to change in the foreseeable future.
Directors' and Officers' liability insurance cover is maintained by the Company
on behalf of the Directors.
Remuneration for Services to the Company as Year Ended Year Ended
Non-Executive Directors
02 February 2021 29 February 2020
US$ US$
David Macfarlane (Chairman) 120,000.00 160,000.00
James Jordan 50,000.00 60,000.00
Sharon Parr 95,000.00 67,000.00
Ashley Paxton (appointed 12 August 2020) 27,000.00 -
Tanja Tibaldi (resigned 12 August 2020) 27,000.00 60,000.00
Patrick Firth (resigned 27 June 2019) - 23,000.00
Christopher Waldron (resigned 26 November 2019) - 51,000.00
319,000.00 421,000.00
As from 1 March 2020, fees payable to the Chairman and Directors (excluding Ms
Tibaldi) were reduced to $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 year received a further fee of $25,000 for
additional work relating to events in the prior 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 18 May 2021 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
2021. 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;
· monitor and review the internal control and risk management systems of
the service providers; and
· consider and make representations to the Board regarding Directors'
remuneration.
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:
· COVID-19
During the year, the Audit Committee received regular updates from the
Investment Adviser of the impact of COVID-19 on the Company's investment
portfolio. Information was provided on the following business aspects of
portfolio companies/properties, to enable the Board to assess the ongoing risk
to the Company and also any impact COVID-19 may have had on the reporting year
ended 28 February 2021:
i) Demand for product/service;
ii) Supply Chain & operational issues;
iii) Flexibility and adaptability of workforce to perform duties;
iv) Financial Strength of Company - Liquidity Issues;
v) Support received from Government programmes; and
vi) Real estate markets.
The Audit Committee have also been regularly updated on scheduled realisations
and liquidity projections in light of the COVID-19 lockdowns and delays in
corporate transactions.
· 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 1 October 2022. 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 ending 1 October
2022. 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 1
October 2022 or failing to do so can implement an alternative debt
restructuring plan that will enable the Company to repay all of its debt
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 29 February 2024. 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 2021, which
are valued using techniques detailed in Note 5 of the financial statements, was
$433,224,000 accounting for 92.8% 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 IFRS9 - "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.
The External Auditor
Ernst & Young LLP have acted as external auditor since the Company's inception
in April 2008. This is the third 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, which includes determining whether the
Company is a passive foreign investment company as defined by the U.S. Internal
Revenue Code, 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 commence for periods on
and after the year ended 28 February 2021 but 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 2021 and 29 February 2020.
$ $
Equivalent Equivalent
Year ended Year ended Year ended Year ended
28.2.2021 28.2.2021 29.2.2020 29.2.2020
Ernst & Young LLP
- Annual audit £275,000 $384,478 £425,0001 $510,000
- Auditor's interim £50,000 $69,000 N/A2 N/A
review
Other Ernst & Young LLP affiliates
- Passive Foreign Investment Company tax - $65,000 - $65,000
services
1JZCP incurred additional audit fees resulting from the real estate property
portfolio valuation issues as well as going concern considerations, including
COVID-19.
2The Interim Report and Financial Statements for the six-month period ended 31
August 2019 were not reviewed by EY. Due to further requested information
provided by real estate appraisers it would not have been possible for EY to
have been able to complete their customary review of the interim results and
related report within the regulatory timeframe.
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 in Corporate Governance.
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
18 May 2021
Independent Auditor's Report
To The Members of JZ Capital Partners Limited
Opinion
We have audited the Financial Statements of JZ Partners Capital Limited (the
'Company") for the year ended 28 February 2021 which comprise the Statement of
Comprehensive Income, the Statement of Financial Position, the Statement of
Changes in Equity, the Statement of Cash Flows and the related notes 1 to 31,
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 2021 and of its loss 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 below. 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 entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
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 1 October 2022 or failing to do so can
implement an alternative debt restructuring plan that will enable the Company
to repay all of its debt 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 Report of the Directors,
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 ending 1 October 2022. 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 events 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:
We describe below how our audit responded to the risk relating to going
concern:
1. The audit engagement partner directed and supervised the audit procedures
on going concern;
2. 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;
3. We obtained the agreements and enquired of management to understand the
Cohanzick loan facility and associated agreement amendments, including the
nature of facilities, repayment terms and covenants;
4. 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;
5. 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;
6. We assessed whether available funds are sufficient to cover commitments
made to underlying investments and other ongoing commitments including
investment adviser and other expenses, cast significant doubt over the going
concern status of the Company;
7. We held discussions with the Investment Adviser and the Audit Committee in
relation to the status of the asset realisations and renegotiation of the
Cohanzick loan facility;
8. We assessed the likely success and risk factors of the Company's
alternative investing and financing plans with its Investment Adviser; and
9. 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 respect of the directors' identification in the financial statements of any
material uncertainties to the Company's ability to continue for the period
ending 1 October 2022.
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; and
Impairment of direct loans measured at amortised cost.
Materiality Overall materiality of $3.3 million (2020:
$4.8 million), which represents 1% (2020: 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.
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
year 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. In addition to the matter described in the material
uncertainties related to going concern section, we have determined the matters
described below to be the key audit matters to be communicated in our report.
Risk Our response to the risk Key observations
communicated to the
Audit Committee
Misstatement of the Our audit procedures consisted We confirmed that
unquoted investment fair of: there were no
values including the impact material instances of
on management fees (2021: use of inappropriate
$433 million; 2020: $661 policies or
million) methodologies and
that the valuation of
Refer to the Audit the investments was
Committee Report; not materially
Accounting policies; and misstated.
Note 5 of the Financial
Statements Updating and confirming
our understanding of the
99% (2020: 99%) of the Company's processes and
carrying value of methodologies, including
investments relates to the the use of industry
Company's holdings in specific measures, and
unquoted investments, which policies for valuing
are valued using different unquoted investments held
valuation techniques, as by the Company;
described in note 5 to the
Financial Statements. Obtaining and inspecting
the valuation decks and
The valuation is supporting data for the
subjective, with a high private equity
level of judgement and investments, to assess
estimation linked to the whether the data used is
determination of the values appropriate and relevant,
with limited market and discussing these with
information available, as a Investment Adviser to
result of the low level of evaluate whether the fair
liquidity in the private value of the Company's
equity and real estate private equity
markets at the year-end. investments are
reasonably stated,
As a result, there is a challenging the
risk of an inappropriate assumptions made by JZAI
valuation model being and Board of Directors of
applied, together with the the Company;
risk of inappropriate
inputs to the model/ Obtaining and inspecting
calculation being selected the independent
including the possible appraisals and supporting
impact on the management data regarding the real
fees. estate assets, to assess
whether the data used is
The valuation of the appropriate and relevant,
unquoted investments is the and discussing these with
key driver of the Company's Investment Adviser to
net asset value and total evaluate whether the fair
return. Incorrect valuation value of the Company's
could have a significant real estate investments
impact on the net asset are reasonably stated,
value of the Company and challenging the
therefore the return assumptions made by JZAI
generated for shareholders. and Board of Directors of
the Company;
Attending fair value
discussions in relation
to 28 February 2021
valuations, for both real
estate and private equity
investments. Challenging
the value roll forward
considerations between
the 31 August 2020 real
estate valuations and the
balance sheet date. These
included the Investment
Adviser, EY Guernsey and
EY valuation specialists;
Vouching valuation inputs
that do not require
specialist knowledge to
independent sources and
testing the arithmetical
accuracy of the Company's
calculations for a sample
of significant
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;
For a sample of
significant private
equity investments
selected based on their
size/value, we engaged EY
Canada ("EY VME").
It was considered
appropriate for EY Canada
to review both US and
European assets as the
estimation process is
common across both
geographies.
For the real estate
investments, we engaged
EY New York and Miami
(collectively "EY TRE")
as valuation specialists
to:
use their knowledge of
the market to assess and
corroborate Investment
Adviser's and third party
specialists' 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;
performed procedures to
assess whether, in light
of market data, the fair
values of certain
recently acquired
investments continue to
approximate to their
consideration paid; and
assist us in determining
whether the Company's
specialist 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
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;
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-performed the
management fee
calculations for
mathematical accuracy and
consistency with the
terms of the investment
advisory agreement.
Impairment of direct loans For all loans greater than We confirmed that
measured at amortised cost materiality we have performed there were no
(2021: $34 million; 2020 the following procedures: material matters
$31 million) arising from our
audit work on the
Risk that the carrying judgments and
value of the direct loans estimates made by
might be misstated due to management regarding
application of the expected credit
inappropriate loss that we wished
methodologies, inputs and/ to bring to the
or judgemental factors attention of the
determining the expected Committee.
credit loss in accordance
with IFRS 9. We confirmed that the
expected credit loss
Refer to the Audit was not materially
Committee Report; misstated.
Accounting policies, and
Note 7 to the Financial We obtained copies of the
Statements. signed loan agreements
including any changes to
the terms and conditions
of the loans;
We re-performed the
amortised cost
calculations for
mathematical accuracy and
consistency with the
terms of the loan
agreements;
We obtained the expected
credit loss calculation
from the Investment
Advisor for each material
loan and determined that
the estimate and
judgements applied by
management specific to
each loan were in
accordance with IFRS 9;
and
We reviewed the possible
default scenarios and
credit risk of each loan
separately and applied
probabilities of default
to assess the ECL over
the next 12 months.
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 planning materiality for the Company to be $3.3 million (2020:
$4.8 million), which is 1% (2020: 1%) of Total Equity. This provided 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% (2020: 50%) of our planning materiality, namely $1.65
million (2020: $2.4 million). Although there is no history of material
misstatements, based on which our expectation of the likelihood of misstatement
in the future is low and we have a strong understanding of the control
environment, there were changes in circumstances or events outside the normal
course of business during the prior year's audit for which the performance
materiality was reduced to 50%. This has been maintained at the same level. Our
objective in adopting this approach was to ensure that 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 $0.17 million (2020: $0.24 million), 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 evaluated any uncorrected misstatements against both the quantitative
measures of materiality discussed above and considering other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report,
other than the Financial Statements and our auditor's report thereon. The
Directors are responsible for the other information.
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
ISAs (UK) 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 in the Report of the Directors;
· Directors' explanation as to its assessment of the Company's prospects,
the period this assessment covers and why the period is appropriate, set out in
the Report of the Directors;
· Directors' statement on fair, balanced and understandable, set out in
the Report of the Directors;
· Board's confirmation that it has carried out a robust assessment of the
emerging and principal risks, set out in the Report of the Directors;
· The section of the annual report that describes the review of
effectiveness of risk management and internal control systems, set out in the
Corporate Governance Report; and;
· The section describing the work of the audit committee set out in the
Audit Committee Report.
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 controls 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.
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
18 May 2021
1. The maintenance and integrity of the JZ Capital Partners Limited
website is the responsibility of the Directors; the work carried out by theauditors 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
To The Directors of JZ Capital Partners Limited
We have audited the accompanying financial statements of JZ Capital Partners
Limited (the "Company"), which comprise the statement of financial position as
of 28 February, 2021, and the related statements of comprehensive income,
changes in equity and cash flows for the year then ended, and the related notes
to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these
financial statements in conformity with International Financial Reporting
Standards as adopted by the European Union ("IFRS"); this includes 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.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control
relevant to the Company's preparation and fair presentation of the financial
statements 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, we express no
such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting
estimates made by management, as well as evaluating the overall presentation of
the financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JZ Capital Partners Limited at
28 February 2021, and the results of its operations, changes in its equity, and
its cash flows for the year then ended, in conformity with IFRS.
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 in 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 1 October 2022 or failing to do so can implement an
alternative debt restructuring plan that will enable the Company to repay all
of its debt 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. 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 in respect of this matter.
Ernst & Young LLP
Guernsey, Channel Islands
18 May 2021
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 2021
Year Ended Year Ended
28 February 29 February
2021 2020
Note US$'000 US$'000
Income and investment and other gains
Investment income 8 22,160 33,264
Bank and deposit interest 220 455
Realisations from investments held in escrow 27 1,147 5,559
accounts
Net foreign currency exchange gains - 664
Gain on financial liabilities at fair value 15 - 4,388
through profit or loss
23,527 44,330
Expenses and losses
Net loss on investments at fair value through 6 (126,386) (316,506)
profit or loss
Expected credit losses 7 (3,062) (29,318)
Net foreign currency exchange loss (4,897) -
Loss on financial liabilities at fair value 15 (3,618) -
through profit or loss
Investment Adviser's base fee 10 (9,722) (15,224)
Investment Adviser's incentive fee 10 - 35,880
Administrative expenses 10 (4,707) (3,708)
Directors' remuneration 10 (319) (421)
(152,711) (329,297)
Operating loss (129,184) (284,967)
Finance costs 9 (18,191) (20,460)
Loss before taxation (147,375) (305,427)
Withholding taxes 11 126 878
Loss for the year (147,249) (304,549)
Other comprehensive income
Other comprehensive income that will not be reclassified to the Income
Statement
Gain on financial liabilities due to change 15 1,074 -
in credit risk
Total comprehensive loss for the year (146,175) (304,549)
Weighted average number of Ordinary shares in 24 77,474,175 79,053,060
issue during the year
Basic loss per Ordinary share 24 (190.06)c (385.25)c
Diluted loss per Ordinary share 24 (190.06)c (385.25)c
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Financial Position
As at 28 February 2021
28 February 29 February
2021 2020
Note US$'000 US$'000
Assets
Investments at fair value through profit or loss 12 433,224 661,200
Loans at amortised cost 12 33,813 30,972
Other receivables 13 22 119
Cash at bank 59,784 52,912
Total Assets 526,843 745,203
Liabilities
Zero Dividend Preference (2022) shares 14 74,303 64,510
Convertible Unsecured Loan Stock 15 52,430 49,886
Loans payable 16 68,694 150,362
Investment Adviser's base fee 10 573 1,179
Other payables 17 1,284 1,225
Investment Adviser's incentive fee 10 - 2,307
Total Liabilities 197,284 269,469
Equity
Share capital 18 216,625 216,625
Other reserve 20 354,602 353,528
Retained deficit 20 (241,668) (94,419)
Total Equity 329,559 475,734
Total Liabilities and Equity 526,843 745,203
Number of Ordinary shares in issue at year end 18 77,474,175 77,474,175
Net Asset Value per Ordinary share 26 $4.25 $6.14
These Audited Financial Statements were approved by the Board of Directors and
authorised for issuance on 18 May 2021. They were signed on its behalf by:
David Macfarlane
Chairman
Sharon Parr
Director
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Changes in Equity
For the Year Ended 28 February 2021
Share Other Retained
Deficit
Capital Reserve Total
Note US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2020 216,625 353,528 (94,419) 475,734
Loss for the year - - (147,249) (147,249)
Gain on financial liabilities due 15 - 1,074 - 1,074
to change in credit risk
Balance at 28 February 2021 216,625 354,602 (241,668) 329,559
Comparative for the Year ended 29 February 2020
Share Other Retained
Capital Reserve Deficit Total
US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2019 246,604 353,528 210,130 810,262
Loss for the year - - (304,549) (304,549)
Buy back of Ordinary shares 18 (29,979) - - (29,979)
Balance at 29 February 2020 216,625 353,528 (94,419) 475,734
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Cash Flows
For the Year Ended 28 February 2021
28 February 29 February
2021 2020
Note US$'000 US$'000
Cash flows from operating activities
Cash inflows
Realisation of investments 138,336 140,296
Maturity of treasury bills 6,790 6,700
Escrow receipts received 1,147 5,559
Interest received from unlisted investments 361 1,669
Income distributions received from investments 379 1,781
Bank Interest received 220 455
Cash outflows
Direct investments and capital calls (17,966) (77,110)
Purchase of treasury bills (6,787) (6,706)
Investment Adviser's base fee paid (10,328) (16,147)
Investment Adviser's incentive fee paid (2,307) (4,584)
Other operating expenses paid (4,744) (4,188)
Foreign exchange loss realised (42) (626)
Net cash inflow before financing activities 105,059 47,099
Cash flows from financing activities
Repayment of senior debt facility (82,912) -
Finance costs paid:
. Convertible Unsecured Loan Stock (2,953) (2,956)
. Loan Payable (12,331) (12,436)
Buy back of Ordinary shares 18 - (29,979)
Net cash outflow from financing activities (98,196) (45,371)
Increase in cash and cash equivalents 6,863 1,728
Reconciliation of Net Cash Flow to Movements in Cash and Cash Equivalents
Cash at bank at beginning of year 52,912 50,994
Increase in cash and cash equivalents as above 6,863 1,728
Unrealised foreign exchange movements on cash at bank 9 190
Cash at bank at year end 59,784 52,912
Reconciliation of cash inflows from realisations to the total realisations
during the year
Year Ended Year Ended
28 February 29 February
2021 2020
US$'000 US$'000
Proceeds from realisation and repayment of investments 186,091 146,996
(Note 12)
Less proceeds from maturity of treasury bills (6,790) (6,700)
Less notional cost of the Company's interest in JZHL Secondary (40,965) -
Fund to derive at the net proceeds received from the secondary
transaction being $87.7 million
Cash inflow from realisation of unlisted investments 138,336 140,296
(above)
Adjusted to reconcile to totals quoted in Annual Report
Cash inflow from realisation of unlisted investments 138,336
(above)
Escrow receipts 1,147
Total realisations for the year (Key Highlights) 139,483
The accompanying notes form an integral part of the Audited Financial
Statements.
Notes to the Annual 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 1987. The
Company's Capital consists of Ordinary shares, Zero Dividend Preference ("ZDP")
shares and Convertible Unsecured Loan Stock ("CULS"). The Company's shares
trade on the London Stock Exchange's Specialist Fund Segment ("SFS").
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) real estate interests.
The Company has no direct employees. For its services the Investment Adviser
receives a management fee and is also entitled to performance related fees
(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, which is the functional
currency of the Company, and all values are presented to the nearest thousand
dollars ($000), except where otherwise indicated.
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
The Company applied, for the first time, certain standards and amendments,
which are effective for annual periods beginning on or after 1 January 2020.
The new standards or amendments to existing standards and interpretations,
effective from 1 March 2020, 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
Financial assets and financial liabilities are offset and the net amount is
reported in the Statement of Financial Position if, and only if, there is a
currently enforceable legal right to offset the recognised amounts and there is
an intention to settle on a net basis, or to realise the asset and settle the
liability simultaneously. This is generally not the case with master netting
agreements unless one party to the agreement defaults and the related assets
and liabilities are presented gross in the Statement of Financial Position.
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 ("SPPI") 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
A financial asset is measured at fair value through profit or loss if:
· Its contractual terms do not give rise to cash flows on specified dates
that are SPPI on the principal amount outstanding; or
· It is not held within a business model whose objective is either to
collect contractual cash flows, or to both collect contractual cash flows and
sell; or
· At initial recognition, it is irrevocably designated as measured at FVPL
when doing so eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on different bases.
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 IAS28 -
"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 FTVPL.
· 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 nominal value as reduced by appropriate
allowances for estimated irrecoverable amounts.
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 is 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 elects to account for the
CULS in its entirety in accordance with the IFRS 9 'Fair Value Option'.
The CULS' fair value is deemed to be the listed offer price at the year end.
CULS is translated at the exchange rate at the reporting date and both
differences in fair value due to the listed offer price and exchange rates are
recognised in the Statement of Comprehensive Income. Changes in fair value due
to changes in credit risk are 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 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) 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.
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.
In determining the fair value of unlisted investments JZCP follows the
principles of IPEVCA valuation guidelines. The Valuation Guidelines have been
prepared with the goal that Fair Value measurements derived when using these
Valuation Guidelines are compliant with IFRS. The Board of JZCP evaluates the
performance of unlisted investments quarterly on a fair value basis. Listed
investments are recorded at Fair Value in accordance with IFRS being the last
traded market price where this price falls within the bid-ask spread.
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.
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.,
Spruceview Capital Partners, LLC and Orangewood Partners Platform LLC using the
equity method. Instead, the Company has elected to measure its investment in
its associates at FVTPL.
The Directors have determined that although the Company has over 50% economic
interest in EuroMicrocap Fund 2010, L.P., JZI Fund III GP, L.P. and Orangewood
Partners Platform LLC, 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.
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 outstanding debt on maturity, including the redemption of its ZDP
shares (due 1 October 2022), nor be able to restructure/extend the debt for
redemption beyond the going concern period, 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
2021 have been prepared on a going concern basis given the Board's assessment
set out below and as the Board, with recommendation from the Audit Committee,
have a reasonable expectation that the Company has adequate resources to
continue in operational existence for the foreseeable future.
In reaching its conclusion, the Board have considered the risks that could
impact the Company's liquidity over the period to 1 October 2022. This period,
which is longer than the required period of 12 months, has been considered to
be relevant due to the repayment date for the Company's ZDP shares being
approximately 4 months after the 12-month period.
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 1
October 2022 or failing to do so can implement an alternative debt
restructuring plan that will enable the Company to repay all of its debt
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
Update on material liabilities due for settlement and post year-end restructure
The Company's material debt obligations and cash and cash equivalents at the
year end, prior year end and a forecasted position post the proposed debt
restructure (detailed below) are as follows:
31.7.20211 28.2.2021 29.2.2020
$'000 $'000 $'000
ZDP Shares - maturity date 1 October 2022 - 80,527 80,527 73,569
redemption amount of £57.6 million2
Loan Notes - maturity date 11 September 2022 31,500 - -
Senior Debt Facility - maturity date 12 June 2022 68,694 - -
CULS - maturity date 30 July 2021 - redemption amount - 54,332 49,637
of £38.9 million
Senior Debt Facility - current interim maturity date - 68,694 150,362
25 June 2021
180,721 203,553 273,568
Cash and cash equivalents held 36,600 63,178 56,298
1Forecast cash position assumes no material realisation proceeds received prior
to the CULS redemption.
2Forecast ZDP maturity Dollar amount translated using the 28.2.2021 year end
rate being £1/$1.3981.
During the year ended 28 February 2021, the Company had realisations of
investments totalling $139.5 million, this included $87.7 million from the
successfully concluded Secondary Sale of interests in certain US microcap
portfolio companies. Following these investment realisations, the Company has
repaid a total of $82.9 million of the senior debt's outstanding principal
amount.
On 23 October 2020, the Company announced that the Company agreed with its
senior lenders, Guggenheim Partners (the "Original lenders") amended terms of
the senior debt facility. Under the terms of those amendments to the senior
debt facility, $40 million of the outstanding principal amount was assigned
from the original lenders to clients and funds advised by Cohanzick Management,
LLC and CrossingBridge Advisors, LLC (the "Replacement lenders"). As part of
this transaction, and at an increased interest cost, the Company secured more
advantageous covenant terms for itself, including the minimum asset coverage
covenant being reset (from not less than 4x to a lower requirement of 3.5x) and
a relaxation of rating requirements, removal of certain concentration limits,
updates to the use of proceeds requirements pertaining to asset sales to
preserve liquidity, and reduced requirements related to its real estate
collateral and reporting on investments. On 23 February 2021, the Company then
announced that the replacement lenders had acquired the remaining interest in
the Company's senior debt facility from the Original Lenders.
Post year end, the Company also entered into an amendment agreement with its
replacement lenders to amend the terms of its senior debt facility which will,
among other things, extend (subject to certain conditions including shareholder
approval of the Loan Note proposal referred to below) the maturity date of the
senior debt facility by one year until 12 June 2022 and permit JZCP to repay
its CULS when they become due on their maturity date of 30 July 2021,
notwithstanding that the CULS are subordinated to the senior debt facility.
Post year end, the Company also 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. ("JZAI"),
pursuant to which they have agreed to purchase directly or through their
affiliates, subordinated, second lien 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").
Their purchase of the Loan Notes is subject to a number of conditions,
including shareholder approval of both the Loan Note proposal and a proposal
for Jay Jordan and David Zalaznick or their affiliates to assume the Company's
remaining commitment to the Orangewood Fund, with the latter also being a
requirement of the amendments to the senior debt facility.
The Board acknowledges that the new maturity date of the senior debt facility
and the Loan Notes still fall within the going concern period and therefore the
Company will still need to generate sufficient realisation proceeds, within the
period, to repay its debt obligations or make alternative debt arrangements
with lenders post 1 October 2022.
Considering the Company's projected cash position, ongoing operating costs and
the anticipated further investment required to support the Company's portfolio
the Board anticipate further proceeds of approx. $185 million are required from
the realisation of investments to enable the Company to settle its debts as
they fall due.
It is anticipated that the liquidity required to settle the debt obligations
mentioned above, and other ongoing obligations in 2022, will be generated from
realisations within the 16 month going concern period. The Company's investment
adviser, JZAI, is currently pursuing various opportunities to realise value,
these forecast realisations include several anticipated sales of micro-cap
companies. Total realisation proceeds of approximately $275 million are
forecast, over the going concern period, from the aforementioned events.
The Board continue 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 recognise, under current market conditions, the raising of the
required total realisation amount is a considerable task but remains confident
in the value of its underlying micro-cap investments and are buoyed by their
post COVID performance.
The restructuring of the Company's debt structure, following satisfaction of
closing conditions, will enable the Company to realise investments in a
timeframe that will help maximise the portfolio's value. In the instance that
sufficient realisations proceeds are not raised, in the going concern period,
to meet the Company's debt liabilities, the Board are confident the Company can
work to ensure alternative financing plans are in place.
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
are 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
1 October 2022.
However, the Board have 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 1
October 2022 or failing to do so can implement an alternative debt
restructuring plan that will enable the Company to repay all of its debt
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 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 revenue 19,511 2,638 - - 22,149
Net (loss)/gain on (13,772) 11,819 (13)
investments at FVTPL (124,420) (126,386)
Expected credit losses - (3,062) - - (3,062)
Realisations from 1,147 - - - 1,147
investments held in Escrow
Withholding tax 126 - - - 126
Investment Adviser's base (5,839) (1,642) (1,187) (346) (9,014)
fee
Total segmental operating 1,173 9,753 (359)
profit/(loss) (125,607) (115,040)
For the year ended 29 February 2020
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Interest revenue 27,372 4,499 (454) - 31,417
Other portfolio income 560 1,221 - - 1,781
Total segmental revenue 27,932 5,720 (454) - 33,198
Net gain/(loss) on 12,459 1,941 (330,906) - (316,506)
investments at FVTPL
Expected credit losses - (29,318) - - (29,318)
Realisations from 5,559 - - - 5,559
investments held in
Escrow
Withholding tax (126) - - 1,004 878
Investment Adviser's (6,454) (1,583) (5,860) (307) (14,204)
base fee
Investment Adviser's - - 35,880 - 35,880
capital incentive fee
Total segmental operating 39,370 (23,240) 697 (284,513)
profit/(loss) (301,340)
Certain income and expenditure is not considered part of the performance of an
individual segment. This includes net foreign exchange gains, 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
loss and operating loss.
28.2.2021 29.2.2020
US$ '000 US$ '000
Total Segmental Operating Loss
(115,040) (284,513)
(Loss)/Gain on financial liabilities at fair value through (3,618) 4,388
profit or loss
Net foreign exchange (loss)/gain (4,897) 664
Interest on treasury notes and corporate bonds 11 66
Interest on cash 220 455
Fees payable to investment adviser based on non-segmental assets (708) (1,020)
Expenses not attributable to segments (5,026) (4,129)
Withholding tax (126) (878)
Operating Loss
(129,184) (284,967)
The following table provides a reconciliation between total segmental revenue
and Company revenue.
28.2.2021 29.2.2020
US$ '000 US$ '000
Total segmental revenue 22,149 33,198
Non-segmental revenue
Interest on treasury bills 11 66
Bank and deposit interest 220 455
Total revenue 22,380 33,719
Segmental Net Assets
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 - 33,813 - - 33,813
cost
Total segmental assets 299,339 117,781 23,376 23,147 463,643
Segmental liabilities
Payables and accrued (771) (101) (43) (21) (936)
expenses
Total segmental (771) (101) (43) (21) (936)
liabilities
Total segmental net assets 298,568 117,680 23,333 23,126 462,707
At 29 February 2020
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 404,880 71,619 158,712 22,603 657,814
Loans at amortised - 30,972 - - 30,972
cost
Other receivables - - 80 - 80
Total segmental assets 404,880 102,591 158,792 22,603 688,866
Segmental liabilities
Payables and accrued (3,290) (113) (501) (23) (3,927)
expenses
Total segmental (3,290) (113) (501) (23) (3,927)
liabilities
Total segmental net assets 401,590 102,478 158,291 22,580 684,939
Other receivables 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.
28.2.2021 29.2.2020
US$ '000 US$ '000
Total Segmental Assets 463,643 688,866
Non Segmental Assets
Cash at bank 59,784 52,912
Treasury bills 3,394 3,386
Other receivables 22 39
Total Assets 526,843 745,203
Total Segmental Liabilities (936) (3,927)
Non Segmental Liabilities
Zero Dividend Preference (2022) shares (74,303) (64,510)
Convertible Unsecured Loan Stock (52,430) (49,886)
Loans payable (68,694) (150,362)
Other payables (921) (784)
Total Liabilities (197,284) (269,469)
Total Net Assets 329,559 475,734
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 tradable.
Another example would be derivatives such as interest rate swaps or forward
currency contracts where inputs are observable and therefore may also fall into
Level 2.
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 (see Quantitative information of significant unobservable
inputs and sensitivity analysis to significant changes in unobservable inputs
within Level 3 hierarchy table below) 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 financial instruments recognised at fair value,
analysed between those whose fair value is based on:
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 investments - - 23,147 23,147
Listed investments 3,394 - - 3,394
3,394 - 429,830 433,224
Financial assets at 29 February 2020
Level 1 Level 2 Level 3 Total
US$ '000 US$ US$ '000 US$ '000
'000
US micro-cap - - 404,880 404,880
European micro-cap - - 71,619 71,619
Real estate - - 158,712 158,712
Other investments - - 22,603 22,603
Listed investments 3,386 - - 3,386
3,386 - 657,814 661,200
Financial liabilities designated at fair value through profit or loss at
inception
Financial liabilities at 28 February 2021
Level 1 Level 2 Level 3 Total
US$ '000 US$ US$ US$ '000
'000 '000
Convertible Subordinated Unsecured Loan Stock - 52,430 - 52,430
- 52,430 - 52,430
Financial liabilities at 29 February 2020
Level 1 Level 2 Level 3 Total
US$ '000 US$ US$ US$ '000
'000 '000
Convertible Subordinated Unsecured Loan Stock - 49,886 - 49,886
- 49,886 - 49,886
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
August 2020, rather than the usual 31 December date. The Board, commissioned
updated appraisals in order to take into account the effect of COVID-19 whilst
releasing the interim results. Subsequent discussions with appraisers indicate
there would be no significant change in property values between 31 August 2020
and 28 February 2021. 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 both current
assets under management ("AUM") and the potential for new AUM.
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 2021 and 29 February 2020 are shown below:
Value Valuation Unobservable Range Sensitivity Effect on Fair
28.2.2021 (weighted Value
average)
US$'000 Technique input Used US$'000
US micro-cap 299,339 EBITDA Average EBITDA 7.5% - -0.5x/+0.5x (26,888) 22,859
investments Multiple Multiple of 13.5%
Peers (9.6x)
Discount to 10% - 30% +5%/-5% (36,420) 35,604
Average (17%)
Multiple
European 80,689 EBITDA Average EBITDA 7.4x - -0.5x/+0.5x (4,615) 4,597
micro-cap Multiple Multiple of 14.0x
investments Peers (10.0x)
Discount to 11% - 69% +5%/-5% (4,225) 4,205
Average (29%)
Multiple
Real estate1,2 23,376 Cap Rate/ Capitalisation 5.25% - +50bps/ (7,925) 9,834
Income Rate 6.25% -50bps
Approach (5.94%)
Other 21,938 AUM AUM $3.8Bn -10%/+10% (4,989) 4,989
investments3 Approach
% Applied to 2% -10%/+10% (2,194) 2,194
AUM
Value Valuation Unobservable Range Sensitivity Effect on Fair
29.2.2020 (weighted Value
average)
US$'000 Technique input Used US$'000
US micro-cap 404,880 EBITDA Average EBITDA 6.5% - -0.5x/+0.5x (32,240) 33,918
investments Multiple Multiple of 16.3%
Peers (8.7x)
Discount to 10% - 30% +5%/-5% (39,497) 40,898
Average (17%)
Multiple
European 71,619 EBITDA Average EBITDA 6.7x - -0.5x/+0.5x (4,210) 4,210
micro-cap Multiple Multiple of 14.0x
investments Peers (10.0x)
Discount to 3% - 58% +5%/-5% (4,380) 4,380
Average (16%)
Multiple
Real estate1,2 73,126 Comparable Market Value $268 - -10%/+10% (21,188) 22,717
Sales Per Square $1,964
Foot ($795) per
sq ft
45,283 DCF Model/ Capitalisation 5.25% - +50bps/ (19,797) 27,497
Income Rate 5.75% -50bps
Approach (5.5%)
Cap Rate/ Discount Rate 6.25% - +50bps/ (13,671) 16,084
Income 7.50% -50bps
Approach (6.5%)
32,518 Capitalisation 4.75% -
Rate 6.0%
(5.75%)
Other 20,338 AUM Approach AUM $3.2 Bn -10%/+10% (4,065) 4,065
investments
% Applied to 2.60% -10%/+10% (2,034) 2,034
AUM
1 The Fair Value of JZCP's investment in financial interests in Real Estate is
measured as JZCP's percentage interest in the value of the underlying
properties.
2 Sensitivity is applied to the property value and then the debt associated to
the property is deducted before the impact to JZCP's equity value is
calculated. Due to gearing levels in the property structures an increase in the
sensitivity of measurement metrics at property level will result in a
significantly greater impact at JZCP's equity level.
3 JZCP's investment in Spruceview.
The following table shows a reconciliation of all movements in the fair value
of financial instruments categorised within Level 3 between the beginning and
the end of the reporting year.
Year ended 28 February 2021
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '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 3,629 9,858 2,639 1,840 17,966
including capital calls
Payment In Kind ("PIK") 20,027 - - - 20,027
Proceeds from investments (9,328) (13,555) (1,283)
realised (114,170) (138,336)
Net (losses)/gains on (13,772) 11,819 (13)
investments (124,420) (126,386)
Movement in accrued (1,255) - - - (1,255)
interest
At 28 February 2021 299,339 83,968 23,376 23,147 429,830
Year ended 29 February 2020
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
At 1 March 2019 478,970 70,686 443,044 18,302 1,011,002
Investments in year 9,678 12,635 51,196 4,301 77,810
including capital calls
Payment In Kind ("PIK") 26,205 - - - 26,205
Proceeds from investments (13,643) (4,622) - (140,296)
realised (122,031)
Net gains/(losses) on 12,459 1,941 - (316,506)
investments (330,906)
Movement in accrued interest (401) - - - (401)
At 29 February 2020 404,880 71,619 158,712 22,603 657,814
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 2021, the offer price for the ZDP (2022) shares was £3.80 (29
February 2020: £4.34) the total fair value of the ZDP shares was $63,263,000
(29 February 2020: $66,010,000) which is $11,040,000 lower (29 February 2020:
$1,500,000 higher) than the liability recorded in the Statement of Financial
Position.
ZDP shares are recorded at amortised cost and would fall in to the Level 1
hierarchy if valued at FVTPL.
6. Net Loss on Investments at Fair Value Through Profit or Loss
Year Ended Year Ended
28.2.2021 29.2.2020
US$ '000 US$ '000
Net loss on investments held in investment portfolio at
year end
Net movement in unrealised gains/(loss) positions during 199,715 (342,851)
year
Net unrealised (loss)/gain in prior years now realised (215,285) 13,576
Net unrealised loss on investments held at the year end (15,570) (329,275)
Gains on investments realised in year
Proceeds from investments realised 179,301 140,296
Cost of investments realised (505,402) (113,951)
Net realised (loss)/gain (326,101) 26,345
Net unrealised loss/(gain) in prior years now realised 215,285 (13,576)
Total (loss)/gain in the year on investments realised (101,816) 12,769
Net loss on investments during the year (126,386) (316,506)
The losses recorded for the years ended 28 February 2021 and 29 February 2020
are predominantly attributable to valuation write downs in the Company's real
estate portfolio.
7. Expected credit losses
Year Year
Ended Ended
28.2.2021 29.2.2020
US$ '000 US$ '000
Impairments on loans during year 3,062 29,318
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.
During the year, the Company has determined that the credit risk relating to
its loan in Xacom has significantly increased and is now therefore classified
at Stage 2, consequently expected losses of $2.3 million have been recognised.
Other loans are classified at Stage 1 and expected losses of $0.8 million have
been recognised on these credit exposures. During the prior year, as from 1
June 2019, the Company recognised ECLs on its investment in Ombuds per the
stage two methodology due to the likelihood that the portfolio company would
enter bankruptcy (which it did in the summer of 2019). As from 1 December 2019,
the Company provided for ECLs to write down the value of the Ombuds loans to
nil as no recovery of the loan is expected. Following the default event, and
the loan being fully impaired no further interest is being recognised on the
loan.
8. Investment Income
Year Ended Year Ended
28.2.2021 29.2.2020
US$ '000 US$ '000
Interest revenue calculated using the effective 2,987 5,740
interest method
Other interest and similar income 19,173 27,524
22,160 33,264
Income for the year ended 28 February 2021
Preferred Loan note Other
Dividends Dividends PIK Cash Income Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ US$
'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
Income for the year ended 29 February 2020
Preferred Loan note Other
Dividends Dividends PIK Cash Income Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ US$
'000 '000
US micro-cap 560 26,131 218 1,023 - 27,932
portfolio
European micro-cap - - 4,499 - 1,221 5,720
portfolio
Real estate - - - - (454) (454)
Treasury bills - - - - 66 66
560 26,131 4,717 1,023 833 33,264
9. Finance Costs
Year Ended Year Ended
28.2.2021 29.2.2020
US$ '000 US$ '000
Interest expense calculated using the effective
interest method
ZDP shares (Note 14) 3,441 3,211
Loan interest (Note 11,797 14,293
16)
15,238 17,504
Other interest and similar
expense
CULS finance costs paid (Note 15) 2,953 2,956
18,191 20,460
10. Expenses
Year Ended Year Ended
28.2.2021 29.2.2020
US$ '000 US$ '000
Investment Adviser's base fee 9,722 15,224
Investment Adviser's incentive fee - (35,880)
Directors' remuneration 319 421
10,041 (20,235)
Administrative expenses:
Legal fees 2,934 1,730
Other professional fees 565 666
Accounting, secretarial and administration fees 350 350
Auditors' remuneration 500 458
Auditors' remuneration - non-audit fees 134 65
Custodian fees 17 27
Other expenses 207 412
4,707 3,708
Total expenses 14,748 (16,527)
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 (29 February 2020:
$350,000) payable quarterly in arrears. Fees payable to the Administrator are
subject to an annual fee review.
Directors' Remuneration
For the year ended 28 February 2021 total Directors' fees included in the
Statement of Comprehensive Income were $319,000 (year ended 29 February 2020:
US$421,000), of this amount $46,000 was outstanding at the year end (29
February 2020: $58,000). 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 2021, total investment advisory and management
expenses, based on the average total assets of the Company, were included in
the Statement of Comprehensive Income of $9,722,000 (year ended 29 February
2020: $15,224,000). Of this amount $573,000 (29 February 2020: $1,179,000) 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 is
payable provided that the net investment income for the quarter exceeds 2 per
cent of the average of the net asset value of the Company for that quarter (the
"hurdle") (8 per cent. annualised). For the years ended 28 February 2021 and 29
February 2020 there was no Income Incentive fee.
The second part of the incentive fee is calculated by reference to the net
realised capital gains ("Capital Gains Incentive Fee", or "CGIF") of the
Company and is equal to: (a) 20 per cent. of the realised capital gains of the
Company for each financial year less all realised capital losses of the Company
for the year less (b) the aggregate of all previous capital gains incentive
fees paid by the Company to the Investment Adviser.
For the purpose of calculating incentive fees, assets of the EuroMicrocap Fund
2010, L.P. and JZI Fund III, L.P. are excluded from the calculation of the fee
and cumulative preferred dividends received on the disposal of an investment
are treated as a capital return rather than a receipt of income.
At 28 February 2021, a CGIF of $nil (29 February 2020: $2,307,000) based on net
realised gains was payable to the Investment Adviser.
In December 2019, 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 $10.1 million were also waived. No further incentive fees will
be paid to the Investment Adviser until the Company and Investment Adviser have
mutually agreed to reinstate such payments.
The Company also provided for a CGIF based on unrealised gains, calculated on
the same basis as that of the fee on realised gains/losses. No provision was
included at 28 February 2021 or 29 February 2020.
Provision Provision Paid In Reversal of
At At Year Expense
28.2.2021 29.2.2020 28.2.2021 28.2.2021
US$ '000 US$ '000 US$ '000 US$ '000
Provision for CGIF on unrealised - - - -
investments
CGIF on realised investments - (2,307) 2,307 -
- (2,307) 2,307 -
Provision Provision Paid In Expense
At At Year
29.2.2020 28.2.2019 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000
Provision for CGIF on unrealised - (21,342) - (21,342)
investments
CGIF on realised investments 2,307 (21,429) 4,584 (14,538)
2,307 (42,771) 4,584 (35,880)
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).
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 2021, total Custodian expenses of $17,000 (29 February 2020: $27,000)
were included in the Statement of Comprehensive Income of which $10,000 (29
February 2020: $10,000) was outstanding at the year end and is included within
Other Payables.
Auditors' Remuneration
During the year ended 28 February 2021, the Company incurred fees for audit
services of $500,000 (29 February 2020: $458,000). Fees are also payable to
Ernst & Young for non-audit services including taxation services in relation to
the Company's status as a Passive Foreign Investment Company.
28.2.2021 29.2.2020
Audit Fees US$ '000 US$ '000
Audit fees - 2021 (based on estimate received: £275,000) 385 -
Audit fees - 2020: £425,0001 115 395
Audit fees - 2019: £257,750 - 63
Total audit fees 500 458
Non-audit Fees Paid to Ernst & Young US$ '000 US$ '000
Interim Review - £50,000 (no review for the interim period 69 -
ended 31 August 2019)
Taxation services 65 65
Total non-audit fees 134 65
1 Includes additional audit fees of £60,000 which were agreed by the Audit
Committee post 29 February 2020 year end.
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 year, a withholding tax provision of $126,000 provided for in the
prior year on receipt of a dividend from an unlisted investment was reversed.
At 29 February 2020, a prior period provision of $1,004,000 relating to
dividends received from a listed investment realised in 2012 was reversed. At
28 February 2021, the Company has provided for $398,000 (29 February 2020:
$523,000 of potential withholding tax).
12. Investments
Category of financial instruments
Listed Unlisted Unlisted Carrying
Value
FVTPL FVTPL Loans Total
28.2.2021 28.2.2021 28.2.2021 28.2.2021
US$ '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 capital calls 6,787 58,9311 - 65,718
Payment in kind ("PIK")2 - 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) - (326,101)
exchange gain
Book cost at 28 February 2021 3,393 543,740 74,651 621,784
Unrealised net investment and foreign - (116,434) (7,973) (124,407)
exchange loss
Impairment on loans at amortised cost - - (33,323) (33,323)
Accrued interest 1 2,524 458 2,983
Carrying value at 28 February 2021 3,394 429,830 33,813 467,037
Comparative reconciliation for the year ended 29 February 2020
Category of financial instruments
Listed Unlisted Unlisted Carrying
Value
FVTPL FVTPL Loans Total
29.2.2020 29.2.2020 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000
Book cost at 1 March 2019 3,312 980,120 66,849 1,050,281
Investments in year including capital 6,706 77,810 - 84,516
calls
Payment in kind ("PIK")2 - 26,205 5,090 31,295
Proceeds from realisation and repayment (6,700) (140,296) - (146,996)
of investments
Interest received on maturity 67 - - 67
Net realised investment and foreign - 26,345 - 26,345
exchange gain
Book cost at 29 February 2020 3,385 970,184 71,939 1,045,508
Unrealised net investment and foreign - (316,149) (11,077) (327,226)
exchange loss
Impairment on loans at amortised cost - - (30,261) (30,261)
Accrued interest 1 3,779 371 4,151
Carrying value at 29 February 2020 3,386 657,814 30,972 692,172
1 Includes the 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.
2 The 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.
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 29 February 2020
2021
8% 10% 14% Total 8% 10% 14% Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Loans at 28,652 2,247 2,914 33,813 25,289 1,616 4,067 30,972
amortised cost
Maturity dates are as follows:
As At 28 February 2021 As At 29 February 2020
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 $'000
Loans at - - 33,813 33,813 3,827 27,145 - 30,972
amortised
cost
Post year end, the Company agreed to extend the maturity date of all loans to
European micro-cap companies to 31 December 2022.
Investment in Associates
An associate is an entity over which the Company has significant influence. An
entity is regarded as a subsidiary only if the Company has control over its
strategic, operating and financial policies and intends to hold the investment
on a long term basis for the purpose of securing a contribution to the
Company's activities. The Company has elected for an exemption for 'equity
accounting' for associates and instead classifies its associates as Investments
at fair value through profit or loss.
28.2.2021 29.2.2020
Entity Place of % US$'000 US$'000
incorporation Interest
JZI Fund III GP, LP (has 18.75% Cayman 75% 80,689 68,887
partnership interest in JZI Fund III,
LP)
JZHL Secondary Fund L.P. Delaware N/A 72,154 -
Orangewood Partners Platform LLC1 Delaware 79% 10,876 74,694
Spruceview Capital Partners, LLC Delaware 49% 21,938 20,338
EuroMicrocap Fund 2010, L.P. ("EMC Cayman 75% 3,279 2,732
2010")
Investments in associates at fair value 188,936 166,651
The principal activity of all the JZI Fund III, JZHL Secondary Fund,
EuroMicrocap Fund 2010, L.P. and Orangewood Partners Platform LLC is the
acquisition of micro-cap companies. The principal activity of Spruceview
Capital Partners, LLC is that of an asset management company. There are no
significant restrictions on the ability of associates to transfer funds to the
Company in the form of dividends or repayment of loans or advances.
The Company's maximum exposure to losses from the associates (shown below)
equates to the carrying value plus outstanding commitments:
Entity 28.2.2021 29.2.2020
US$'000 US$'000
JZI Fund III GP, L.P. 104,514 94,830
JZHL Secondary Fund L.P. 72,154 -
Orangewood Partners Platform LLC1 25,980 91,941
Spruceview Capital Partners, LLC 22,838 20,558
EuroMicrocap Fund 2010, L.P. 3,279 2,732
228,765 210,061
1Invests in George Industries and Orangewood Partners II-A L.P. (29 February
2020: K2 Towers II, George Industries, Peaceable Street Capital, ABTB and
Orangewood Partners II-A L.P.)
Investment in Subsidiaries
The principal place of business for subsidiaries is the USA. The Company meets
the definition of an Investment Entity in accordance with IFRS 10. Therefore,
it does not consolidate its subsidiaries but rather recognises them as
investments at fair value through profit or loss.
Entity Place of % 28.2.2021 29.2.2020
incorporation Interest US$'000 US$'000
JZCP Realty, Ltd Cayman 100% 23,376 158,712
JZBC, Inc. (Invests in Spruceview Delaware 99% 21,938 20,338
Capital Partners, LLC)
Investments in subsidiaries at fair 45,314 179,050
value
There are no significant restrictions on the ability of subsidiaries to
transfer funds to the Company. The Company has no contractual commitments to
provide any financial or other support to its unconsolidated subsidiaries.
JZCP Realty Ltd has a 100% interest in the following Delaware incorporated
entities: JZCP Loan 1 Corp, JZCP Loan Fulton Corp, JZCP Loan Flatbush Corp,
JZCP Loan Flatbush Portfolio Corp, JZCP Loan Design Corp and JZCP Loan
Esperante Corp.
JZCP Realty Ltd has a 99% interest in the following Delaware incorporated
entities: JZ REIT Fund 1, LLC, JZ REIT Fund Fulton, LLC, JZ REIT Fund Flatbush,
LLC, JZ REIT Fund Flatbush Portfolio, LLC, JZ REIT Fund Design LLC and JZ REIT
Fund Esperante LLC.
13. Other Receivables
28.2.2021 29.2.2020
US$ '000 US$ '000
Prepayments 22 39
Other receivables - 80
22 119
14. 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 $80,527,000 using the exchange rate at year end).
ZDP shares are designed to provide a pre-determined final capital entitlement
which ranks behind the Company's creditors but in priority to the capital
entitlements of the Ordinary shares. The ZDP shares carry no entitlement to
income and the whole of their return will therefore take the form of capital.
In certain circumstances, ZDP shares carry the right to vote at general
meetings of the Company as detailed in the Company's Memorandum of Articles and
Incorporation. Issue costs are deducted from the cost of the liability and
allocated to the Statement of Comprehensive Income over the life of the ZDP
shares.
ZDP (2022) Shares 28.2.2021 29.2.2020
US$ '000 US$ '000
Amortised cost at 1 March 64,510 63,838
Finance costs allocated to Statement of Comprehensive Income 3,441 3,211
Unrealised currency loss/(gain) to the Company on translation 6,352 (2,539)
during the year
Amortised cost at year end 74,303 64,510
Total number of ZDP (2022) shares in issue 11,907,720 11,907,720
15. Convertible Subordinated Unsecured Loan Stock ("CULS")
On 30 July 2014, JZCP issued £38,861,140 6% CULS. Holders of CULS may convert
the whole or part (being an integral multiple of £10 in nominal amount) of
their CULS into Ordinary Shares. The initial conversion price was £6.0373 per
Ordinary Share, which shall be subject to adjustment to deal with certain
events which would otherwise dilute the conversion of the CULS.
CULS bear interest on their nominal amount at the rate of 6.00% per annum,
payable semi-annually in arrears. During the year ended 28 February 2021:
$2,953,000 (29 February 2020: $2,956,000) of interest was paid to holders of
CULS and is shown as a finance cost in the Statement of Comprehensive Income.
The CULS are valued at fair value being the listed offer price at the year end.
Given the illiquid nature of the instruments, the Company considers the
potential need to apply an adjustment to the listed offer price. No adjustment
was applied at the year-end.
The Company has calculated the fair value movement due to the change in the
credit risk of the entity by comparing the movement in the fair value of the
CULS with the impact of the changes in the market interest rate. The amount
calculated of $1,074,000 (29 February 2020: deemed immaterial) is presented in
Other Comprehensive Income in the Statement of Comprehensive Income.
28.2.2021 29.2.2020
US$ '000 US$ '000
Fair Value of CULS at 1 March 49,886 54,274
Unrealised movement in value of CULS due to change in Company's (1,074) -
Credit Risk
Unrealised movement in fair value (912) (2,326)
of CULS
Unrealised currency loss/(gain) to the Company on translation 4,530 (2,062)
during the year
Loss/(gain) on financial liabilities at fair value 3,618 (4,388)
through profit or loss
Fair Value of CULS based on offer 52,430 49,886
price
16. Loan Payable
Senior Secured Debt Facility
On 12 June 2015, JZCP entered into a Senior Secured Debt Facility agreement
with Guggenheim Partners Limited (the "original lenders". The original facility
was structured as $80 million and ?18 million and increased by a further $50
million in April 2017. The facility is due to mature on 12 June 2021 (6 year
term).
On 23 October 2020, the Company announced that it has agreed with its senior
lenders amended terms of the Senior Debt Facility. Under the terms of the
Amended Senior Facility, $40 million of the outstanding principal amount was
assigned from the original lenders to clients and funds advised by Cohanzick
Management, LLC and CrossingBridge Advisors, LLC (the "replacement lenders").
The interest rate payable by the Company for the $40 million tranche purchased
by the replacement lenders (the "Last-Out Loan") was amended to LIBOR1 +
11.00%, instead of LIBOR + 5.75% as is applicable to the original lenders. As
part of this transaction, the Company secured more advantageous terms for
itself, including the minimum asset coverage covenant being reset (from not
less than 4.00:1.00 to a lower requirement of 3.50:1.00) and a relaxation of
rating requirements, removal of certain concentration limits, updates to the
use of proceeds requirements pertaining to asset sales to preserve liquidity,
and reduced requirements related to its real estate collateral and reporting on
investments.
Subsequent to entering into the amended agreement and following investment
realisations the Company repaid a total of $82.9 million of the outstanding
principal amount.
On 23 February 2021, the Company announced that Guggenheim Partners Europe
Limited had sold its remaining interest in the Company's senior debt facility
(the "First-Out Loan") to clients and funds advised and sub-advised by the
Replacement Lenders. There were no further changes to the quantum or terms of
the existing First-Out Loan as a result of this transaction.
The modified terms of the loan are not deemed to be substantially different
from the original terms. Therefore as per IFRS-9, the senior debt facility is
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 14 May 2021, the Company entered into an amendment agreement with its senior
lenders to further amend the terms of its senior debt facility which will,
among other things, extend the maturity date of the senior debt facility by one
year until 12 June 2022. The interest rate charges under the amended agreement
for the First Out Loans will be amended 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 charges under the amended agreement for the Last Out Loans will be 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. shall be charged as payment-in-kind
interest.
At 28 February 2021, investments and cash valued at $504,883,0002 (29 February
2020: $668,141,000) were held as collateral on the loan. A covenant on the loan
states the fair value of the collateral must be 3.5.x the loan value. The
Company is also required to hold a minimum cash balance of $15 million. At 28
February 2021, the Company was full compliance with covenant terms. Breaches of
the original agreement were waived as part of the amended senior debt facility
agreement.
28.2.2021 29.2.2020
US$ '000 US$ '000
Amortised cost (Dollar drawdown) - 1 March 130,523 128,838
Amortised cost (Euro drawdown) - 1 March 19,839 20,389
Loan repayments (82,912) -
Finance costs charged to Statement of Comprehensive 11,797 14,293
Income
Interest and finance costs paid (12,331) (12,436)
Unrealised currency gain on translation of Euro drawdown 1,778 (722)
Amortised cost at year end 68,694 150,362
Amortised cost (Dollar drawdown) 68,694 130,523
Amortised cost (Euro drawdown) - 19,839
68,694 150,362
The carrying value of the loans approximates to fair value.
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, and
are looking to implement alternative risk-free rates by the end of 2021.
2Investments held as collateral exclude the Company's investment in Spruceview
Capital.
17. Other Payables
28.2.2021 29.2.2020
US$ '000 US$ '000
Provision for tax on dividends received not withheld 398 523
at source
Legal fee provision 250 250
Audit fees 363 190
Directors' remuneration 48 58
Other expenses 225 204
1,284 1,225
18. Share Capital
Authorised Capital
Unlimited number of ordinary shares of no par value.
Ordinary shares - Issued Capital
28.2.2021 29.2.2020
Number of Number of
shares shares
Total Ordinary shares in issue 77,474,175 77,474,175
During the year ended 28 February 2021, there were no Ordinary shares bought
back by the Company. During the prior year ended 29 February 2020, the Company
bought back 3,192,663 of its own Ordinary shares as part of a tender offer. The
shares were purchased at a price of $9.39 (£7.67) per share being a 5% discount
to the NAV at 31 July 2019, the total cost of the repurchase of the shares was
$29.979 million. All shares repurchased were subsequently cancelled.
The Company's shares trade on the London Stock Exchange's Specialist Fund
Segment.
The Ordinary shares carry a right to receive the profits of the Company
available for distribution by dividend and resolved to be distributed by way of
dividend to be made at such time as determined by the Directors.
In addition to receiving the income distributed, the Ordinary shares are
entitled to the net assets of the Company on a winding up, after all
liabilities have been settled and the entitlement of the ZDP shares have been
met. In addition, holders of Ordinary shares will be entitled on a winding up
to receive any accumulated but unpaid revenue reserves of the Company, subject
to all creditors having been paid out in full but in priority to the
entitlements of the ZDP shares. Any distribution of revenue reserves on a
winding up is currently expected to be made by way of a final special dividend
prior to the Company's eventual liquidation.
Holders of Ordinary shares have the rights to receive notice of, to attend and
to vote at all general meetings of the Company.
Capital raised on issue of new shares and capital repaid on buy back of shares
Subsequent amounts raised by the issue of new shares (net of issue costs) and
amounts paid to buy back Ordinary shares, are credited/debited to the share
capital account.
Share Capital Account
28.2.2021 29.2.2020
US$ '000 US$ '000
At beginning of year 216,625 246,604
Buy back of Ordinary shares - (29,979)
At year end 216,625 216,625
19. 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.
20. Reserves
Capital raised on formation of 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.
Summary of reserves attributable to Ordinary shareholders
28.2.2021 29.2.2020
US$ '000 US$ '000
Share capital account 216,625 216,625
Other reserve 354,602 353,528
Retained earnings (241,668) (94,419)
329,559 475,734
Other reserve
The movement in Other Reserve during the year was the Gain on financial
liabilities due to change in credit risk of $1,074,000 (29 February 2020:
$nil).
Subject to satisfaction of the solvency test, all of the Company's capital and
reserves are distributable in accordance with The Companies (Guernsey) Law,
2008.
Retained earnings
The Company's loss is now posted to one 'retained earnings' reserve.
Previously, profit/loss was split between revenue and capital and reflected in
separate reserve accounts. The comparative reserve accounts have been adjusted
accordingly.
28.2.2021 29.2.2020
US$ '000 US$ '000
At beginning of year (94,419) 210,130
Loss for the year attributable to
revenue (147,249) (304,549)
At year end (94,419)
(241,668)
21. 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
28.2.2021 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 table below summarises the Company's exposure to interest rate risks:
Interest bearing Non
interest
Fixed rate Floating bearing Total
rate
29.2.2020 29.2.2020 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 218,757 - 442,443 661,200
Loans at amortised cost 30,972 - - 30,972
Cash and cash equivalents - 52,912 - 52,912
Other receivables and - - 119 119
prepayments
Loans payable - (150,362) -
(150,362)
ZDP shares (2022) (64,510) - - (64,510)
CULS (49,886) - - (49,886)
Other payables - - (4,711) (4,711)
135,333 (97,450) 437,851 475,734
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 2021
0-3 4-12 1 - <3 3 - <5 Past No Total
months months years years due maturity
date
US$ US$ US$ US$ US$ US$ '000 US$ '000
'000 '000 '000 '000 '000
Investments at - 3,394 - - 1,000 173,433 177,827
FVTPL
Loans at - 33,813 - - - - 33,813
amortised cost
Cash and cash - - - - - 59,784 59,784
equivalents
Loans payable - (68,694) - - - - (68,694)
ZDP shares - - (74,303) - - - (74,303)
(2022)
CULS - (52,430) - - - - (52,430)
- (83,917) (74,303) - 1,000 233,217 75,997
As at 29 February 2020
0-3 4-12 1 - <3 3 - <5 <5 No Total
months months years years years maturity
date
US$ US$ US$ US$ US$ US$ '000 US$ '000
'000 '000 '000 '000 '000
Investments at 3,386 5,000 4,138 - - 206,233 218,757
FVTPL
Loans at - 30,972 - - - - 30,972
amortised cost
Cash and cash - - - - - 52,912 52,912
equivalents
Loans payable - - (150,362) - - - (150,362)
ZDP shares - - (64,510) - - - (64,510)
(2022)
CULS - - (49,886) - - - (49,886)
3,386 35,972 (260,620) - - 259,145 37,883
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 values 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 is deemed immaterial. Therefore no sensitivity analysis is
presented.
Of the cash and cash equivalents held, $59,784,000 (29 February 2020:
$52,912,000) earns interest at variable rates and the income may rise and fall
depending on changes to interest rates.
The Investment Adviser monitors the Company's overall interest sensitivity on a
regular basis by reference to the current market rate and the level of the
Company's cash balances. The Company has not used derivatives to mitigate the
impact of changes in interest rates.
The table below demonstrates the sensitivity of the Company's profit/(loss) for
the year to a reasonably possible change in interest rates. The Company has
cash at bank and loans payable for which interest receivable and payable are
sensitive to a fluctuation to rates. The below sensitivity analysis assumes
year end balances and interest rates are constant through the year.
Interest Interest Payable2,3
Receivable1,3
28.2.2021 29.2.2020 28.2.2021 29.2.2020
Change in basis points increase/ US$ '000 US$ '000 US$ '000 US$ '000
decrease
+100/-100 503/(252) 476/(429) (137)/ (1,153)/
nil 1,300
+300/-300 1,510/ 1,429/ (1,511)/ (1,153)/
(252) (429) nil 4,432
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 $28.7 million at 6.75%
3 The reduction in interest receivable and interest payable is floored as the
sensitivity applied reduces the interest rate to zero
Currency risk
Currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates.
Changes in exchange rates are considered to impact the fair value of the
Company's investments denominated in Euros and Sterling. However, under IFRS
the foreign currency risk on these investments is deemed to be part of the
market price risk associated with holding such non-monetary investments. As the
information relating to the non-monetary investments is significant, the
Company also provides the total exposure and sensitivity changes on
non-monetary investments on a voluntary basis. The following tables set out the
Company's exposure by currency to foreign currency.
Exposure to Monetary Assets/Liabilities (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
28.2.2021 28.2.2021 28.2.2021 29.2.2020 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Loans at Amortised 33,813 - 33,813 30,972 - 30,972
Cost
Cash at Bank 406 44 450 352 27 379
Other Receivables - 22 22 - 39 39
Liabilities
CULS - (52,430) (52,430) - (49,886) (49,886)
ZDP (2022) shares - (74,303) (74,303) - (64,510) (64,510)
Loans payable - - - (19,839) - (19,839)
Other payables - (528) (528) - (352) (352)
Net Currency Exposure 34,219 (127,195) (92,976) 11,485 (114,682) (103,197)
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.
Effect on net assets attributable to
shareholders
(relates to monetary financial assets and
liabilities)
28.2.2021 29.2.2020
Currency Change in Currency US$ '000 US$ '000
Rate
Euro +10% 3,422 1,149
GBP +10% (12,722) (11,468)
Exposure to Non-Monetary Assets (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
28.2.2021 28.2.2021 28.2.2021 29.2.2020 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Financial assets 69,956 14,762 84,718 60,770 11,599 72,369
at FVTPL
Net Currency 69,956 14,762 84,718 60,770 11,599 72,369
Exposure
Effect on net assets attributable to
shareholders
(relates to non-monetary financial assets)
28.2.2021 29.2.2020
Currency Change in Currency US$ '000 US$ '000
Rate
Euro +10% 6,996 6,077
GBP +10% 1,476 1,160
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 risk.
Total Total
28.2.2021 29.2.2020
US$ '000 US$ '000
US micro-cap debt 1,000 9,138
European micro-cap debt 33,813 30,972
US Treasury Bills 3,394 3,386
Cash and cash equivalents 59,784 52,912
97,991 96,408
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.
28.2.2021 29.2.2020
US$ '000 US$ '000
Financial General 77% 58%
Document Processing 12% 10%
Telecom 8% 10%
House, Leisure & Personal Goods 3% 12%
Healthcare Services & Equipment - 10%
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 has
significantly increased during the year and therefore expected credit losses
are recognised over the life time of the loan. A provision was made in the
prior year (July 2019), when Ombuds entered bankruptcy. The Company do not
believe there will be proceeds from Ombuds, to pay any portion of JZCP's loan
hence a provision has been made to bring the carrying value down to $nil.
ECL Provision
Year ended 28 February 2021 Year ended 29 February 2020
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
US$ '000 US$ '000 US$ '000 US$ US$ '000 US$ '000 US$ US$
'000 '000 '000
ECL at 1 905 - 29,356 30,261 1,470 - - 1,470
March
Provision 815 2,247 - 3,062 1,187 14,106 14,025 29,318
during the
year
Level (749) 749 - - (1,668) (14,106) 15,774 -
Transfer
Foreign 399 181 3,203 3,783 (84) - (443) (527)
exchange
movement
ECL at 1,370 3,177 32,559 37,106 905 - 29,356 30,261
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 28.2.2021
Rating $'000
HSBC Bank USA NA S&P Stable (2020: S&P A+ (2020: A+) 57,156
Negative)
City National Bank Moody's Stable S&P A+ 2,500
Raymond James Bank S&P Stable (2020: S&P BBB+ (2020: 4
Stable) BBB+)
Northern Trust (Guernsey) S&P Stable (2020: S&P AA- (2020: 124
Limited Stable) A-1+)
59,784
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 CULS and a debt facility in 2021
and ZDP shareholders in 2022. At the year end the Company has outstanding
investment commitments of $31,897,000 (29 February 2020: $48,769,000) see Note
22.
The Company manages liquidity risk and the ability to meet its obligations by
monitoring current and expected cash balances from forecasted investment
activity.
The table below analyses JZCP's financial liabilities into relevant maturity
groups based on the remaining period at the reporting date to the contractual
maturity date. Amounts attributed to CULS and ZDP share include future
contractual interest payments. Financial commitments are contractual outflows
of cash and are included within the liquidity statement.
At 28 February 2021 Less than >1 year - >3 years >5 No
1 year 3 years - 5 years stated
years maturity
US$ '000 US$ '000 US$ '000 US$ US$ '000
'000
CULS 57,048 - - - -
ZDP (2022) shares - 80,527 - - -
Loans payable 70,639 - - - -
Other payables 1,459 - - - 398
Financial commitments (see Note 12,832 18,825 240 - -
22)
141,978 99,352 240 - 398
At 29 February 2020 Less than >1 year - >3 years >5 No
1 year 3 years - 5 years stated
years maturity
US$ '000 US$ '000 US$ '000 US$ US$ '000
'000
CULS 2,978 54,594 - - -
ZDP (2022) shares - 73,569 - - -
Loans payable 10,163 152,829 - - -
Other payables 4,711 - - - 523
Financial commitments (see Note 12,049 34,441 2,279 - -
22)
29,901 315,433 2,279 - 523
22. Commitments
At 28 February 2021 and 29 February 2020, JZCP had the following financial
commitments outstanding in relation to fund investments:
Expected 28.2.2021 29.2.2020
date
of Call US$ '000 US$ '000
JZI Fund III GP, L.P. ?19,628,404 (29.2.2020: over 3 years 23,825 25,943
?23,617,789)
Orangewood Partners II-A LP1 see footnote 6,932 17,247
Spruceview Capital Partners, over 1 year 900 220
LLC2
Igloo Products Corp over 3 years 240 240
CERPI - 3,080
Suzo Happ Group - 2,039
31,897 48,769
1During the year, the Company was relieved of outstanding commitments to the
Orangewood Fund of $7.8 million following the sale of total commitments. Post
year end, the Orangewood Fund held it final close resulting in a reallocation
of unfunded commitments. At the date of this report, JZCP's unfunded commitment
to $9.365 million. Subject to shareholder approval, JZCP intends to sell its
remaining commitment to the Orangewood Fund in the near term.
2As approved by a shareholder vote on 12 August 2020, JZCP has the ability to
make up to approximately $4.1 million in further commitments to Spruceview,
above the $0.9 million unfunded commitments as at 28 February 2021.
23. 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 2021, JZCP's investment in Fund III was valued at $80.7 million (29
February 2020: $68.9 million). JZCP's investment in EMC 2010 was valued at $3.3
million (29 February 2020: $2.7 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 2021, was $33.5 million
with $0.9 million of this amount remaining unfunded and outstanding. As
approved by a shareholder vote on 12 August 2020, JZCP has the ability to make
up to approximately $4.1 million in further commitments to Spruceview, above
the $33.5 million committed as of 28 February 2021. 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, 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.
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 2021, these co-investments, with Fund A,
were in the following portfolio companies: Igloo, Industrial Services
Solutions, New Vitality, Salter Labs, Sloan LED, Testing Services Holdings,
Tierpoint and Vitalyst.
During the year, following shareholder approval, JZAI Founders Jay Jordan and
David Zalaznick relieved the Company of its maximum potential commitment of
$8.64 million to CERPI (the investment fund managed by Spruceview Capital
Partners).
During the year, following shareholder approval, JZAI Founders Jay Jordan and
David Zalaznick relieved the Company of $4.25 million of its commitments to the
Orangewood Fund. Post year end, the Company announced that it had entered into
an agreement with Jay Jordan and David Zalaznick which proposes they relieve
the Company of all of its remaining commitments to the Orangewood Fund of
$12.35 million (approximately $3 million of this commitment being "funded" and
$9.35 million "unfunded") The Company is seeking shareholder approval to agree
this proposal.
Post year end, the Company entered into a note purchase agreement with David
Zalaznick and Jay Jordan, pursuant to which they have agreed to purchase
directly or through their affiliates, subordinated, second lien 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 is subject to a number of conditions, including shareholder approval, of
both the Loan Note proposal and the Orangewood Fund proposal.
Total Directors' remuneration for the year ended 28 February 2021 was $319,000
(29 February 2020: $421,000).
24. Basic and Diluted Loss Per Share
Basic loss per share is calculated by dividing the loss for the year by the
weighted average number of Ordinary shares outstanding during the year.
For the year ended 28 February 2021, the weighted average number of Ordinary
shares outstanding during the year was 77,474,175 (Year ended 29 February 2020:
79,053,060).
The Company's diluted loss per share is calculated by considering adjustments
required to the earnings 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 adjusted weighted average of the number of Ordinary shares for
the year ended 28 February 2021 was 83,911,016 (29 February 2020: 85,489,901).
Conversion is assumed even though at 28 February 2021 and 29 February 2020 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'. Earnings are
adjusted to remove the fair value loss of $3,618,000 (29 February 2020: fair
value gain of $4,388,000, unrealised movement in value due to credit risk being
a gain of $1,074,000 (29 February 2020: nil) and finance costs attributable to
CULS of $2,953,000 (29 February 2020: $2,956,000). For the year ended 28
February 2021 and 29 February 2020, the potential conversion of the CULS would
have been anti-dilutive to the total loss per share, therefore the diluted loss
per share is presented as per the basic loss per share calculation.
25. 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.
26. Net Asset Value Per Share
The net asset value per Ordinary share of $4.25 (29 February 2020: $6.14) is
based on the net assets at the year end of $329,559,000 (29 February 2020:
$475,734,000) and on 77,474,175 (29 February 2020: 77,474,175) Ordinary shares,
being the number of Ordinary shares in issue at the year end.
27. Contingent Assets
Amounts held in escrow accounts
When investments have been disposed of by the Company, proceeds may reflect
contractual terms requiring that a percentage is held in an escrow account
pending resolution of any indemnifiable claims that may arise. At 28 February
2021 and 29 February 2020, the Company has assessed that the likelihood of the
recovery of these escrow accounts cannot be determined and has therefore
recognised the escrow accounts as a contingent asset.
As at 28 February 2021 and 29 February 2020, the Company had the following
contingent assets held in escrow accounts which had not been recognised as
assets of the Company:
Company Amount in Escrow
28.2.2021 29.2.2020
US$'000 US$'000
Triwater Holdings 309 644
Xpress Logistics (AKA Priority 19 153
Express)
Bolder Healthcare Solutions - 343
328 1,140
During the year ended 28 February 2021 proceeds of $1,147,000 (29 February
2020: $5,559,000) were realised during the year and recorded in the Statement
of Comprehensive Income.
Year Ended Year Ended
28.2.2021 29.2.2020
US$'000 US$'000
Escrows at beginning of year 1,140 9,261
Escrows added on realisation of - 431
investments
Potential escrows at prior year end no longer - (2,993)
recorded
Escrow receipts during the year (1,147) (5,559)
Additional escrows recognised in year not reflected in 335 -
opening position
Escrows at year end 328 1,140
28. Notes to the Statement of Cash Flows
Investment income and interest received during Year Ended Year Ended
the year
28.2.2021 29.2.2020
US$ '000 US$ '000
Interest on investments 279 1,669
Dividends on unlisted investments 379 1,781
Bank interest 220 455
Treasury interest 11 -
889 3,905
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
1.3.2020 Cash Fair Finance Foreign 28.2.2021
flows Value Costs Exchange
US$ '000 US$ '000 US$ US$ US$ US$
'000 '000 '000 '000
Zero Dividend Preference 64,510 - - 3,441 6,352 74,303
(2022) shares
Convertible Unsecured 49,886 (2,953) (1,986) 2,953 4,530 52,430
Loan Stock
Loans payable 150,362 (95,243) - 11,797 1,778 68,694
264,758 (98,196) (1,986) 18,191 12,660 195,427
Non-cash changes
1.3.2019 Cash Fair Finance Foreign 28.2.2020
flows Value Costs Exchange
US$ '000 US$ '000 US$ US$ US$ US$
'000 '000 '000 '000
Zero Dividend Preference 63,838 - - 3,211 (2,539) 64,510
(2022) shares
Convertible Unsecured 54,274 (2,956) 2,956 (2,062) 49,886
Loan Stock (2,326)
Loans payable 149,227 - 14,293 (722) 150,362
(12,436)
267,339 (15,392) (2,326) 20,460 (5,323) 264,758
29. Dividends Paid and Proposed
No dividends were paid or proposed for the years ended 28 February 2021 and 29
February 2020.
30. 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 2021, 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.
Measurement of Liabilities
The Company's loan facility 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. CULS
is translated at the exchange rate at the reporting date and both differences
in fair value due to the listed offer price and exchange rates are recognised
in the Statement of Comprehensive Income in accordance with US GAAP and IFRS.
The following table presents performance information derived from the Financial
Statements.
28.2.2021 29.2.2020
US$ US$
Net asset value per share at the beginning of the 6.14 10.04
year
Performance during the year (per
share):
Net investment income 0.29 0.42
Net realised and unrealised loss (1.76) (4.30)
Incentive fee - 0.45
Operating expenses (0.19) (0.24)
Finance costs (0.23) (0.25)
Accretion from the buy back of Ordinary shares at a - 0.02
discount to NAV
Total return (1.89) (3.90)
Net asset value per share at the end of 4.25 6.14
the year
Total Return (30.78%) (38.81%)
Net investment income to average net assets excluding 5.72% 4.64%
incentive fee
Operating expenses to average net assets (3.75%) (2.71%)
Incentive fees to average net - 4.97%
assets
Operating expenses to average net assets including (3.75%) 2.26%
incentive fee
Finance costs to average net (4.54%) (2.76%)
assets
31. Subsequent Events
These financial statements were approved by the Board on 18 May 2021.
Subsequent events have been evaluated until this date.
Post year end, the Company has received realisations proceeds totalling
approximately $14.4 million including the sale of George Industries of $9.5
million, $2.6 million following the reallocation of unfunded commitments in the
Orangewood Fund and approximately $2.3 million in deferred gross proceeds from
the Company's sale of Factor Energia to Fund III in November 2017.
Post year end, the Company entered into an amendment agreement with its
replacement lenders to amend the terms of its senior debt facility which will,
among other things, extend (subject to shareholder approval of the Loan Note
proposal noted below) the maturity date of the senior debt facility by one year
until 12 June 2022 and permit JZCP to repay its CULS when they become due on
their maturity date of 30 July 2021, notwithstanding that the CULS are
subordinated to the Senior Facility. The interest rate charges under the
amended agreement for the First Out Loans (approx $28.7 million principal) will
be amended 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 charges under the amended
agreement for the Last Out Loans ($40 million principal) will be 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. shall be charged as payment-in-kind
interest.
Post year end, 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 have agreed to purchase directly or through their affiliates,
subordinated, second lien loan notes totalling $31.5 million, with an interest
rate of 6 per cent. per annum and maturing on 11 September 2022.
Post year end, the board has understood that conditional agreement subject to
closing has been reached in relation to the sale of one of its portfolio
companies which would, if its conditions are satisfied, result in the Company
receiving consideration of approximately $40 million and which reflects a
premium to carrying asset value. The Company will of course make further
announcements as required in relation to the status of the transaction.
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 Bankers
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 Bankers
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
Royal Chambers
St Julian's Avenue
St Peter Port
Guernsey GY1 4HP
Financial Adviser and Broker
J.P. Morgan Cazenove Limited
20 Moorgate
London EC2R 6DA
Useful Information for Shareholders
Listing
JZCP Ordinary, Zero Dividend Preference ("ZDP") shares and Convertible
Unsecured Loan Stock ("CULS") 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 and CULS.
ISIN/SEDOL numbers
Ticker Symbol ISIN Code Sedol Number
Ordinary shares JZCP GG00B403HK58 B403HK5
ZDP (2022) shares JZCZ GG00BZ0RY036 BZ0RY03
CULS JZCC GG00BP46PR08 BP46PR0
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. JZCP also produces an adjusted
Total NAV Return which excludes the effect of the appreciation/dilution per
share caused by the buy back/issue of shares at a discount to NAV, the result
of the adjusted Total NAV return is to provide a measurement of how the
Company's Investment portfolio contributed to NAV growth adjusted for the
Company's expenses and finance costs. The Total NAV Return and the Adjusted NAV
Return for the year ended 28 February 2021 was -30.8% (2020: -38.8%), 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 2021 was -69.8%, which only
reflects the change in share price (£) as no dividends were paid during the
year. The Shareholder Return for the year ended 29 February 2020 was -40.7%.
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 2021, JZCP's Ordinary shares traded at £0.78 (29 February 2020:
£2.58) or $1.09 (29 February 2020: $3.30) being the dollar equivalent using the
year end exchange rate of £1: $1.39 (29 February 2020 £1: $1.28). The shares
traded at a 74.3% (29 February 2020: 46%) discount to the NAV per share of
$4.25 (2020: $6.14).
Ongoing Charges calculation
A measure expressing the Ongoing annualised expenses as a percentage of the
Company's average annualised net assets over the year 3.52% (2020: 2.71%).
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 $13,747,000 (2020: $19,353,000) comprising of
the IA base fee $9,722,000 (2020: $15,224,000), administrative fees $3,706,000
(2020: $3,708,000) and directors fees $319,000 (2020:$421,000). Average net
assets for the year are calculated using quarterly NAVs $390,244,000 (2020:
$713,333,000).
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 6 July 2021
Interim report for the six months ended 31 August November 2021 (date to be
2021 confirmed)
Results for the year ended 28 May 2022 (date to be confirmed)
February 2022
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").
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 NOT a passive foreign investment
company ("PFIC") for the fiscal years ended February 2020 and 2019. An analysis
for the financial year ended 29 February 2021 will be undertaken this year. A
classification as a PFIC would likely have adverse tax consequences for US
taxpayers.
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
May 19, 2021 02:00 ET (06:00 GMT)
Jz Capital Partners (LSE:JZCP)
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Jz Capital Partners (LSE:JZCP)
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