Audit Committee role

Ensures fair, balanced and understandable reporting of Company results and valuations.

The principal role of the Audit Committee is to consider the following matters and make appropriate recommendations to the Board to ensure that:

• the integrity of financial reporting and the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy;
• the independence, objectivity and effectiveness of the appointed Auditor is monitored and reviewed. The Committee additionally reviews the Auditor’s performance in terms of quality, control and value and considers whether shareholders would be better served by a change of Auditor; and
• the financial reporting internal control systems of the Company are adequate and effective.

The Audit Committee met six times during 2023. It formally reports to the Board on its proceedings after each meeting. Attendance is summarised as part of the report by the Nomination Committee of the Board.

Significant estimates

The most significant estimates in the Company’s Financial Statements are the fair value of the Oakley Funds and the fair value of direct investments.

Key elements considered by the Audit Committee in its consideration of fair values of Oakley funds are:

• valuation approach to underlying portfolio companies – understanding input data, assumptions and methodologies used;
• consistency in valuation approach;
• investments are valued in accordance with the International Private Equity and Venture Capital (IPEV) Valuation Guidelines;
• results of independent, third-party valuation engagement commissioned by the Investment Adviser, which produces an annual independent valuation of each portfolio company;
• results of backtesting performed by the Investment Adviser comparing realisations against carrying values on disposal;
• internal controls, including the work of the Valuation Committee at the Investment Adviser; and
• results of the independent audit, including detailed discussions with the audit team.

The continued conflict between Russia and Ukraine throughout 2023, combined with increasing tensions and conflict in the Middle East continue to drive a prolonged period of economic and geopolitical uncertainty, with stubborn levels of inflation and high interest rates impacting many businesses. The Committee remains focused on how these impacts have been addressed in the assumptions and methods used in the valuations. Specifically, the potential impacts of economic downturns and inflation on portfolio company operating performance, the impact of interest rates on valuation multiples, the quality, and relevance of comparables use, general market activity, and the availability of credit and its impact on fund credit facilities and therefore the Company’s cash flow and liquidity. 

During the year, OCI’s direct debt investments with North Sails were converted into preferred equity.  In its consideration of the fair value, for this restructuring of the Committee:

• obtained and reviewed detailed valuation documents provided by the Investment Adviser, which includes trading performance of counterparties, out-turn and return analysis for OCI following the debt-to-equity conversion, and fair value estimates;
• commissioned an independent, third-party valuation adviser to produce an independent valuation for the preferred equity investment with North Sails; and
• considered the results of the work of the independent Auditor.

As part of the liquidation of Fund I, OCI’s direct debt investment with Fund I was settled via the transfer of shares in Time Out, and its holding in Fund I was repaid by a distribution in specie of Time Out shares. This resulted in the Company's ownership in Time Out now being direct rather than indirect. In its consideration of the fair value, the Committee:

• obtained and reviewed the Investment Adviser’s assessment of the volume and level of activity of the Time Out shares and the appropriateness of the fair value to be measured at the quoted market price on the measurement date; and
• considered whether a discount of the quoted value of Time Out shares in the settlement was appropriate, ultimately concluding that it was not.

The Audit Committee concluded that the valuation process was effective in providing fair value estimates for both the fund and direct investments. It also noted that the valuation process, internal controls and accounting principles used were consistent with previous years.

Except for the independent, third-party valuation reports and external audits that are performed at year-end only, the valuation process is also consistent with the quarterly processes.

Financial reporting internal controls

Financial reporting and administration functions of the Company are mostly outsourced to Oakley through an Investment Advisory and Operational Services Agreement. The Committee is provided with documents detailing the key internal controls in the financial reporting process. Further, it has regular access to and discussions with the finance team of Oakley as part of the regular financial reporting process. The Committee also receives regular reporting from the Oakley compliance function. On at least an annual basis the Management Engagement Committee conducts a formal assessment of the performance of Oakley, including the operating effectiveness of financial reporting controls and reports back to the Board. Through these combined activities the Audit Committee is satisfied that financial reporting internal controls are adequate and effective.

During the year, the Audit Committee reviewed and approved the publication of the quarterly NAV, the Half-yearly Report and Accounts and the dividend declarations.

The Audit Committee approved the Annual Report, confirming to the Board that financial and narrative reporting is fair, balanced and understandable.

Audit: independence and objectivity

The Committee is responsible for overseeing the relationship with the external Auditor, including (but not limited to): approval of their remuneration; approval of their terms of engagement; assessing annually their independence and objectivity; monitoring the Auditor’s compliance with relevant ethical and professional guidance on the rotation of audit partners and specialists; and assessing annually their qualifications, expertise and resources and the overall quality and effectiveness of the audit process. The Audit Committee meets with the external Auditor in person at least twice a year.

KPMG Audit Limited (KPMG or the ‘Auditor’), located in Hamilton, Bermuda, has been the Company’s Auditor since 2007. The Audit Committee reviews their performance annually. The Audit Committee considers a range of factors in determining the quality of the audit firm, including independence and objectivity, quality of service, the Auditor’s specialist expertise and the level of audit fee.