5.1 Introduction and overview

The Board of Directors, the Company’s Risk Committee (the 'Risk Committee') and Oakley Capital Limited (the 'Investment Adviser') attribute great importance to professional risk management, proper understanding and negotiation of appropriate terms and conditions and active monitoring, including a thorough analysis of reports and financial statements and ongoing review of investments made. The Company has investment guidelines that set out its overall business strategies, its tolerance for risk and its general risk management philosophy and has established processes to monitor and control the economic impact of these risks. The Investment Adviser provides the Board of Directors with recommendations as to the Company’s asset allocation and annual investment levels that are consistent with the Company’s objectives. The Risk Committee reviews and agrees policies for managing the risks.

The Company has exposures to the following risks from financial instruments: credit risk, liquidity risk and market risk (including interest rate risk, currency risk and price risk). The Company’s overall risk management process focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial performance.

During the year under review, the Risk Committee has continued to identify, assess, monitor and manage risks within the Company, including those that would impact its future performance, solvency, liquidity or reputation. This review includes the monitoring of risk exposure compared with the risk appetite established by the Board.

Key risks and uncertainties of the Company are assessed on a scale, considering their impact and likelihood. The Committee monitors detailed and, wherever possible, quantifiable indicators of the Company’s exposure to risk, segmented into five core categories – see Our principal risk and uncertainties section. Consideration has been given to the risks posed by the ongoing conflict between Russia and Ukraine and, more recently, the conflict in the Middle East which presents a heightened risk to companies operating in the area. The Company can confirm that it has no direct operational or financial exposure to Russia, Ukraine, Israel or Palestine.

5.2 Credit risk

The Company is subject to credit risk on its unquoted investments and cash. The majority of the Company’s cash balances were held with Barclays and Royal Bank of Scotland, with a minority also held with HSBC and Butterfield Bank. Barclays, Royal Bank of Scotland and HSBC are rated A1 and Butterfield Bank is rated A3 by Moodys (2022: Barclays and HSBC A1 and Butterfield A3).

In accordance with the Company’s policy, the Investment Adviser monitors the Company’s exposure to credit risk on cash on a quarterly basis and the Risk Committee regularly reviews the Company’s exposure to credit risk. During the year, OCI’s debt positions in North Sails were converted into preferred equity to mitigate OCI’s credit risk and crystallise its equity position for greater upside resulting from any future refinancing or exit.

During the year OCI’s debt security to Fund I was settled in Time Out shares. OCI still has a debt security with Time Out of £6 million and the Investment Adviser continues to monitor the risks arising from this position. As at 31 December 2023, the debt security held was not overdue or impaired.

5.3 Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations arising from its financial liabilities that are settled by delivering cash or another financial asset, or that such obligations will have to be settled in a manner disadvantageous to the Company. The Company, with advice from the Investment Adviser, manages liquidity through reviews of detailed cash flow projections that estimate the timing and quantums of outflows, including capital calls, and inflows from disposals of portfolio companies held within the Funds that aim to avoid undue risk of illiquidity.

The unfunded commitments to the Funds are irrevocable and usually exceed cash and cash equivalents available to the Company. Based on current cash flow projections and barring unforeseen events, the Company expects to be able to honour all capital calls by the Funds. To facilitate the funding of future commitments, the Company renewed and expanded its £100 million credit facility to total committed lending of £175 million for a two-year term. The credit facility remains undrawn as at 31 December 2023. The Board of Directors’ assessment of liquidity risk is further detailed in Note 2.

The majority of the investments held by the Company are in Funds that are unquoted and subject to specific restrictions on transferability and disposal. Consequently, the risk exists that the Company might not be able to readily dispose of its holdings at the time of its choosing and also that the price attained on a disposal may be below the amount at which such investments were included in the Company’s consolidated balance sheet.

The Company’s consolidated financial liabilities are all repayable within three months after the balance sheet date and are carried at amounts which approximate their expected settlement values. Financial liabilities exclude outstanding capital commitments at year end.

5.4 Market risk

Market risk is the risk that changes in market prices, such as equity prices, foreign exchange rates and interest rates, will affect the Company’s income or the value of its holdings of financial instruments.  The Company’s sensitivity to these items is set out below.

The Company’s financial assets that are subject to currency and interest rate risk are analysed below (presented in Pounds and translated at the year end foreign exchange rate):

(a) Interest rate risk

Interest rate risk arises principally from changes in interest receivable on cash and deposits and unquoted debt security held at fair value.

The Company's unquoted debt security carries a variable interest rate of 10% plus the average Sterling Overnight Index Average rate (SONIA) (2022: 6.5% to 10%). The loan is subject to interest rate risk as increases and decreases in interest rates will have an impact on its fair value. A 200 basis point increase in interest rates would result in a decrease in the fair value of this loan of £0.18 million and a corresponding decrease of 200 basis points in interest rates would result in an increase in the fair value by £0.15 million (2022: £1.48 million including Fund I, North Sails and Time Out at 100 basis points). The impact of an increase in interest rates of 100 basis points on cash and deposits, based on the closing consolidated balance sheet position over a 12-month period, would have been £1.86 million on the profit and loss in the consolidated statement of comprehensive income (2022: £1.13 million). A decrease in interest rates of 100 basis points on cash and deposits would have an equal and opposite effect.

In addition, the Company has indirect exposure to interest rate fluctuations through changes to the financial performance and valuation in equity investments in the Funds as certain portfolio companies have issued debt. Short-term receivables and payables are excluded as, due to their short-term nature, the risks due to fluctuation in the prevailing levels of market interest rates associated with these instruments are not significant.

(b) Currency risk

The Company holds significant assets and liabilities denominated in currencies other than its functional currency, which expose the Company to the risk that the exchange rates of those currencies against the pound will change in a manner that adversely impacts the Company’s net profit and net assets attributable to shareholders. The following sensitivity analysis shows the sensitivity of the Company’s net assets to movements in foreign currency exchange rates assuming a 10% increase in exchange rates against the pound. A 10% decrease in exchange rates against the pound would have an equal and opposite effect. This sensitivity analysis is representative of the year as a whole, since the level of exposure changes as Company’s holdings change through the purchase and realisation of investments. 

The Investment Adviser monitors the Company’s currency position on a regular basis and reports the impact of currency movements on the performance of the investment portfolio to the Risk Committee quarterly. In accordance with the Company’s investment policy, all direct investments in quoted equity securities and debt securities are denominated in pounds, placing currency risk on the counterparty. The investments in the Funds are denominated in euros and dollars.

(c) Price risk – market fluctuations

The Company’s management of price risk, which arises primarily from quoted and unquoted equity instruments, is through the selection of financial assets within specified limits as advised by the Investment Adviser and approved by the Risk Committee.        

For quoted equity securities, the market risk variable is deemed to be the market price itself. A 10% change in the price of those investments would have a £6.88 million (2022: £2.53 million) direct impact on the profit and loss in the consolidated statement of comprehensive income and the net assets attributable to shareholders in the consolidated balance sheet. The impact on net assets per ordinary share is £0.04 (2022: £0.01).

For the direct preferred equity investment in the Funds, the market risk is deemed to be the change in fair value. A 10% change in the fair value of those investments would have a £78.79 million (2022: £87.58 million) direct impact on the profit and loss in the consolidated statement of comprehensive income and the net assets attributable to shareholders in the consolidated balance sheet. The impact on net assets per ordinary share is £0.45 (2022: £0.50).

For the investment in North Sails, the market risk is deemed to be the change in fair value. A 10% change in the fair value of this investments would have a £14.45 million (2022: nil) direct impact on the profit and loss in the consolidated statement of comprehensive income and the net assets attributable to shareholders in the consolidated balance sheet. The impact on net assets per ordinary share is £0.08 (2022: nil). 

The Company is exposed to a variety of market risk factors that may change significantly over time. As a result, measurement of such exposure at any given point in time may be difficult given the complexity and diversity of the investments held by the Funds.

Limitations of sensitivity analysis

The sensitivity information included in Notes 5 and 8 demonstrates the estimated impact of a change in a major input assumption while other assumptions remain unchanged. In reality, there are normally significant levels of correlation between the assumptions and other factors.

It should also be noted that these sensitivities are non-linear and larger or smaller impacts should not be interpolated or extrapolated from these results. Furthermore, estimates of sensitivity may become less reliable in unusual market conditions such as instances when risk-free interest rates fall towards zero.

5.5 Capital management

The Company’s capital comprises ordinary shares with £0.01 par value and carrying one vote each. The holders of the shares are entitled to dividends when declared. The Company has no additional restrictions or specific capital requirements on the issuance and repurchase of ordinary shares. The movements of capital are shown in the consolidated statement of changes in equity. 

The Company’s objectives when managing capital are to safeguard the Company’s assets to achieve positive returns. In order to maintain or adjust the capital structure, the Company may issue shares or may return capital to shareholders through the repurchase of shares or by paying dividends. The effects of the issue, repurchase and resale of shares are described in Note 18.