Annual Report

& Accounts 2021

For the year ended 31 December 2021

LMS Capital plc Annual Report & Accounts 2021

LMS Capital plc (‘LMS’ or

‘the Company’) is a listed

investment company.

We harness experience, capital

and access to deal flow to create

enhanced shareholder returns

for family offices, high net worth

investors and others.

Our competitive advantage

lies in our long experience, our

relationships with exceptional

management teams with knowledge

of, and connections in, the sectors

where we focus – particularly in

real estate, energy and late-stage

private equity.

We seek to achieve a balance

between preserving and growing

wealth. We expect to deliver an

attractive rate of return – 12% to

15% per annum over the medium

to long term – of which an element

will include an annual dividend.

Dividends were commenced in 2020

at 1.5% of our year end NAV with the

intention to progressively increase as

the investment portfolio evolves.

We invest in high quality portfolio

companies that generally require a

level of management attention

which larger funds are unable to

support or are too complex for direct

investment by individual family

offices or individual investors.

IN THIS REPORT

Overview

01 2021 Highlights

02 Company Overview

04 Statement from the Chairman

and the Managing Director

10 Portfolio Overview

12 Strategic Report

16 Responsible Investing

18 Company Performance in 2021

and Objectives for 2022

20 Risk Management

22 Viability Statement

24 Portfolio Management Review

Governance

30 Board of Directors

32 Corporate Governance Report

39 Audit Committee Report

42 Remuneration Report

54 Directors’ Report

57 Statement of Directors’

Responsibilities

58 Independent Auditor’s Report

Financial Statements

66 Income Statement

67 Statement of Other

Comprehensive Income

68 Statement of Financial Position

69 Statement of Changes in Equity

70 Cash Flow Statement

71 Notes to the Financial

Statements

Other Information

94 Corporate Information

For further investor information:

www.lmscapital.com

Who We Are and Why Invest?

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

2021 HIGHLIGHTS

NET ASSET VALUE (‘NAV’)

£49.1m

The net asset value (‘NAV’) at 31 December

2021 was £49.1 million, 60.8 pence per

share (31 December 2020: £47.9 million,

59.4 pence per share).

DIVIDENDS TO SHAREHOLDERS

£0.7m

The Company paid a 2020 final dividend

to shareholders of 0.6 pence per share in

May 2021 and an interim dividend for the

2021 year of 0.3 pence per share in

September 2021.

GAINS ON PORTFOLIO VALUE

£3.8m

The portfolio showed an overall net increase

in value on the year of £3.8 million from

net realised and unrealised gains, interest

income and foreign exchange movements

(2020: £2.1 million net decrease). Within

this, the mature portfolio showed an 11.6%

return in the year.

RUNNING COSTS

£1.8m

Running costs, including those incurred

by subsidiaries, were £1.8 million and

there were an additional £0.3 million of

investment related costs, bringing total

overheads to £2.1 million (2020: £1.7 million

running costs and an additional £0.2

million of investment related costs

representing total overheads of £1.9 million).

NEW INVESTMENTS

DACIAN PETROLEUM

£6.7m

Completed our first cornerstone

investment in Dacian Petroleum

(‘Dacian’), a newly formed Romanian

oil and natural gas production company

that has acquired and now operates,

mature onshore energy production assets.

PORTFOLIO REALISATIONS

£2.7m

Cash proceeds from portfolio realisations

in the year totalled £2.7 million, mainly

from the redemption of Northbridge

Industrial convertible debt and

distributions from ICU Eyewear

(2020: £9.3 million).

YEAR-END CASH BALANCE

£20.1m

Group cash balances at the year end,

including amounts held by subsidiaries,

were £20.1 million, representing 41.0%

of the NAV (2020: £20.6 million and

representing 43.0% of the NAV).

REVIEW

FINANCIAL STATEMENTSGOVERNANCE

Company Overview

LMS has a proven record of successfully providing opportunities for wealth creation

through nurturing and careful management. Our focus is on realising our mature

investments while deploying available cash for new investments that focus on our

three key sectors – real estate, energy and late-stage private equity.

MATURE INVESTMENTS

• investments that originate

from the Company’s strategy

prior to 2012;

• held with a view to optimising

realisation proceeds in a 1–3

year period;

• nearly 80% of the portfolio

consists of four investments:

an unquoted investment in

Medhost and three funds –

Brockton Capital Fund I, Opus

Capital Venture Partners and

Weber Capital Partners; and

• these investments are

managed mainly by third party

managers; the Company has

information rights and access

to the teams and can seek to

influence but does not

control decisions.

NEW INVESTMENTS

• the completion of the

investment in Dacian is

the first new investment

since our return to internal

management; and

• Dacian is a cornerstone

investment for LMS that

highlights our ability to lead

a co-investment group that

enabled Dacian to complete

its first acquisition of onshore

oil and gas production fields

in Romania.

CASH AVAILABLE FOR DEPLOYMENTS

• we seek opportunities within our three

chosen sectors – real estate, energy and

late-stage private equity – that not only offer

attractive returns on the direct investment

but also allow LMS to have influence and to

participate in developing and bringing further

capital into the underlying business – both

from its own balance sheet and its co-

investment network;

• this potentially creates additional fee

streams and equity opportunity for LMS.

This approach may result in fewer, but

more significant transactions; and

• during 2022, we aim to develop the

opportunities for additional capital

deployment within the acquired

Dacian portfolio, and more widely

also bringing forward opportunities

with our real estate teams.

Cash

Other Net Liabilities

Mature Investments

New Investments

Other Net Liabilities

£(1.9m)

-4%

Mature Investments

£23.0m

47%

New Investments

£7.9m

16%

Cash

£20.1m

41%

-4%

47%

16%

41%

2021 NAV AT A GLANCE

CASH

£20.1m

MATURE INVESTMENTS

£23.0m

OTHER NET LIABILITIES

£(1.9)m

NEW INVESTMENTS

£7.9 m

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

SECTORS

LMS has a long history

of investing in real

estate and providing

cornerstone funding to

entrepreneurs for the

creation of niche real

estate businesses.

REAL ESTATE

LMS has deep

relationships in the

energy sector giving it a

competitive advantage in

sourcing opportunities.

ENERGY

LMS has a track record

of success in late-stage

private equity

investment, creating

wealth for both its

shareholders and

entrepreneurs.

LATE-STAGE

PRIVATE EQUITY

FINANCIAL STATEMENTSGOVERNANCE

REVIEW

Statement from the Chairman

and the Managing Director

ROBERT RAYNE

CHAIRMAN

NICHOLAS FRIEDLOS

MANAGING DIRECTOR

We are delighted to be introducing this, our second set of results, as a self-managed

investment business. The Coronavirus pandemic meant that 2021 continued to be a year

of disruption and uncertainty in society as a whole and for businesses. Notwithstanding

this, we have made progress in improving our NAV and completed our investment in

Dacian, our first cornerstone investment since returning to self-management. Whilst

the investment took longer to close than initially anticipated, its completion in

November 2021 was a highlight and will create further opportunities for us in 2022.

We have considered the impact of the Russian invasion of Ukraine on our portfolio

investments and our overall business. We do not hold any investments that have

operations in Russia or Ukraine. Elateral, our investment in the digital marketing

sector, utilises contract staff in Ukraine, Russia and Belarus for its software

development and has developed a contingency plan to manage potential disruption.

The situation remains highly uncertain, and we will monitor developments closely.

FINANCIAL RESULTS

FOR THE YEAR ENDED

31 DECEMBER 2021

NET ASSET VALUE (‘NAV’) OVERVIEW

The NAV of the company at 31

December 2021 was £49.1 million,

60.8 pence per share (31 December

2020: £47.9 million, 59.4 pence per

share). This represents an increase

of £1.2 million on the prior year

and comprises:

• net increase of £2.6 million being

realised and unrealised net gains

on the mature asset portfolio;

• increase of £1.2 million being

accrued interest on Dacian;

• net reduction of £1.9 million for

other items including running costs,

taxation, the investment costs

principally associated with

developing real estate deal

opportunities and foreign exchange

gains on non-portfolio assets; and

• reduction of £0.7 million for

dividends paid to shareholders.

After adjusting for the 0.9 pence per

share distributed as dividends during

2021, the NAV has shown an

increase on the year of 4.0%.

The Company’s NAV comprises

three distinct groups of assets:

MATURE INVESTMENTS –

31 DECEMBER 2021 NAV £23.0 MILLION

(28.5 PENCE PER SHARE)

• these comprise investments

which originate from the

Company’s strategy pre-2012;

• the investments are managed

with a view to optimising the

realisation values. Where the

investment case supports it, we

may commit additional capital;

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

• most of these investments are

managed by third parties. Whilst

the Company has information

rights and regular access to the

managers, it has no direct control

of decision making;

• it is our expectation that these

assets will be substantially

realised over the next 1–3 years;

and during the year, this group of

investments:

– produced cash realisations of

£2.7 million; and

– showed realised/unrealised

gains of £2.6 million,

representing an 11.6% return

on the opening balance.

NEW INVESTMENTS – 31 DECEMBER 2021

NAV £7.9 MILLION

(9.9 PENCE PER SHARE)

• currently, this comprises the

Company’s investment in Dacian.

The commitment to invest was

made in Q3 2020, and funds

were set aside; the transaction

completed, following obtaining

regulatory approvals in

November 2021;

• Dacian is the Company’s first

new investment in accordance

with the investment approach

set out when it returned to

self-management at the

beginning of 2020;

• accrued interest on the loans

through which the investment

is structured, have added £1.2

million to NAV in 2021; and

• the background, rationale and

prospects for the investment

are discussed further below.

NAV

£49.1m

NAV RETURN

4.0%

MATURE PORTFOLIO

RETURN

11.6%

LIQUIDITY – CASH LESS OTHER NET

LIABILITIES – 31 DECEMBER 2021

NAV £18.2 MILLION

(22.4 PENCE PER SHARE)

• cash comprises £20.1 million,

some 41.0% of the Company’s

total NAV;

• other net liabilities comprise

£1.9 million and relate mainly

to accruals for income taxes,

historic carried interest liabilities

for one remaining asset and

other sundry costs; and

• this represents the ‘fire power’

with which we intend to continue

implementing the investment

approach which is discussed in

more detail in our approach to

the deployment of capital below.

Overall, net increases, both realised

and unrealised, in the underlying

value of the portfolio over the

year were £3.8 million.

MATURE ASSETS

- PORTFOLIO OVERVIEW

The four largest assets comprise

79% of the mature portfolio:

• Medhost – Co-investment,

alongside Primus Capital, in this

US software company serving

the mid-sized hospital market in

America. A mature business with

strong and consistent revenues,

earnings and cash flows. The

unrealised increase in NAV for

the year, excluding the impact of

foreign exchange gains, was £0.2

million, a 4.1% return on opening

NAV for this investment;

FINANCIAL STATEMENTSGOVERNANCEREVIEW

• Brockton Capital Fund I – The

remaining asset in this real estate

fund, of which the Company

holds 16.7%, is a preferred debt

investment in a ‘Super Prime’

residential development in

Mayfair, central London. Whilst

the pandemic has created delays

in both the construction and

sales programme for this project,

work is nearing completion and

sales are being achieved. The

investment, which is valued on

a discounted cash flow basis

showed an unrealised increase in

NAV for the year of £1.5 million,

representing an unrealised 37.2%

return on the opening NAV of the

investment. This reflects the

annual accrual of interest on

the underlying preferred debt

and unwind of the discount rate

used in the valuation and the

recognition of certain reserves

previously held to cover potential

cost overruns;

• Opus Capital Venture Partners –

The Company holds 2.3% of this

2008 vintage US early-stage

technology fund, managed by

Opus Capital Venture Partners.

The fund has two significant

remaining investments. The

fund life has now been exceeded,

the manager is no longer charging

annual fees, and the expectation

is that an exit will be sought

in the reasonably near term.

The unrealised increase in NAV

during the year was £0.4 million

representing an unrealised return

of 11.4% on the opening NAV

of this investment; and

• Weber Capital Partners –

This US micro-cap stock fund is

run for the Company by Weber

Capital Partners with whom the

Company has worked closely

for over 20 years. The theme is

substantially but not exclusively

around technology and medical

stocks. Historic returns have been

excellent. To September 2021,

average rolling five year returns

since 2006 and three year returns

since 2002 have been 14.3% and

18.6% respectively. Prior to the

return to self-management,

Weber Capital Partners was

instructed to realise and return

much of the holding. In Q3 2020,

additional capital of $1 million

was committed, to rebuild the

investment and allow greater

diversity within the portfolio.

The NAV increase on this

investment during 2021 was

£0.8 million, a return of 44.2%

on the opening balance.

On other mature assets:

• during the year, we have achieved

a restructure and injection of

additional capital into Elateral

(NAV £0.8 million) in conjunction

with bringing in a new operating

partner who has joined their

Board. As noted above, Elateral

has outsourced software

development resources in Ukraine,

Russia and Belarus which are being

disrupted. The company has

developed a contingency plan to

help mitigate the consequences;

• ICU Eyewear (NAV £1.8 million),

which produced an unexpected

windfall in 2020 from its

opportunistic move into

distribution of PPE equipment,

has returned largely to its core

eyewear activity. This investment

is managed by San Francisco

Equity Partners (‘SFEP’) and

options to exit the business are

being explored; and

• the winding up of YesTo in Q4 was

a significant disappointment. In

April 2020, the Company declined

to invest further capital in YesTo,

but the indications at the

time from the manager, SFEP,

were that at least the historic

debt investment should be

recoverable, albeit the equity

was unlikely to have any value.

Accordingly, a write down was

taken in 2020. A combination of

factors, including the pandemic,

put additional financial stress on

the business and the YesTo board

took the decision in Q4 2021 that

it was unlikely to raise further

debt or equity and to pursue

an orderly winding up to repay

external creditors. The Company

has written off its remaining

£0.7 million investment.

As noted above, notwithstanding

the outcome on YesTo, the mature

asset portfolio overall showed a

return of 11.6% for the year on the

NAV at 1 January 2021.

NEW INVESTMENTS – DACIAN

The Company has invested £6.7

million ($9.1 million) in Dacian, a

newly formed Romanian oil and gas

production company established to

acquire and operate mature onshore

energy production assets.

LMS assembled a funding package,

comprising its own investment and

co-investment, to enable Dacian to

complete its first acquisition. The

Company’s $9.1 million investment

is structured almost entirely as

senior secured loan notes with a

coupon of 14% per annum gross

before a 10% withholding tax,

plus a nominal payment for a

32% equity stake in Dacian.

Dacian was able to conclude its

acquisition in November 2021, after

a longer than anticipated delay in

obtaining the necessary local

regulatory approvals.

STATEMENT FROM THE CHAIRMAN AND THE MANAGING DIRECTOR CONTINUED

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

Under the terms of the August 2020

Dacian investment agreement, the

senior secured loan notes carry an

entitlement to interest running

from the date of original funding by

investors, which was in September

2020. Accordingly, accrued interest

of £1.2 million ($1.7 million) has been

added to the value of the investment.

This generated an unrealised return

of 18.5% for the year.

The rationale for the investment in

Dacian was:

• the business is operationally cash

flow positive from day one;

• a business focused on the

extension of life of existing

production assets that has an

environmentally important role

to play in the world’s transition

away from carbon fuels; and

• it was evaluated and the

investment decision taken

on the basis of:

– attractive entry pricing;

– a founder team with extensive

industry experience and a

Romanian team with prior

knowledge of the assets

being acquired;

– a robust operating plan

able to withstand volatility

in energy prices;

– the opportunity for gains

through production enhancing

technology that can extend

the productive life of

mature assets; and

– overall, the potential to meet

and exceed LMS’s target

investment returns.

It remains early days for Dacian,

having operated for less than four

months at time of writing, but

initial indications are positive as

the company continues to increase

production with its workover

programme and is generating

positive cash flow from operations.

LIQUIDITY – CASH LESS

OTHER NET LIABILITIES

CASH

Cash balances in the Company and

its subsidiaries at 31 December 2021

were £20.1 million (31 December 2020:

£20.6 million).

Outflows during the year amounted

to £3.2 million, this includes £1.8

million of running costs, £0.3

million of investment related

costs, £0.7 million of dividend

payments and £0.4 million of

new capital invested in Elateral.

Inflows were £2.7 million and

include a £1.5 million distribution

from ICU Eyewear, £0.8 million from

the redemption of the Northbridge

convertible debt, plus sundry fund

distributions.

NET LIABILITIES

Net liabilities of £1.9 million consist

primarily of accruals for income

taxes, historic carried interest

liabilities for one remaining

asset and other sundry costs.

DIVIDEND POLICY

The Company paid £0.7 million in

dividends during the year comprising

a final dividend for the year ended

31 December 2020 of 0.6 pence per

share, paid on 14 June 2021 and an

interim dividend for the year ended

31 December 2021 of 0.3 pence per

share paid on 3 September 2021.

A final dividend of 0.625 pence per

share for the year ended 31 December

2021 is recommended by the Board.

The increase reflects the increase in

2021 year end NAV compared to the

prior year. Subject to approval by

shareholders at the AGM in May

2022, the dividend will be paid to

shareholders in early June 2022.

The 2020 dividend and, if the Board’s

recommendation is approved, the

2021 dividend payment will equate

to approximately 1.5% of the

respective year end NAV each

year. This is in accordance with

the policy laid out by the Board in

2020. Whilst the dividends currently

exceed the net cash income, the

Board is confident of the Company’s

ability to generate future annual

income and has therefore

continued the policy.

The Board’s ambition is to increase

the level of dividend and will keep

the current policy under review. The

actual level of dividend each year will

take account of market conditions

generally, the Company’s financial

position and its distributable reserves.

REVIEW

FINANCIAL STATEMENTSGOVERNANCE

APPROACH TO THE

DEPLOYMENT OF CAPITAL

Whilst the Dacian deal has

now completed, the Company

still has 41.0% of its NAV as

uninvested cash. As the mature

asset portfolio is realised further

cash will be generated.

Our approach to the further

deployment of capital is to seek

opportunities, within our chosen

sectors, which not only offer

attractive returns on the direct

investment but also allow LMS

to have influence and, over time,

to participate in developing and

bringing further capital into the

underlying business – both from

its own balance sheet and its

co-investment network. This

potentially creates additional

fee streams and equity

opportunities for LMS.

This approach results in fewer,

but more significant transactions.

One consequence of this is that

individual deals can take longer –

Dacian has been an example of this.

However, we believe this approach

to be the most effective one given

the current size of the Company

and our ambition to grow.

INVESTMENT THEMES

The Company has a widely drawn

investment policy, but we are

conscious of the importance of

bringing forward investments where

we have a track record of success

and can offer distinct competitive

advantage based on our knowledge,

past experience and access to

exceptional management teams.

Our focus is on the following sectors:

ENERGY

The Company has a history of

investing in the energy sector and

has connections with management

teams that enable it to identify and

execute on opportunities not readily

accessible to others.

In relation to carbon-based energy,

we see the extension of life of

existing production assets as having

a key and environmentally important

role to play in the world’s transition

away from carbon fuels over the

next few decades. Dacian has a

portfolio of sunset life assets where

the extension of life of these ageing

assets allows for very low carbon

footprint per barrel and molecule

produced because the existing

industrial infrastructure is put

to further use. Dacian is the

first investment in this area.

We also see opportunities in

renewable energy and in the

businesses that service the

generation of that energy.

REAL ESTATE

Real estate has been a consistent

theme in the LMS portfolio and is an

area of deep expertise and access to

opportunities and management.

In evaluating the opportunities

we see, we remain cautious,

noting continued high asset and

site acquisition prices against a

backdrop of continuing uncertainty,

in particular around the inflationary

pressures on construction costs.

We see opportunity in developing

specialist-use real estate and by

working in partnership with

landowners and other third

parties. We are working to

bring opportunities forward.

LATE-STAGE PRIVATE EQUITY

Late-stage private equity covers

a wide spectrum of opportunities

and we are aware of the need to

employ our resources efficiently and

in areas where we can show some

differentiation and relative

competitive advantage.

Whilst we continue to see a range of

opportunities, we have focused our

resources on looking at those that

have some cross over with our real

estate or energy themes, for

example industrial products whose

market includes the energy sector or

real estate service businesses.

INVESTMENT CHARACTERISTICS

The Company sees many

opportunities during a typical year

but focuses on those where not

only the underlying investment

merits are attractive, but also where

LMS has a competitive advantage.

The sources of advantage are:

• working with management

teams we know well, who are

respected in their sector,

experienced and with a track

record of successful execution;

• ‘hard to access’ assets, typically

at the smaller end of their

respective sectors, allowing more

attractive acquisition pricing and

giving the opportunity for value

creation through more intensive

management; and

• the opportunity to introduce

co-investment capital alongside

our own balance sheet.

STATEMENT FROM THE CHAIRMAN AND THE MANAGING DIRECTOR CONTINUED

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

The Dacian transaction, which is

our first deal since the return to

self-management, reflects the

approach we seek to adopt and

the above characteristics:

• backing a team with whom we

have deep and long standing

relationships and who have

outstanding experience in

their sector;

• experience brought to bear

to acquire assets at attractive

entry prices and which, through

operational know how,

can be driven to produce

excellent returns;

• creating a platform from

which the management team

and LMS can expand their

exposure to the sector; and

• creating the opportunity

for LMS to introduce

co-investment partners.

LOOKING FORWARD

The Company’s objective is the

preservation and creation of wealth

for its shareholders over the longer

term. Its target is to deliver returns,

net of costs, of between 12% and

15% over the longer period.

Looking forward in 2022,

our focus is to:

• use our Board position to nurture

the Dacian investment – still

less than six months old – and

to ensure that there is a clear

operating plan to achieve the

production objectives envisaged

at the time the investment

was made;

• develop the opportunities for

additional capital deployment

within the acquired Dacian

portfolio, and more widely; and

• bring forward opportunities with

our real estate teams.

The completion of the

Dacian transaction is an

important milestone for all

our activities. It allows us to

demonstrate to shareholders,

to co-investors and to the

markets in which we wish to

invest, the characteristics of

the opportunities we seek to

pursue and demonstrates our

ability to execute on deals.

NICHOLAS FRIEDLOS

MANAGING DIRECTOR

We would like to express our

appreciation for the support from

our team and from the network of

people with whom we work on a

regular basis. We would also like

to express our appreciation for

the continued support of our

shareholders. We look forward

to reporting progress to you

during 2022.

Robert Rayne

Chairman

Nicholas Friedlos

Managing Director

9 March 2022

REVIEW

FINANCIAL STATEMENTSGOVERNANCE

Portfolio Overview

The following are the principal portfolio

investments of the Company, representing

nearly 93% of the total portfolio value:

INTRODUCTION

Dacian Petroleum

REGION: EU | YEAR: 2021 |

% Holding: 32% | NAV: £7.9 million

Dacian is a newly formed Romanian oil

and natural gas production company

operating over 40 late life, onshore

fields with nearly 100 producing

wells. The completion of the Dacian

transaction, our first cornerstone

investment after the return to

self-management, demonstrates

the ability of LMS to execute its

co-investment strategy.

The Company invested £6.7 million ($9.1 million)

in Dacian for senior secured loan notes with a 14%

per annum coupon and a 32% equity stake in the

company, and also led the co-investment group

that raised the additional capital allowing Dacian

to complete in November 2021 the acquisition of

these oil and natural gas fields from OMV Petrom.

Dacian is a business that is operationally cash flow

positive from day one and has a business plan to

more than double its current level of oil and natural

gas production, primarily through a series of

intervention and workover projects on existing wells.

The investment, through its attractive entry pricing

and the potential for Dacian to grow production and

thereby its earnings and cash flow, has the potential

to meet and exceed our target investment returns.

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

Brockton

Capital Fund I

Principal Funds

Opus Capital

Venture Partners

Weber Capital

Partners

REGION: UK | YEAR: 2008 |

NAV: £5.6 million

Brockton is a UK real estate fund

with one remaining investment in

a super prime London residential

development. The Company’s

investment represents its share

of preferred debt investments

via the Brockton fund.

www.brocktoneverlast.com

REGION: UK | YEAR: 2008 |

NAV: £3.9 million

Opus is a US fund that invests in

early-stage technology opportunities

with two principal assets remaining.

www.opuscapitalventures.com

REGION: UK | YEAR: 2008 |

NAV: £2.6 million

Weber Capital GW 2001 is a fund

that invests in listed US microcap

stocks, primarily in the technology

and medical sectors.

www.webercapital.com

ICU Eyewear

REGION: US | YEAR: 2010 |

% Holding: 50% | NAV: £1.7 million

ICU Eyewear (‘ICU’), a co-investment

managed by San Francisco Equity

Partners, is primarily a designer and

distributor of glasses and sunglasses

made from reclaimed plastic,

recycled metal and bamboo.

www.icueyewear.com

Medhost

Principal Unquoted Investments

REGION: US | YEAR: 2008 |

% Holding: 8.8% | NAV: £6.0 million

Medhost, a co-investment with

funds of Primus Capital, is a

healthcare information technology

group that provides cloud-based

enterprise, departmental and

healthcare engagement solutions

to over 1,000 community and

specialty hospitals. Its products

include cloud-based clinical,

financial and operational solutions

as well as maintenance, support

and consulting services.

www.medhost.com

Elateral

REGION: UK | YEAR: 2008 |

% Holding: 62.5% | NAV: £0.8 million

Elateral operates in the digital

marketing sector and has developed

cloud-based software which allows

corporate marketing materials to

be distributed to local marketing

teams to enable content to be

tailored whilst protecting brand

identity. Elateral targets large

international companies with

multi-language requirements

and has a concentration of

global corporate customers.

www.elateral.com

REVIEW GOVERNANCE FINANCIAL STATEMENTS

Strategic Report

INTRODUCTION

LMS Capital is a listed investment company. The Company returned to internal

management in January 2020 at which time it was entered by the FCA on the Register

of Small Registered AIFMs. 2021 represents its second year of operation as an

internally managed investment business.

We will focus on areas where we

have competitive advantages:

• real estate, energy and

late-stage private equity.

Our competitive advantage

comes from:

• our significant experience

and knowledge;

• our track record of

successful investing; and

• our ability to access

exceptional management

teams.

The characteristics of

individual deals will include:

• an opportunity for LMS

to contribute expertise as

well as financial backing;

• assets at the smaller end of

their respective sectors where

market inefficiencies allow

attractive entry pricing;

• situations requiring a level

of management attention

which larger funds are

unable to support or are

too complex for direct

investment by family offices

or individual investors; and

• controlling or influential

minority positions:

– Board or Investment

Committee representation;

and

– full information rights.

To deliver consistent

long-term financial returns

for our shareholders:

• an overall total return, net

of costs, over the long-term

of 12% to 15% per annum;

• the total return to include

an annual dividend, initially

set at 1.5% of NAV and

ultimately progressing

to 3.0%; and

• to broaden our shareholder

base and develop the

Company into an attractive

investment for family

offices, high net worth

investors and institutions

attracted by the returns

we can achieve and our

access to deal flow.

We seek to bring co-investors

to deals to invest alongside the

Company’s own capital. Each

deal will be different, but LMS

sees the opportunity for each

£1 of its own capital to bring

at least as much again from

co-investors.

Our co-investors gain the

opportunity to invest directly

in deals which they would be

unlikely to access directly.

LMS benefits from influencing

a larger pool of capital,

participation in a more

diversified range of deals,

the possibility of enhanced

economics and the ability

to recover fees to offset

against its costs.

Our first cornerstone

investment under internal

management, Dacian, is an

example of our ability to

attract co-investment capital.

We invested $9.1 million in

senior loan notes and a 32%

equity ownership in Dacian

and also led a co-investment

group that invested an

additional $5.0 million

in senior loan notes and

an 18% equity ownership.

OUR CO-INVESTMENT

ACTIVITY

OUR INVESTMENT

APPROACH

OUR INVESTMENT

OBJECTIVES

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

Richard Fidler

Tim Willis

Josh Lamstein

Bernard Duroc-Danner

Thomas Bruni

Tim Willis

Chris Dancer

Ben Young

Tim Willis

REAL ESTATE ENERGY

LMS

CO-INVEST

PRIVATE

EQUITY

Robert Rayne

Nicholas Friedlos

James Wilson

Peter Harvey

Graham Stedman

Nicholas Friedlos

Doug Mills

Aimee Fraser

Chris Garrod

BOARD & INVESTMENT COMMITTEE

CORE TEAM

ADVISORY

GROUPS

We have assembled an experienced Board to oversee the development of our business and

also to function as the Investment Committee that closely monitors existing investments

and evaluates and approves new investments. Information on our Board is set out on pages

30 to 31 of this report.

We operate through a small core team, working closely with the management teams in our

investee businesses. We have a network of investment professionals with whom our core team

work on individual opportunities.

We have appointed advisory groups of individuals with relevant experience in each of our

three areas of focus. The groups provide additional external perspective, access to further

investment opportunities in their sectors and guidance for the Company.

HOW WE

OPERATE

REVIEW

FINANCIAL STATEMENTSGOVERNANCE

STRATEGY

A new Board was appointed in

November 2019. Since then, the

business has been reshaped under

the management of its own team

to focus on investment in its known

areas of expertise in real estate,

energy and late-stage private equity.

The emphasis across each of these

themes is on deals with well

protected downside and a target

overall return over the longer term

of 12% to 15% per annum, net of all

costs, and including the annual

dividend payment to shareholders.

The Company implemented an

annual dividend policy in August

2020 that has been set initially at

1.5% of the 31 December NAV. The

dividend policy is intended to be

progressive with a target to achieve

a dividend of 3% per annum of the

Company’s NAV and fully covered

by annual profits. In paying any

interim dividend and recommending

a final dividend, the Board will

take account of progress towards

covering the dividend with

income, available liquidity, other

circumstances relevant to the

Company’s financial condition

and overall market conditions.

INVESTMENT POLICY

The Company’s investment

objective, stated in the current

investment policy approved by

shareholders in August 2016, is

to achieve total returns over the

medium to longer-term, principally

through capital gains supplemented

with the generation of a

longer-term income yield.

The investment strategy is focused

predominantly on private equity

investment and alternative,

specialist asset classes:

• the Company will invest in

profitable and cash generative

businesses and investments;

• the focus will primarily be on

smaller private investment

opportunities below £50 million

value where the Company believes

there to be significant market

inefficiencies which create

opportunities for superior

long-term returns and to

leverage the experience

of the investment team;

• investments may include

alternative, specialist asset

classes which target long-term,

illiquid strategies both through

co-investment and fund

opportunities on preferred

terms; and

• the Company will optimise the

value of existing holdings and,

where growth prospects are clear,

to preserve and support longer-

term value creation.

No investment in any single

company will (at the time of

investment) represent more than

15% of the Company’s net assets.

Any investment in securities of a

single company or investment fund,

which represents more than 10% of

the Company’s net assets at the

time the investment is made,

requires the Board’s approval.

The Company may invest in public or

private securities. Investments may

be made in the form of, inter alia,

equity, equity-related instruments,

derivatives and indebtedness. The

Company may hold controlling or

non-controlling positions and may

invest directly or indirectly.

Whilst the Company has three focus

areas, it is not restricted to specific

sectors; its assets are and will

continue to be predominantly

invested in the United Kingdom,

Europe and North America.

The Company may put in place bank

facilities to help manage working

capital, but indebtedness of the

Company will not exceed 25%

of NAV measured at the time

of drawdown. The Company

had no indebtedness, other

than inter-group indebtedness,

at 31 December 2021 or at the

date of this report.

OUTLOOK AND PROSPECTS

The Board is focused on finding

opportunities in our three core

sectors that meet our return targets

and allow us to have influence over

the underlying business.

We are also focused on progressing

the existing portfolio, either through

an orderly realisation or through

financial support where the

investment case validates

this course of action.

Our approach to the further

deployment of capital is to seek

opportunities, within our chosen

sectors, which not only offer

attractive returns on the direct

investment but also allow LMS to

have influence and to participate

in developing and bringing further

capital into the underlying business

– both from its own balance sheet

and its co-investment network.

This potentially creates additional

fee streams and equity opportunity

for LMS.

This approach results in fewer,

but more significant transactions.

One consequence of this is that

individual deals can take longer –

Dacian has been an example of this.

However, we believe this approach

to be the most effective one given

the current size of the Company

and our ambition to grow.

STRATEGIC REPORT CONTINUED

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

REVIEW FINANCIAL STATEMENTSGOVERNANCE

Responsible Investing

OUR APPROACH

The origins of the Company lie in the

investment of family wealth, much

of it used to endow charitable

foundations focused on a wide range

of endeavours in our society. The

Board understands its responsibility

to build on this history and evolve

it to ensure that the Company

adopts and adheres to an approach

to business that is relevant

to environmental, social and

governance (‘ESG’) standards today.

As a small investment company,

much of our ESG impact is driven

by the companies in which we

choose to invest. We believe that

investing in businesses that place

an emphasis on ESG issues both

protects and creates value for

our shareholders.

GOVERNANCE AND STRATEGY

The Board has overall responsibility

for the development and

implementation of our ESG

principles, including climate risks

and opportunities. The Board has

ensured that ESG principles are

integrated into the Company’s

investment strategy. We are

committed to maintaining high

standards of corporate governance.

As a company listed on the London

Stock Exchange, we are diligent in

our own internal procedures and

reporting to shareholders.

Our ESG considerations are guided

by our core responsible investment

principles:

• integrate ESG considerations

throughout our

investment process;

• focus on making responsible,

long-term decisions, supported

by the expertise of our network,

that minimise the risks associated

with poor ESG practices; and

• maintain high standards

of corporate governance.

RISK MANAGEMENT

Our risk management procedures

include carrying out an assessment

of the principal risks within our

business and considering the

likelihood and potential impact

of each risk and the effectiveness

of the procedures to mitigate each

risk (see page 20).

We have a broad investment

universe in the sectors we focus

on, and we aim to increase the

potential for long-term success

by minimising our exposure to

companies which are at risk of

disruption, litigation, regulation

or loss of business as a result of

poor ESG practices. As part of

our investment process, we aim

to integrate ESG considerations

throughout – from the

identification of potential

investments in our pipeline

of opportunities, to time

of investment, throughout our

ownership and ultimately to exit.

We also target new investments

where we have influence over the

management team.

New investments are subject to a

rigorous multi-stage assessment

and approval process by the

Investment Committee and Board.

Our evaluation of investments

includes, but not limited to,

consideration of climate change

impacts, the business ethics of

an investee company, its human

resource practices, health and

safety record and overall, the

way it implements, monitors

and manages its own ESG policies.

The relative significance of individual

factors will vary from business to

business according to the nature

of its operations.

We work closely with the

management teams of our investee

businesses, with input from our

Advisory Groups with specific sector

knowledge, to drive responsible,

long-term decisions and ensure

alignment with our own responsible

investment principles.

METRICS

The Company monitors its

greenhouse gas (‘GHG’) emissions

annually (see page 54) and

continues to maintain low GHG

emissions levels due to its small

size and limited office footprint.

The Company also engages with

its portfolio investments on their

ESG governance and strategies.

The Task Force on Climate-Related Financial Disclosures (‘TCFD’) Recommendations,

first launched in 2017, are designed to encourage consistent and comparable reporting

on climate-related risks and opportunities by companies to their stakeholders. The

TCFD Recommendations are structured around four content pillars: (i) Governance;

(ii) Strategy; (iii) Risk Management; and (iv) Metrics & Targets. This responsible

investing section reflects a summary of our progress made to date towards our

goal of incorporating climate risk and opportunity identification and management

into our overall business strategy.

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

CASE STUDY – DACIAN PETROLEUM

Dacian, completed in November 2021, was the first new

investment by the Company since return to internal

management. Dacian is a Romanian oil and natural

gas production company with 40 mature fields. The

production of natural resources, while essential to

our current daily lives, also contributes to some of the

environmental issues at the forefront of society today.

The Company considered the climate change impact and

other ESG factors when making its decision to invest in

Dacian. The key factors the Company considered were:

• Dacian has a portfolio of later life assets where the

extension of life of these ageing assets allows for low

carbon footprint per barrel and molecule produced

because the existing industrial infrastructure is put

to further use;

• the business is primarily focused on a workover

programme that extends the life of existing wells

as opposed to exploration and drilling activity that

has a significantly higher carbon footprint;

• the natural gas production is primarily utilised in

the generation of electricity and displaces coal,

which has a much higher carbon footprint, in

that mix of natural resources;

• the company retained a local, Romanian workforce

and has a minimal number of expatriates; and

• the company has an experienced management team

that puts the health and safety of its employees at

the forefront of its business operations.

The Board is pleased that a new investment was

completed in a company that is expected to generate

financial returns that meet or exceed our strategic

target, plays a role in the global energy transition

and has a positive presence in the region in which it

operates by maintaining good corporate stewardship

of its assets and its employees.

FINANCIAL STATEMENTSGOVERNANCEREVIEW

Company Performance in 2021

and Objectives for 2022

LMS CAPITAL PLC | ANNUAL REPORT AND ACCOUNTS 2021

DEVELOPMENT OF NEW INVESTMENT OPPORTUNITIES

ENERGY

Completion of the Dacian transaction in November 2021 was an important milestone for the Company – this being a large

deal, just below 15% of NAV at the time of investment, and also the first deal since the return to self-management.

The delays in completion were frustrating and during the year the Board kept its options under active review, including

the option to unwind its investment. However, in conjunction with the local management team, the Board continued

to support the efforts to get the transaction approved in Romania and complete the investment.

Objective for 2022 – With the transaction now completed, the focus is two-fold:

• working with the Dacian team to implement the business plan, in particular around the capital programme

to achieve increases in the oil and gas production of the assets acquired; and

• identifying further opportunities to build an energy business focused on mature production assets.

A detailed review of the management of the portfolio is set out on pages 24 to 29 of this Annual Report.

The detailed financial results are set out in the accounts on pages 66 to 93.

The Board’s overall aim is to create value for the Company’s shareholders, through a combination of annual

dividends and share price appreciation. To achieve this aim, the Board is focused on delivering its stated target

returns, and its success will be measured by the Total Shareholder Return generated by the Company’s shares

over the longer term. The Board is also aware of the need to expand and diversify the capital base of the Company.

The Board determines annual priorities and objectives for the Company with a view to achieving its long-term

goals. These priorities and objectives will generally be focused on the following areas:

• achieving the annual returns target by:

– effectively managing its active investments;

– sourcing new investment opportunities, which meet its target returns, and deploying surplus cash; and

– exercising strict control over its running costs.

• building the profile of the Company in the public markets and taking advantage of opportunities that

arise to expand the capital base.

The table below provides a summary of the outcomes of the annual objectives set for 2021 and an indication

of the priorities and objectives for 2022.

PERFORMANCE INDICATORS

The Board’s objective is to create wealth in the Company over the medium to longer-term and takes decisions

through the lens of this timeframe.

Progress towards the medium to longer-term objective may not be reflected in individual annual performance metrics.

However, the Board recognises the need to report the Company’s annual performance against these measures.

The Company’s NAV per share total return, excluding the impact of dividends, was plus 4.0% (2020: minus 7.8%)

and its share price total return was 23.3% for the year ended 31 December 2021. These measures compare to the

FTSE All Share Index which showed a return of 18.3% for the year ended 31 December 2021.

Further information on the Company’s performance is provided in the Portfolio Management Review on

pages 24 to 29.

REVIEW GOVERNANCE FINANCIAL STATEMENTS

DEVELOPMENT OF NEW INVESTMENT OPPORTUNITIES

REAL ESTATE

We are looking for opportunities which

• deliver our target returns; and

• provide the potential to create an ongoing business – not sporadic one-offs.

The current market broadly is characterised by continuing high acquisition prices and escalating construction costs. In

evaluating opportunities, we are therefore cautious and prepared to be patient before committing capital. During the

year we have invested time and external resource with our real estate teams in developing a pipeline of opportunities.

Objectives for 2022 – to bring forward the opportunities under development, which meet our two criteria set

out above, and commit capital to our real estate pipeline.

LATE-STAGE PRIVATE EQUITY

Whilst the Company’s main themes are energy and real estate, it also looks at other late-stage investment

opportunities, particularly where there is some cross over in the investment with either of our two main themes.

The Company has assembled a small group of investment professionals who provide support in its initial evaluation of

opportunities. A number of opportunities were reviewed during the year, but none were considered a suitable

investment fit in the Company’s portfolio.

Objectives for 2022 – to identify and deploy capital in at least one opportunity.

CO-INVESTMENT

An important part of the Company’s strategy is to build its network of co-investors who invest alongside LMS. The

completion of the Dacian transaction represents a significant milestone – the Company having led the sourcing of all

of the investor debt and equity required.

Objectives for 2022 – to continue to build the co-investment network and to bring co-investment capital into

our next investment opportunity.

PUBLIC MARKETS PROFILE AND SHAREHOLDER COMMUNICATIONS

The Company recognises the importance of building a wider understanding of its strategy and its approach in the

public markets. The delay in completing Dacian, the Company’s first significant investment since the return to

self-management, delayed progress in this area.

Objectives for 2022 – With Dacian now complete, the Company is well positioned to expand its communications

both with existing and potential shareholders and other partners in its chosen areas of activity.

MANAGING THE MATURE PORTFOLIO

The bulk of the mature portfolio comprises interests in funds and minority equity positions where the Company has access

to information and is able to engage with and seek to influence management but does not have control of decisions.

The mature portfolio overall has shown an 11.6% unrealised return in the year, broadly in line with the Board’s

expectations for this portfolio of assets. The investments in Brockton and Weber have performed well, and

Medhost and ICU have shown modest gains. The decision by SFEP during Q4 to wind up YesTo, resulting in its

write off, was a disappointment. The only remaining asset with SFEP is ICU.

At Elateral the Company led a restructuring, which resulted in the former investment partner being bought out by

LMS together with a new operating partner who joined the board and, with the chairman, also provided funding in

conjunction with LMS.

Objectives for 2022 – To introduce further third-party capital to Elateral in conjunction with our new operating

partner. Whilst the Company does not control the realisation strategy on most of the mature asset portfolio,

it regularly reviews options including secondary market sales – although generally continuing to hold to

maturity represents a better option.

Risk Management

On behalf of the Board, the Audit

Committee has responsibility for ensuring

that the Company has an effective

process to identify, assess and manage

the various risks within its business.

The Company has carried out an

assessment of the principal risks within its

business and has considered the likelihood

and potential impact of each risk and the

effectiveness of the procedures to mitigate

each risk. A summary of the principal risks

identified is set out below.

PRINCIPAL RISKS IN EACH CATEGORY MITIGATION

Strategic risk

Risk that the business model does not deliver target long-term returns of 12% to 15% to

shareholders or that the Board is unable to implement its strategy or cannot pay its target dividend.

The Board establishes both long-term and annual objectives with KPIs against which it monitors the Company’s

performance. It also considers the Company’s performance in the context of investment market conditions and

developments generally.

Market risk

Risk that macro market and geopolitical uncertainties have an adverse impact on investment

values, liquidity and deal flow or otherwise disrupt the markets in which the Company operates.

Regular assessment at Board level of the macro environment on the Company’s business overall and at the

individual asset level.

The current significant level of cash held by the Company provides some protection against uncertainty

in the short-term.

Investment risk

Risk that the Company’s investments may perform below expectations or may not achieve

target exit valuations or timing.

New investments may not meet investment criteria or fit with the strategy set by the

Board, including the Company’s Environmental, Social and Governance ‘ESG’ direction.

Regular monitoring by the Board of underlying performance and realisation strategy for all investments.

Where the Company does not control the investment realisation decision, it maintains dialogue with

external managers and regularly considers alternative realisation routes.

New investments are subject to a rigorous multi-stage assessment and approval process by the Investment

Committee and Board.

The Board also integrates ESG considerations throughout the whole investment process, including

consideration of how an investee company monitors and manages its own ESG impact.

Financial risk

Risk that the valuation of the investment portfolio is misstated.

The investment portfolio is valued at fair value in accordance with IPEV Guidelines and supported by third party

evidence where available. Valuation judgements are reviewed regularly by the Board and Audit Committee and

also subject to external auditor review.

Operational and Governance risk

Risk that the Company does not have the appropriate resources in place to support the delivery

of its strategy. This includes risk of heavy reliance on a small core team and the risk that Board

makeup may no longer be appropriate.

The core team whilst small, is supported by advisers in key areas and also by outsourced providers. The Company,

through its Board, has a wide network of associates who provide additional input on an as needs basis and who

could provide additional support were members of the core team to be unavailable.

The Board was appointed in November 2019 and regularly reviews its effectiveness through a combination of

internal and external reviews.

Legal and Regulatory risk

The risk that the Company does not comply with the legal regulatory framework to which it is

subject, including but not limited to the Companies Act 2006, the FCA listing and DTR rules,

the principles of the UK Corporate Governance Code and international accounting standards

in conformity with the requirements of the Companies Act 2006. Risk that changes to the

legal or regulatory framework could impact the Company’s business.

Compliance with the relevant legal and regulatory requirements is overseen by the Audit Committee and the Board.

The Company has in place the necessary procedures and policies required by the regulatory framework and works

with external advisers periodically to review its procedures and to ensure it is aware of relevant legislative or

regulatory changes.