Independent Auditor's Report

Report on the audit of the consolidated financial statements, to the Shareholders and Board of Directors of Oakley Capital Investments Limited.

Opinion

We have audited the consolidated financial statements of Oakley Capital Investments Limited and its subsidiary (“the Company”), which comprise the consolidated balance sheet as at 31 December 2023, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising material accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at 31 December 2023, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board (IFRS Accounting Standards).

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Company in accordance with International Ethics Standards Board for Accountants International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Bermuda and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of unquoted fund investments

The key audit matter

As discussed in Notes 6 and 8 to the consolidated financial statements, the Company holds investments in unquoted fund investments (the “Funds”) managed by Oakley Capital Limited (the “Investment Adviser”). The Funds are unquoted equity securities.

Unquoted fund investments are the largest asset class in the financial statements representing 65% (2022: 75%) of the Company’s net assets of £1.2 billion (2022: £1.17 billion). The unquoted fund investments are carried at their estimated fair values in accordance with International Private Equity and Venture Capital Association (“IPEV”) valuation guidelines and IFRS 13.

The valuation of the Funds held in the Company’s investment portfolio is the key driver of its net asset value and total return to shareholders.

The Funds hold equity investments in unquoted portfolio companies. The valuations of these portfolio companies are complex and require the application of judgment by the Investment Adviser.

The fair values of these portfolio companies are principally based upon the market approach, which estimates the enterprise value of portfolio companies using an average of comparable multiples of revenues or EBITDA, information from recent comparable transactions or the underlying net asset value.

The risk

The significance of the unquoted fund investments to the Company’s consolidated financial statements, combined with the judgment required in estimating their fair values, means this was an area of focus during our audit.

How the matter was addressed in our audit

In responding to the key audit matter, we performed the following audit procedures:

We obtained management’s schedule of investments comprising the fair values of the Company’s investments in the Funds and performed the following procedures:

  • Compared the net asset value to the audited financial statements of the Funds as at 31 December 2023.
  • Inspected the components of the Funds’ net assets to ascertain whether the reported net asset values in the Funds’ audited financial statements were representative of fair value under IFRS.
  • Inspected the disclosures made about the Funds in the notes to the consolidated financial statements for compliance with IFRS.
  • Monitored any events that emerged in the post balance sheet period (up to the date of approval of the Company’s consolidated financial statements) that would have a potential impact on the value of the Funds held at year end.

Through our involvement in the audits of the Funds, we selected all unquoted equity investments held indirectly through the Company’s investments in the Funds and performed the following audit procedures:

  • Examined the minutes of the Valuations Committee meetings of the Investment Adviser held during the year to understand and confirm the committee's oversight and challenge of the investment valuations process.
  • Obtained the Investment Adviser’s models and the independent external valuation report used for valuing the unquoted equity investments.
  • Conducted procedures to confirm the appropriateness of the qualifications, independence and expertise of the valuation specialists engaged by the Investment Adviser.
  • Conducted a walkthrough of the investment valuation process and assessed the design and implementation of valuation related processes and controls in place at the Investment Adviser.
  • Tested the mathematical accuracy of the valuation models and scrutinized the allocation of value based on the portfolio company's capital structure.
  • Engaged KPMG valuation specialists to corroborate and challenge key assumptions and judgments within management's valuation models, specifically focusing on:
  • Scrutinizing the composition and completeness of the basket of comparable companies derived by the Investment Adviser.
  • Assessing the reasonableness of the transaction multiples employed in the valuations. This evaluation sought to confirm whether the chosen multiples were justified and whether they represented an appropriate average of comparable quoted companies in the market.
  • Engaged KPMG valuation specialists to challenge the Investment Adviser’s methodologies followed in determining the fair value of unquoted equity investments to ensure compliance with IPEV valuation guidelines and IFRS 13.
  • Agreed the data input in the valuation models to supporting information received from portfolio companies and that provided by the Investment Adviser to confirm accuracy. The testing encompassed both historic and forecast performance data. For historical performance data, we verified the data against relevant portfolio company financial statements, ensuring consistency and reliability. For forecast performance data, we conducted retrospective testing to confirm the reliability of forecast performance data utilized in previous valuation models. In cases where adjustments were made to normalize earnings, we tested these adjustments, where material, confirming that they were appropriate.
  • Obtained an understanding of matters that may affect the fair value of the unquoted investments through discussions with the Investment Adviser and independent research into investee companies and industry trends.
  • Obtained independent confirmations of the existence and accuracy of the unquoted equity investments from third parties.
  • Monitored any events that emerged in the post balance sheet period (up to the date of approval of each Fund’s financial statements) that would have a potential impact on the value of the unquoted equity investments held at year end.

Valuation of the unquoted preferred equity instruments

The key audit matter

As discussed in Notes 6 and 8 to the consolidated financial statements, the Company holds investments in unquoted preferred equity instruments. We recognized that the valuation of these unquoted preferred equity instruments poses a risk of material misstatement, both in terms of potential error and the risk of fraud.

The Company's principal objective is to deliver long term returns to its shareholders, and it pursues this goal by investing in unquoted preferred equity instruments through direct equity holdings managed by the Investment Adviser.

The investments in unquoted preferred equity instruments are carried at estimated fair value in accordance with International Private Equity and Venture Capital Association (“IPEV”) valuation guidelines and IFRS 13.

The risk

The valuations of unquoted preferred equity instruments involves subjectivity and estimation uncertainty. The valuations process relies on a market-based valuation approach, whereby multiples derived from comparable quoted companies and market transactions are applied to the maintainable earnings or revenue of the investee companies.

The critical judgments within these valuation models encompass the selection of suitable multiples, potential adjustments to observable market data and the determination of the weightings assigned to these adjustments. Given the subjective and complex nature of the valuation process, there exists a risk that the fair values of unquoted preferred equity instruments may not be accurate or appropriate.

How the matter was addressed in our audit

In responding to the key audit matter, we performed the following audit procedures:

  • Examined the minutes of the Board, Audit and Risk Committee meetings held during the year to understand and confirm the oversight and challenge of these committees relating to the valuations of unquoted preferred equity instruments.
  • Examined the minutes of the Valuations Committee meetings of the Investment Adviser held during the year to understand and confirm the committee's oversight and challenge of the investment valuations process.
  • Conducted procedures to confirm the appropriateness of the qualifications, independence and expertise of the valuation specialists engaged by the Company.
  • Conducted a walkthrough of the investment valuation process and assessed the design and implementation of the valuation related processes and controls in place at the Investment Adviser.
  • Tested the mathematical accuracy of the valuation models and scrutinized the allocation of value based on the portfolio company's capital structure.
  • Obtained independent confirmations of the existence and accuracy of the unquoted preferred equity instruments from third parties.
  • Engaged KPMG valuation specialists to corroborate and challenge key assumptions and judgments within management's valuation models, specifically focusing on:
  • Scrutinizing the composition and completeness of the basket of comparable companies derived by the Investment Adviser.
  • Assessing the reasonableness of the transaction multiples and discount rates employed in the valuations. This evaluation sought to confirm whether the chosen multiples and discout rates were justified and whether they represented an appropriate average of comparable quoted companies in the market.
  • Engaged KPMG valuation specialists to challenge the Investment Adviser’s methodologies followed in determining the fair value of unquoted preferred equity instruments in compliance with IPEV valuation guidelines and IFRS 13.
  • Evaluated the validity of assumptions made by the Investment Adviser and the expected timing and magnitude of future cash flows.
  • Conducted a sensitivity analysis on the discount rates, expected cash flows and exit strategies' assigned probabilities within the discounted cash flow model provided by management.
  • Agreed the data input in the valuation models to supporting information received from portfolio companies and that provided by the Investment Adviser to ensure accuracy. The testing encompassed both historic and forecast performance data. For historical performance data, we verified the data against relevant portfolio company financial statements, ensuring consistency and reliability. For forecast performance data, we conducted retrospective testing to confirm the reliability of forecast performance data utilized in previous valuation models. In cases where adjustments were made to normalize earnings, we tested these adjustments, where material, confirming that they were appropriate.
  • Inspected the disclosures made about the Company’s investments in unquoted preferred equity instruments in the notes to the consolidated financial statements for compliance with IFRS.
  • Monitored any events that emerged in the post balance sheet period (up to the date of approval of the Company’s consolidated financial statements) that would have a potential impact on the value of the unquoted preferred equity instruments held at year end.

Other information

Management is responsible for the other information contained in the Annual Report. The other information comprises the Strategic Report and Governance sections but does not include the consolidated financial statements and our auditor’s report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is 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 management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated 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 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 consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
  • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the Company’s Shareholders and Board of Directors. Our audit work has been undertaken so that we might state to the Company’s Shareholders and Board of Directors 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 Shareholders and Board of Directors, as a body, for our audit work, for this report, or for the opinion we have formed.

The Engagement Partner on the audit resulting in this independent auditor’s report is Gary Pickering.

Chartered Professional Accountants
Hamilton, Bermuda
13 March 2024