Duke Royalty Announces Strong Financial Results for FY23 and Increased Cash Revenue

4 July 2023

Duke Royalty Limited

("Duke Royalty", "Duke" or the "Company")

Final Results for the year ended 31 March 2023

Duke Royalty Limited (AIM: DUKE), a provider of alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad, is pleased to announce its audited final results for the 12 months ended 31 March 2023 ("FY23").

FY23 Highlights

·           46% year-on-year increase in recurring cash revenue* to £21.8 million (FY22: £14.9 million)

·           19% year-on-year increase in total cash revenue to £21.9 million (FY22: £18.4 million)

·           Free cash flow of £13.1 million, up 9% from £12.1 million in FY22

·           Free cash flow** per share reduced from 3.53p in FY22 to 3.30p in FY23, due to lack of investment buyouts

·           30% increase in recurring free cash flow per share from 2.52p per share to 3.27p per share

·           24% year-on-year increase in dividend per share of to 2.80p (FY22: 2.25p)

·           Deployed over £26 million of capital, adding two new royalty partners to the portfolio and completed four material follow-on investments into existing royalty partners

·          £20 million of equity capital raised in oversubscribed placing

·           Refinanced and upsized a £100 million credit facility to facilitate more investment opportunities

Post Period End Highlights

·           Achieved £6.0 million of recurring cash revenue in Q1 FY24, representing an 18% year-on-year increase (Q1 FY23: £5.1 million) and an increase on Q4 FY23

·           Exited royalty partner Instor, receiving net cash of US$11.2 million at closing, delivering a total gain of US$2.4 million over Duke's initial investment amount and a triple digit IRR

·           Two additional follow-on investments completed in Q1 into Tristone and New Path Fire & Security

* Recurring cash revenue excludes buyout premiums and cash gains from the sale of equity investments

** Free cashflow is defined as net cash inflows from operations plus cash gains from the sale of equity investments less interest paid on borrowings

Neil Johnson, CEO of Duke Royalty, said:

"We are delighted to announce that we have achieved a strong set of financial results across all our important financial metrics for the 12 months to 31 March 2023. Despite the prevailing macro uncertainties, it also brings forth opportunities. We understand that during times of short-term uncertainty, business owners seek long-term capital solutions, which further reinforces the attractiveness of our proposition to them, as our solution offers both investors and shareholders what they desire - a long-term, predictable revenue stream with a focus on dividends.

"Having achieved £2.0 million per month of cash revenue in Q1 FY24, this represents the 11^th consecutive quarter of delivering increasing quarterly recurring cash revenue. With this in mind, we have witnessed a very healthy and promising pipeline of new partners. The recent increase in deal flow has been encouraging, as it demonstrates the attractiveness of our proposition in a difficult funding market, and we are confident that our product continues to demonstrate its competitiveness against other financing options available to small businesses."

Investor Presentation

Neil Johnson, CEO, and Hugo Evans, CFO, will also provide a live investor presentation relating the Full Year Results via the Investor Meet Company platform on Thursday 13 July at 13:30 BST.

The presentation is open to all existing and potential shareholders. Questions can be submitted via the Investor Meet Company dashboard up until 9 a.m. the day before the meeting or at any time during the live presentation.

Investors can sign up to Investor Meet Company for free and add to meet Duke Royalty via: https://www.investormeetcompany.com/duke-royalty-limited/register-investor

Investors who already follow Duke Royalty on the Investor Meet Company platform will automatically be invited.

Annual Report & Accounts

The 2023 Annual Report and Accounts are expected to be posted to shareholders on Monday 10 July 2023, together with a notice of the Company's Annual General Meeting. An electronic copy of the Annual Report and Accounts will also be available to view on the Company's website at www.dukeroyalty.com

This announcement contains inside information.

For further information, please contact www.dukeroyalty.com, or contact:

About Duke Royalty

Duke Royalty Limited provides alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad. Duke Royalty's experienced team provide financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. Duke Royalty's royalty investments are intended to provide robust, stable, long term returns to its shareholders. Duke Royalty is listed on the AIM market under the ticker DUKE and is headquartered in Guernsey.

Chairman's Statement

Dear Shareholder,

I am pleased to report a strong set of results for the financial year ending 31 March 2023 ("FY23"), which once again demonstrated the resilience of Duke's business model to perform robustly in both a positive and challenging macroeconomic environment.

It is fair to say that FY23 presented a challenging operating environment for Duke's royalty partners. They battled against interest rate hikes and supply chain issues, alongside a significant increase in corporate energy prices and a general shortage of labour. Furthermore, overall consumer demand was affected by surging utility bills and food prices, resulting in a general reduction of consumer discretionary spend. Despite these challenging circumstances, I would like to congratulate Duke's royalty partners for their extremely resilient operating performance in FY23.

Duke's strategic focus on providing long-term, secured lending to established and profitable owner-operated businesses has proven to be a safeguard against these economic challenges. Moreover, the very low amortisation payments of Duke's product in the early years have alleviated some of the short-term liquidity concerns of our royalty partners, allowing them to focus on managing their businesses rather than having to refinance their debts during unfavourable times. This, together with a long-term partnership approach which has always been at the core of Duke's investment and corporate philosophy, has helped support our partners through these times of macroeconomic pressure.

It is worth noting that one of the inevitable consequences of the substantial increase in global interest rates has been the material increase in the cost for all other competing forms of short-term debt. However, Duke's permanent equity capital base and its long-term lending approach throughout economic cycles have enabled the Company to refrain from increasing the cost of its offering in the short-term. As a result, we have experienced a notable increase in both the number and the quality of deal opportunities that Duke has been offered, the benefits of which will be witnessed in the current financial year and in the periods ahead.

Outlook

FY23 has been a year of relentless collaboration between the Duke team and our royalty partners, as we work together to overcome significant economic challenges they have faced. I would like to take this opportunity to thank them for their considerable efforts. As a long-term investor, Duke believes that a business' long-term success is directly correlated to its business approach and management of their environmental, social and governance considerations. We remain committed to adhering to the commitments set out in the Company's Responsible Investment Policy.

Whilst the macro environment continues to create ongoing challenges for our royalty partners, the higher level of global interest rates and continued lack of demand from the mainstream banks to lend to well-managed, profitable SMEs, puts Duke in an ideal position to selectively deploy further capital and increase market share. As a result, I expect to see a higher deployment rate in FY24 than we saw in FY23.

Over the past few years, Duke has been able to put together a diverse portfolio, and now has exposure to 62 underlying operating companies. In FY23, The Company was able to release a series of record quarterly recurring cash revenue updates, which is a trend that I expect to see continue into FY24. This is attributable to the anticipated growth in deployment rate, alongside positive adjustment resets linked to the underlying companies' organic revenue performance in this inflationary macroenvironment.

As always, I would like to express my gratitude to the ongoing support of our shareholders and to the achievements of our employees. It is my pleasure to report the Chairman's Statement for FY23. I look forward to reporting on the Group's ongoing progress and development, and I remain cautiously optimistic about the Company's future.

Nigel Birrell

Chairman

CEO's Statement

In 2022, businesses around the world faced a remarkable landscape that surpassed the unprecedented challenges brought by the pandemic in 2020. The Bank of England's 12th consecutive interest rate hikes brought rates to their highest level in almost 15 years, and inflation being at a 40-year high has further intensified the economic climate. The geopolitical situation in Europe also demanded our attention and played a crucial role in shaping our decisions at Duke.

Despite this, I am pleased to report that Duke managed a strong set of financial results across all our important financial metrics. In particular, our recurring cash revenue grew 46% to £21.8 million against £14.9 million in FY22 and our recurring cash revenue per share grew 30% over FY22. It is reassuring to note our solution continues to deliver for investors and business owners alike during these challenging times.

However, during FY23, we exercised caution in our approach to new deployments, analogous to the Covid-19 impaired FY21. With rapidly changing macroeconomic developments, we chose caution in allocating shareholder funds following our successful fundraising efforts in May 2022, which resulted in four follow-on investments (totalling £11.5 million) into existing partners and two new royalty agreements (totalling £12.3 million). During the 12 months under review, we deployed a total of £26.8 million, spread over several geographic markets in line with our strategy, while also reinforcing our portfolio in our core territories. This strategic decision reflects our prudent approach to capital allocation and our commitment to ensuring that financial stability is maintained. Nevertheless, we continued to diversify the portfolio, ending the period with exposure to 61 underlying operating companies with an aggregate book cost of £185 million. We continue to maintain a close relationship with our royalty partners, which generally performed robustly during the period, and are reassured of their resilience to trading in the current market conditions.

It is important to note that we feel the prevailing macro uncertainties do not pose only risks, but also opportunities. We know that when there is short term uncertainty, business owners seek long term capital solutions, reinforcing the attractiveness of our proposition to them. What sets Duke apart is our long-term strategic partnership approach, which offers business owners the certainty of sustainable capital without significant dilution of their ownership or large capital repayments which need refinancing.

The credit and equity characteristics of our hybrid model drives our relationships with all of our stakeholders

Our shareholders who participate in our regular shareholder meetings, conferences and podcasts will know, we believe Duke has a unique value proposition for shareholders. At the core of our offering is a focus on preserving capital, which is why our royalty agreements are structured as senior secured loans. We aim to provide a healthy dividend to investors, which is our second priority, investing into profitable, longstanding private companies. And unlike a traditional debt product, as our third priority, we look to be rewarded in the event of a positive outcome at the time of the buyout. The six buyouts achieved since inception have shown that our product has produced the results we intended.

Our hybrid model also drives our relationships with our royalty partners. We see ourselves as more than just a lender. We are economically invested in the long-term success of the partners we work with, like equity owners. However, because we have downside protections to preserve our capital, we also have capped our equity participation. The combination of these factors means that Duke's model combines the best elements of private equity and private credit.

Duke's approach allows us to develop good relationships with our royalty partners. Receiving monthly management accounts gives us regular and in-depth financial information to ensure our royalty partners are performing to budget. In addition, we actively engage with our portfolio companies through Board representation and/or monthly management meetings. This involvement allows us to provide continuous support and strategic guidance throughout their journey, helping them to navigate through headwinds and to seize opportunities. We do this because we are economically incentivised in the growth of the company through our annual adjustment factor and when we have minority equity stakes. However, the business owners know they control the destiny of the company and have the incentive to succeed. With our alignment of interests, I am delighted to be able to observe the exceptional dedication to meet all challenges head on of our current royalty partners, and we remain fully dedicated to supporting their ongoing growth in the future.

Our model augments the resilience of our existing partners in the face of market fluctuations. Unlike floating-rate loans, Duke's monthly payments from our royalty partners change only once per year at the annual adjustment date according to the revenue performance of the business, and the adjustment is capped. This aligns Duke's return with the performance of the royalty partners over the long-term and gives them certainty of their obligations to us as senior lender, leading to confidence of decision making during these challenging times.

With this in mind, Duke's partners generally performed robustly in the period, with inflationary forces driving the average yield of the Company's portfolio to 13.1%, its highest level to date. Duke also received 94% of its expected cash revenue payments in the period and the Company was able to increase our recurring cash revenue each quarter throughout the financial year.

I am pleased to be able to report that at period end, Duke had over £50 million of liquidity available to deploy into its pipeline of opportunities with FY24 gearing up to be a busy period for the Company.

Financial Review

In May 2022, Duke announced a £20 million equity placing from both institutional and retail investors. Net proceeds from this fundraising were used to repay the existing debt and provide additional liquidity headroom, allowing the Company both to invest further capital into its existing royalty partners as well into new opportunities.

During the period, we were delighted to announce that we had entered into a new £100 million credit facility agreement with Fairfax Financial Holdings Limited and certain of its subsidiaries ("Fairfax"). In refinancing and upsizing our credit facility, we secured a significant amount of additional liquidity, prolonging our requirement for additional equity capital. We also reduced the headline interest rate by 225 bps in comparison to our previous facility, leading to an immediate and material impact on our free cash flow. This support from such a reputable firm represents a huge endorsement of our business model, and we look forward to a long-term relationship with Fairfax.

The financial results for FY23 represent a strong operating performance and I am pleased to report that the Company's cash revenue, being cash distributions from royalty partners, cash gains from the sale of equity investments and buyout premiums, grew to £21.9 million during the Period under review, a 19% increase over the £18.4 million generated in FY22.

However, as our portfolio matures and buyouts start to become a material part of the of the Group's cashflows, it is important to distinguish between recurring and non-recurring cash revenue. Recurring cash revenue relates to the annuity-like monthly cash revenue streams that Duke receives from its royalty partners, as opposed to the non-recurring nature of buyout premiums and realised gains on equity that Duke receives on an investment exit. In FY22, the Group benefited from a royalty buyout and an equity realisation event, which delivered over £3.5 million of premiums and realised equity gains. Therefore, on a like-for-like basis, FY23 produced £21.8 million of recurring cash revenue against £14.9 million in FY22, a 46% increase.

Free cash flow, defined as net operating cash inflow plus cash gains from the sale of equity investments less its interest on debt financing, also continued to grow, increasing by 9% to £13.1 million. However, if we strip out the non-recurring cash revenue, then recurring free cash flow actually grew 51% from £8.6m to £13.0 million, while recurring free cash flow per share grew 30% to 3.27 pence per share, a significant achievement given a macroenvironment of high inflation and soaring interest rates. It is these last two metrics that are particularly pleasing as it is these that derive our ability to continue paying a steady quarterly dividend to our shareholders.

Total income, which includes non-cash fair value movements on the Company's investment portfolio, grew to £31.0 million, an 8% increase over FY22. This generated total earnings after tax of £19.6 million and earnings per share of 4.92 pence against £20.4 million in FY22 and earnings per share of 5.95 pence. Adjusted earnings, which strips out the fair value movements, decreased 5% from £13.1m in FY22 to £12.5m in FY23, due to the lack investment exits in FY23.

Dividend

Duke maintained a 0.70 pence quarterly dividend throughout FY23, equating to an annualised dividend of 2.80 pence which represents a material increase from the 2.25 pence per share of dividends paid out in FY22. Despite the high dividend yield percentage at the current share price, I can reassure shareholders that the dividend remains well covered by recurring free cash flow.

Duke Royalty's ESG initiatives

By definition, a royalty company itself has a small environmental footprint, being an investment company in other companies. Since inception over eight years ago, our business model has been underpinned by an ethos of responsible investing. We do not invest in extraction industries, and we support business owners who have a positive impact in providing local jobs and keeping ownership in their hands for the betterment of their communities.

As we have increased capital deployed in an expanding number of companies, we understand our duty and influence in asking more of our royalty partners' ESG credentials. We admire each company's leadership as they work to improve the lives of their employees, their communities, and the world they inhabit.

While we can only help indirectly with our royalty partners' operations, the Duke team has led by example and remains deeply committed to making a positive social impact in the world we live in.

Duke Royalty's leaders are also leaders in their community. I am the Founder and Chair of the UK Terry Fox Association and Hugo Evans our CFO acts as Treasurer. It is the UK affiliate of the Terry Fox Foundation, which has raised over £500 million for cancer research in the name of Canada's hero. Terry Fox ran 143 consecutive marathons in the summer of 1980 on a prosthetic leg before cancer returned and forced him to stop. Terry Fox died less than a year later, but the Terry Fox Run was born. The money we raise stays in the UK, supporting the UK's #1 academic cancer research centre, The Institute of Cancer Research (ICR). Our mission is to bring communities and families touched by cancer together for the free, family friendly and non-competitive Terry Fox Runs across the UK. Since I re-started the London Terry Fox Run in 2020, we have raised over £200,000 for the ICR, and our goal is £1,000,000 by 2030. This year, there will be four Terry Fox Runs across the UK. Every year, the Duke team and their families come together to support cancer research and volunteer their time.

Recognising the importance of giving back to local communities, we have also extended our support to Home-Start UK, a network that assists needy families with young children during challenging times. In additional to our financial contributions, the Cannon Brookes family volunteers and advocates for the importance of a healthy and supportive family unit in the first years of life. Professional care workers provide emotional and financial support to single mothers and underprivileged families with young children. This makes a direct impact in the local UK neighbourhoods where Home-Start is active.

Our outlook is one of cautious optimism

The year to 31 March 2024 has already kicked off to a positive start, with Duke achieving an average monthly recurring cash revenue of £2.0 million for the first time for Q1 FY24. A quarter of £6.0 million recurring cash revenue represents a 18% year on year increase (Q1 FY23: £5.1 million) and will be our 11^th consecutive quarter delivering increasing recurring cash revenues.

In addition, we have had our first buyout since 2021 during the first three months of the current financial year. A key aspect that distinguishes Duke is our commitment to empowering business owners by allowing them to retain control over their exit strategies. This was illustrated well with the recent positive exit we announced in May where the terms of Duke's capital facilitated Instor's CEO decision to opportunistically sell the company to a private equity firm, and in turn delivered a triple digit IRR to Duke. This is an attractive differentiator of our capital which enhances the appeal of our long-term, passive capital for business owners and is just one of the qualities that reaffirms Duke's strong position to capture an important share of the private funding market.

One consequence of the rapidly increasing interest rates of 2022 is that Duke's monthly payments have become more competitive to floating rate interest rate payments. For business owners, the monthly payment is their total obligation to Duke subject to only the annual adjustment. The certainty of knowing future obligations, without a looming refinancing event, is increasingly attractive to business owners. With this in mind, we have witnessed a very healthy and promising pipeline of new partners. The recent increase in deal flow has been encouraging, demonstrating the attractiveness of our proposition in a difficult funding market, and we are confident that our product continues to demonstrate its competitiveness against other financing options available to small businesses.

Royalty finance has a longstanding history in North America, drawing investors with its ability to provide downside protection during times of crisis. Similar to how the pandemic showcased the resilience of this model, we believe the current economic environment offers us the opportunity to continue demonstrating the ability of our approach to withstand market cycles. We see a bigger opportunity ahead, as our solution offers both investors and shareholders what they desire: a long-term, predictable revenue stream with a focus on dividends.

We are pleased to report another year of delivering on the promise of our business model for our shareholders: a long-term, predictable revenue stream with a focus on dividends. I would like to personally thank our shareholders, our royalty partners, our employees and our Board as we look forward to continued success.

Neil Johnson

Chief Executive Officer

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2023

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2023

All income is attributable to the holders of the Ordinary Shares of the Company. There is no other comprehensive income.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

FOR THE YEAR ENDED 31 MARCH 2023

The Consolidated Financial Statements were approved and authorised for issue by the Board of Directors on 3 July 2023 and were signed on its behalf by Directors Maree Wilms and Matt Wrigley.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2023

1.       General Information

Duke Royalty Limited ("Duke Royalty" or the "Company") is a company limited by shares, incorporated in Guernsey under the Companies (Guernsey) Law, 2008. Its shares are traded on the AIM market of the London Stock Exchange. The Company's registered office is shown on page 73.

Throughout the year, the "Group" comprised Duke Royalty Limited and its wholly owned subsidiaries; Duke Royalty UK Limited, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited, Capital Step Funding 2 Limited and Duke Royalty Employee Benefit Trust.

The Group's investing policy is to invest in a diversified portfolio of royalty finance and related opportunities.

2.       Significant accounting policies

2.1     Basis of preparation

The Consolidated Financial Statements of the Group have been prepared in accordance with UK adopted international accounting standards, and applicable Guernsey law, and reflect the following policies, which have been adopted and applied consistently.

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into the UK law and became UK-adopted international accounting standards, with future changes being subject to endorsement by the UK Endorsement Board. The group transitioned to UK-adopted international accounting standards in its consolidated financial statements on 1 April 2021. There was no impact or changes in accounting from the transition.

The Consolidated Financial Statements have been prepared on a going concern basis and under the historical cost basis, except for the following:

·           Royalty investments - measured at fair value through profit or loss

·           Equity investments - measured at fair value through profit or loss

·           Royalty participation liabilities - measured at fair value through profit or loss

The Directors consider that the Group has adequate financial resources to enable it to continue operations for a period of no less than 12 months from the date of approval of the financial statements. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

Presentation of statement of cash flows

The Board considers cash flow to be the most important measure of the Group's performance and subsequently has presented its Statement of Cash Flows before the Statement of Comprehensive Income and Statement of Financial Position.

There have been no changes to the classification of any of the cash flows or to the overall cash movements.

Presentation of statement of comprehensive income

In order to better reflect the activities of a royalty financing company, the Statement of Comprehensive Income includes additional analysis, splitting the Group's income by investment type.

2.2     New and amended standards adopted by the Group

A few amendments and interpretations of existing standards apply to the Group's financial year but these did not have a significant impact on the financial statements of the Company.

2.3     New standards and interpretations not yet adopted

At the date of authorisation of these Consolidated Financial Statements, certain standards and interpretations were in issue but not yet effective and have not been applied in these Consolidated Financial Statements. The Directors do not expect that the adoption of these standards and interpretations will have a material impact on the Consolidated Financial Statements of the Group in future periods.

2.4     Going concern

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council.

FY23 continued to present a challenging operating environment for Duke's royalty partners. The impact of the Russia - Ukraine conflict continues to have a significant impact on European economies as businesses battle against interest rate hikes, supply chain issues, alongside a significant increase in corporate power prices and a general shortage of labour. Furthermore, overall consumer demand was affected by surging utility bills and food prices, resulting in a general reduction of consumer discretionary spend.

Despite this, Duke's strategic focus on providing long-term, secured lending to established and profitable owner-operated businesses has proven to be a safeguard against these economic challenges. Moreover, the very low amortisation payments of Duke's product in the early years have alleviated some of the short-term liquidity concerns of our royalty partners, allowing them to focus on managing their businesses rather than having to refinance their debts during unfavourable times.

The directors continue to closely monitor the impact of these macroeconomic headwinds on the Group's trading activities and cashflows, but do not consider that there will be any significant effect on the ability of the Group to continue in business and meet liabilities as they fall due.

During the year, the Group refinanced its debt facility, replacing the previous facility with a new £100 million facility with Fairfax (as detailed in the Directors' Report). At the 31 March 2023, the Group had £42,000,000 of available headroom on the facility.

The Directors consider that the Company has adequate resources to continue in operational existence for the next 24 months and beyond.

2.5     Basis of consolidation

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

All intra-group transactions, balances, income and expenses are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted across the Group.

The "Group" is defined as the Company, its subsidiaries Duke Royalty UK Limited, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited and Capital Step Funding 2 Limited and The Duke Royalty Employee Benefit Trust.

2.6     Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors, as a whole. The key measure of performance used by the Board to assess the Group's performance and to allocate resources is operating cashflow, as calculated under IFRS, and therefore no reconciliation is required between the measure of performance used by the Board and that contained in these Consolidated Financial Statements.

For management purposes, the Group's investment objective is to focus on one main operating segment, which is to invest in a diversified portfolio of royalty finance and related opportunities. At the end of the period the Group has 15 investments into this segment and has derived income from them. Due to the Group's nature, it has no customers.

2.7     Foreign currency

Functional and presentation currency

Items included in the Financial Statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The Consolidated Financial Statements are presented in Pounds Sterling, which is also the functional currency of the Company and its subsidiaries.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevailing at the reporting date.

Foreign exchange gains and losses relating to the financial assets and liabilities carried at fair value through profit or loss are presented in the Consolidated Statement of Comprehensive Income within 'royalty investment net income', 'loan investment net income' and 'equity investment net income'.

Foreign exchange gains and losses relating to cash and cash equivalents are presented in the Consolidated Statement of Comprehensive Income within 'Net foreign currency gains / (losses)'. This has been presented below operating costs as this best reflects the true nature of the balance.

2.8     Transaction costs

Transaction costs are costs incurred to acquire financial assets at fair value through profit or loss. They include finders' fees, legal and due diligence fees and other fees paid to agents and advisers. Transaction costs, when incurred, are recognised immediately in profit or loss as an expense. Where transaction costs are in respect of loans, these are offset using the effective interest method.

2.9     Income tax

The income tax expense or credit for the period is the tax payable on the current period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

2.10   Goodwill

Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill is not amortised, but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of the entity include the carrying amount of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes.

2.11   Dividends

Dividends are recognised as a liability in the Group's financial statements in the period in which they become obligations of the Group.

2.12   Financial instruments

Financial assets and financial liabilities are recognised in the Consolidated Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are only offset and the net amount reported in the Consolidated Statement of Financial Position and Consolidated Statement of Comprehensive Income when there is a currently enforceable legal right to offset the recognised amounts and the Group intends to settle on a net basis or realise the asset and liability simultaneously.

a.       Financial assets

The Group's financial assets are classified in the following measurement categories:

·           those to be measured subsequently at fair value through profit or loss ("FVTPL"); and

·           those to be measured at amortised cost

The classification depends on the entity's business model for managing the financial assets and the contractual terms of the cash flows.

At initial recognition, the Group measures a financial asset at its fair value, plus, in the case of a financial asset not at FVTPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in profit or loss.

Financial assets held at amortised cost

Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. These assets are subsequently measured at amortised cost using the effective interest method.

The Group's financial assets held at amortised cost include loans receivable, trade and other receivables and cash and cash equivalents.

Expected Credit Loss ("ECL") allowance for financial assets measured at amortised cost

Impairment of financial assets is calculated using a forward-looking expected credit loss (ECL) model. ECLs are an unbiased probability weighted estimate of credit losses determined by evaluating a range of possible outcomes. They are measured in a manner that reflects the time value of money and uses reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

The Group recognises an allowance for ECLs for all debt instruments not held at fair value through profit or loss. Assets held at fair value through profit and loss are not subject to impairment.

IFRS 9 establishes a three-stage approach for impairment of financial assets:

·           Stage 1 - when a financial asset is first recognised, it is assigned to Stage 1. If there is no significant increase in credit risk from initial recognition, the financial asset remains in Stage 1. Stage 1 also includes financial assets where the credit risk improved and the financial asset has been reclassified back from Stage 2. For financial assets in Stage 1, a 12-month ECL is recognised;

·           Stage 2 - when a financial asset has experienced a significant increase in credit risk since initial recognition, the asset is classified as Stage 2. Stage 2 also includes financial assets where the credit risk improved and the financial asset has been reclassified back from Stage 3. For financial assets in Stage 2, a lifetime ECL is recognised;

·           Stage 3 - that where there is objective evidence of impairment and the financial asset is considered to be in default, or otherwise credit-impaired, it is moved to Stage 3. For financial assets in Stage 3, a lifetime ECL is recognised and interest income is recognised on a net basis.

In relation to the above

·           Lifetime ECL is defined as ECLs that result from all possible default events over the expected behavioural life of a financial instrument

·           12-month ECL is defined as the portion of lifetime credit loss that will result if a default occurs in the 12 months after the reporting, weighted by the probability of that default occurring

The measurement of ECLs is primarily based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"), taking into account the value of any collateral held or other mitigants of loss and including the impact of discounting using the effective interest rate.

·           The PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months ("12-month PD"), or over the remaining lifetime ("Lifetime PD") of the obligation

·           EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months ("12-month EAD") or over the remaining lifetime ("Lifetime EAD")

·           LGD represents the Group's expectation of the extent of loss on a defaulted exposure

The ECL is determined by estimating the PD, LGD, and EAD for each individual exposure. These three components are multiplied together and adjusted for the likelihood of survival. This effectively calculates an ECL.

The measurement ECLs for each stage and the assessment of significant increases in credit risk considers economic information about past events and current conditions as well as reasonable and supportable forward-looking information. When determining whether the credit risk profile has materially increased, the Group specifically reviews the debt covenant positions of each company. If the debt service coverage ratio falls below zero and the Group does not have sufficient liquidity to cover 12 months of debt obligations, the investment will be deemed to be in default and a lifetime ECL allowance will be provided for.

As with any forecasts and economic assumptions, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. Other forward-looking considerations, such as the impact of any regulatory, legislative or political changes, have also been considered, but no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on an annual basis.

Cash and cash equivalents

Cash and cash equivalents comprise current accounts and demand deposits and other short-term highly liquid investments with an original maturity of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Financial assets at FVTPL

Royalty investments are debt instruments classified at FVTPL under IFRS 9. The return on these investments is linked to a fluctuating revenue stream and thus, whilst the business model is to collect contractual cash flows, such cash flows are not solely payments of principal and interest. Such assets are recognised initially at fair value and remeasured at each reporting date. The change in fair value is recognised in profit or loss and is presented within 'royalty investment income' in the Consolidated Statement of Comprehensive Income. The fair value of these financial instruments is determined using discounted cash flow analysis. Further details of the methods and assumptions used in determining the fair value can be found in note 23.

Investments in equity instruments are classified at FVTPL. The Group subsequently measures all equity investments at fair value and the change in fair value is recognised in profit or loss and is presented within the 'equity investment income' in the Consolidated Statement of Comprehensive Income. Dividends from such investments are recognised in profit or loss when the Group's right to receive payments is established.

Derecognition of financial assets

A financial asset (in whole or in part) is derecognised either (i) when the Group has transferred substantially all the risks and rewards of ownership; or (ii) when it has neither transferred nor retained substantially all the risks and rewards and when it no longer has control over the assets or a portion of the asset; or (iii) when the contractual right to receive cash flow has expired. Any gain or loss on derecognition is taken to other income/expenses in the Consolidated Statement of Comprehensive Income as appropriate.

b.       Financial liabilities

The classification of financial liabilities at initial recognition depends on the purpose for which the financial liability was issued and its characteristics.

All financial liabilities are initially recognised at fair value. Unless otherwise indicated the carrying amounts of the Group's financial liabilities are approximate to their fair values.

Financial liabilities measured at amortised cost

These consist of borrowings and trade and other payables. These liabilities are initially recognised at fair value, net of transaction costs incurred, and subsequently carried at amortised cost using the effective interest rate method.

Financial liabilities at FVTPL

Financial liabilities at FVTPL comprise royalty participation liabilities. These liabilities arise under a contractual agreement between the Group and a strategic partner for the provision of services in connection with the Group's royalty financing arrangements. Under this agreement services are provided in exchange for a percentage of gross royalties' receivable. These instruments are classified at FVTPL on the basis that the liability is linked to the Group's royalty investments. Such liabilities are recognised initially at fair value with the costs being recorded immediately in profit or loss as 'royalty participation fees' and remeasured at each reporting date in order to avoid an accounting mismatch. The change in fair value is recognised in profit or loss and presented within 'royalty investment income'. The fair value of these financial instruments is determined using discounted cash flow analysis. Further details of the methods and assumptions used in determining the fair value can be found in note 23.

Derecognition of financial liabilities

A financial liability (in whole or in part) is derecognised when the Group has extinguished its contractual obligations, it expires or is cancelled. Any gain or loss on derecognition is taken to other income/expenses in the Consolidated Statement of Comprehensive Income.

c.       Equity Instruments

Financial instruments issued by the Group are treated as equity if the holder has only a residual interest in the assets of the Group after the deduction of all liabilities. The Company's Ordinary Shares are classified as equity instruments.

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from proceeds.

2.13   Share-based payments

The Group operates an equity settled Share Option Plan and a Long-Term Incentive Plan for its Directors and key advisers.

The fair value of awards granted under the above plans are recognised in profit or loss with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the awards granted:

·           including any market performance conditions (e.g., the entity's share price)

·           excluding the impact of any service and non-market performance vesting conditions (e.g., increase in cash available for distribution, remaining a director for a specified time period); and

·           including the impact of any non-vesting conditions

The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting and service conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

The Group also settles a portion of expenses by way of share-based payments. These expenses are settled based on the fair value of the service received as an expense with the corresponding amount increasing equity. All expenses recognised in the year in relation to the Group's Share Option and Long-Term Incentive Plan schemes are recognised through the share-based payment reserve.

2.14   Reserves

Equity comprises the following:

·           Share capital represents the nominal value of equity shares in issue

Other reserves comprises the following:

·           Warrant reserve was created in connection with the issue of share warrants. Further warrants were issued during the year ended 31 March 2023. These allow the owner to subscribe for a fixed number of equity shares at a fixed price, and have therefore been classified as equity in accordance with IAS 32 paragraph 16.

·           Share-based payment reserve represents equity-settled share-based employee remuneration as detailed in note 2.13

·           Retained earnings represents retained profits

3.       Critical accounting estimates

The preparation of the Consolidated Financial Statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of revision and future periods, if the revision affects both current and future periods. The following estimates and assumptions that may cause a material adjustment to the carrying amount of assets and liabilities are:

Fair value of royalty investments

Royalty investments are valued using a discounted cash flow analysis. The discount rate used in these valuations has been estimated to take account of market interest rates and the credit worthiness of the investee. Revenue growth has been estimated by the Directors and is based on unobservable market inputs.

Where the royalty investment contains a buy-back clause, the Directors have assessed the likelihood of this occurring. Where occurrence of the buy-back is deemed likely, this is built into the discounted cash flow at the appropriate point.

These assumptions are reviewed semi-annually. The Directors believe that the applied valuation techniques and assumptions used are appropriate in determining the fair value of the royalty investments and have made adjustments to the discount rates and estimated revenue growth where necessary. Further details of the carrying values, methods, assumptions and sensitivities used in determining the fair value can be found in note 23.

Fair value of royalty participation liabilities

The payments falling due under the Group's contract for royalty participation fees are directly linked to the Group's royalty investments and thus the same assumptions have been applied in arriving at the fair value of these liabilities. The Directors have considered whether any increase in discount rate is required to represent the Group's credit risk as the payments are made by the Group rather than the investee and have concluded that none is required since payment under the contract is only due once the Group has received the gross amounts from the investee. Further details of the methods, assumptions and sensitivities used in determining the fair value can be found in note 23.

Fair value of equity investments

The Group's equity investments are not traded in an active market and thus the fair value of the instruments is determined using valuation techniques. The Group make assumptions based on market conditions at the end of each reporting period. The key estimates that the Directors have made in arriving at the fair values are the price/earnings multiples to be applied to the investee entities' profits. These multiples have been estimated based on market information for similar types of companies. The carrying value of equity investments are disclosed in Note 11. Further details of the methods, assumptions and sensitivities used in determining the fair value can be found in note 23.

4.       Auditor's remuneration

5.       Administration and personnel

The table below splits out administration and personnel costs.

6.       Finance costs

7.       Income tax

The Company has been granted exemption from Guernsey taxation. The Company's subsidiaries in the UK are subject to taxation in accordance with relevant tax legislation.

Factors affecting income tax expense for the year

8.       Earnings per share

Basic earnings per share is calculated by dividing total comprehensive income for the period by the weighted average number of shares in issue throughout the period, excluding treasury shares (see Note 17).

Diluted earnings per share represents the basic earnings per share adjusted for the effect of dilutive potential shares issuable on exercise of share options under the Company's share-based payment schemes, weighted for the relevant period.

All share options, warrants and Long-Term Incentive Plan awards in issue are not dilutive at the year-end as the exercise prices were above the average share price for the period. However, these could become dilutive in future periods.

Adjusted earnings per share

Adjusted earnings represent the Group's underlying performance from core activities. Adjusted earnings is the total comprehensive income adjusted for unrealised and non-core fair value movements, non-cash items and transaction-related costs, including royalty participation fees, together with the tax effects thereon. Given the sensitivity of the inputs used to determine the fair value of its investments, the Group believes that adjusted earnings is a better reflection of its ongoing financial performance.

Valuation and other non-cash movements such as those outlined are not considered by management in assessing the level of profit and cash generation of the Group. Additionally, IFRS 9 requires transaction-related costs to be expensed immediately whilst the income benefit is over the life of the asset. As such, an adjusted earnings measure is used which reflects the underlying contribution from the Group's core activities during the year.

9.       Royalty investments

Royalty investments are financial assets held at FVTPL that relate to the provision of royalty capital to a diversified portfolio of companies.

Royalty investments are comprised of:

Royalty investment net income on the face of the consolidated statement of comprehensive income comprises:

All financial assets held at FVTPL are mandatorily measured as such.

The Group's royalty investment assets comprise royalty financing agreements with 15 (31 March 2022:13) investees. Under the terms of these agreements the Group advances funds in exchange for annualised royalty distributions. The distributions are adjusted based on the change in the investees' revenues, subject to a floor and a cap. The financing is secured by way of fixed and floating charges over certain of the investees' assets. The investees are provided with buyback options, exercisable at certain stages of the agreements.

10.     Loan investments

Loan investments are financial assets held at amortised cost with the exception of the £2.2 million loan issued at 0% interest. The impact of discounting is immaterial to the financial statements. The below table shows both the loans at amortised cost and fair value.

The Group's loan investments comprise secured loans advanced to two entities (2022 - two) in connection with the Group's royalty investments.

The loans comprise fixed rate loans of £4,652,000 (31 March 2022: £4,172,000) which bear interest at rates of between 0% and 15% (2022: 0% and 15%). The Group has no variable rate loans at the year end (2022: no variable rate loans at year end). The total interest receivable during the period was £339,074 (31 March 2022: £533,000).

The loan investments mature as follows:

Loan investment net income on the face of the consolidated statement of comprehensive income comprises:

ECL Analysis

The measurement of ECLs is primarily based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"). The Group analyses a range of factors to determine the credit risk of each investment. These include, but are not limited to:

·           liquidity and cash flows of the underlying businesses

·           security strength

·           covenant cover

·           balance sheet strength

If there is a material change in these factors, the weighting of either the PD, LGD or EAD increases, thereby increasing the ECL impairment.

The disclosure below presents the gross and net carrying value of the Group' loan investments by stage:

Under the ECL model introduced by IFRS 9, impairment provisions are driven by changes in credit risk of instruments, with a provision for lifetime expected credit losses recognised where the risk of default of an instrument has increased significantly since initial recognition.

The credit risk profile of the investments has not increased materially and they remain Stage 1 assets. Minor expected credit losses have been charged for the Stage 1 assets.

The following table analyses Group's provision for ECL's by stage:

11.     Equity investments

Equity investments are financial assets held at FVTPL.

The Group's equity investments comprise unlisted shares and warrants in eleven of its royalty investment companies (31 March 2022: nine).

The Group also still holds two (31 March 2022: two) unlisted investments in mining entities from its previous investment objectives. The Board does not consider there to be any future cash flows from the remaining mining investments and they are fully written down to nil value.

Equity investment net income on the face of the consolidated statement of comprehensive income comprises:

12.     Royalty debt liabilities

Royalty debt liabilities are financial liabilities held at fair value through profit and loss.

Royalty investment liabilities are comprised of:

13.     Trade and other receivables

14.     Trade and other payables

15.     Borrowings

In January 2023, the Group entered into a new credit facility agreement with Fairfax Financial Holdings Limited and certain of its subsidiaries ("Fairfax") and issued Fairfax 41,615,134 warrants. Refer to Note 18 for details. The facility term is up to £100m to replace Duke's existing £55m million term and revolving facilities. The credit facility has a five-year term, expiring in January 2028 with a bullet repayment on expiry and no amortisation payments during the five-year term. Furthermore, the interest rate is equal to SONIA plus 5.00% per annum, which represents a 225bps improvement on Duke's previous rate of SONIA plus 7.25%.

The Group has adopted Interest Rate Benchmark Reform - IBOR 'phase 2' (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and 16). Applying the practical expedient introduced by the amendments, when the benchmarks affecting the Group's loans are replaced, the adjustments to the contractual cash flows will be reflected as an adjustment to the effective interest rate. Therefore, the replacement of the loans' benchmark interest rate will not result in an immediate gain or loss recorded in profit or loss, which may have been required if the practical expedient was not available or adopted.

At 31 March 2023, £42,000,000 was undrawn on the facility (31 March 2022: £6,800,000).

At the date of extinguishment of the previous facility, capitalised loan issue fees of £350,000 were outstanding. These fees were immediately charged to the income statement. Further fees of £1,439,000 were capitalised against the new credit facility. At 31 March 2023, £1,391,000 (31 March 2022: £460,000) of unamortised fees remained outstanding.

The table below sets out an analysis of net debt and the movements in net debt for the year ended 31 March 2023 and prior year.

16.     Goodwill

The goodwill has not been assessed for impairment on the basis of materiality.

17.     Share capital

There is a single class of shares. There are no restrictions on the distribution of dividends and the repayment of capital with respect to externally held shares. The shares held by The Duke Royalty Employee Benefit Trust are treated as treasury shares. The rights to dividends and voting rights have been waived in respect of these shares.

18.     Equity-settled share-based payments

Warrant reserve

The following table shows the movements in the warrant reserve during the year:

In January 2023, Duke issued 41,615,134 warrants to Fairfax. The warrants expire in January 2028 and have an exercise price of 45 pence. As per IFRS 2, the warrants have been valued using the Black Scholes model. A total expense of £2,771,000 has been capitalised and will be amortised over the life of the warrants. In the year to 31 March 2023, an expense of £92,000 (2022: £nil) was recognised through finance costs in relation to the warrants.

At 31 March 2023, 43,990,000 (31 March 2022: 4,375,000) warrants were outstanding and exercisable at a weighted average exercise price of 45 pence (31 March 2022: 46 pence). The weighted average remaining contractual life of the warrants outstanding was 4.56 years (31 March 2022: 1.00 years).

Share-based payment reserve

The following table shows the movements in the share-based payment reserve during the period:

Share option scheme

The Group operates a share option scheme ("the Scheme"). The Scheme was established to incentivise Directors, staff and key advisers and consultants to deliver long-term value creation for shareholders.

Under the Scheme, the Board of the Company will award, at its sole discretion, options to subscribe for Ordinary Shares of the Company on terms and at exercise prices and with vesting and exercise periods to be determined at the time. However, the Board of the Company has agreed not to grant options such that the total number of unexercised options represents more than four per cent of the Company's Ordinary Shares in issue from time to time. Options vest immediately and lapse five years from the date of grant.

At 31 March 2023, 200,000 options (31 March 2022: 200,000) were outstanding and exercisable at a weighted average exercise price of 50 pence (31 March 2022: 50 pence). The weighted average remaining contractual life of the options outstanding at the year-end was 0.50 year (31 March 2022: 1.50 year).

Long Term Incentive Plan

Under the rules of the Long-Term Incentive Plan ("LTIP") the Remuneration Committee may grant Performance Share Awards ("PSAs") which vest after a period of three years and are subject to various performance conditions. The LTIP awards will be subject to a performance condition based 50 per cent on total shareholder return ("TSR") and 50 per cent on total cash available for distribution ("TCAD per share"). TSR can be defined as the returns generated by shareholders based on the combined value of the dividends paid out by the Company and the share price performance over the period in question. Upon vesting the awards are issued fully paid.

The fair value of the LTIP awards consists of (a) the fair value of the TSR portion; and (b) the fair value of the TCAD per share portion. Since no consideration is paid for the awards, the fair value of the awards is based on the share price at the date of grant, as adjusted for the probability of the likely vesting of the performance conditions. Since the performance condition in respect of the TSR portion is a market condition, the probability of vesting is not revisited following the date of grant. The probability of vesting of the TCAD per share portion, containing a non-market condition, is reassessed at each reporting date. The resulting fair values are recorded on a straight-line basis over the vesting period of the awards.

On 31 October 2019, 2,525,000 PSAs were granted to Directors and key personnel with a fair value of £842,280. An expense of £185,927 was recognised in Administration and Personnel costs in the Consolidated Statement of Comprehensive Income.

On 1 October 2020, 6,665,000 PSAs were granted to Directors and key personnel with a fair value of £1,093,478. An expense of £364,493 was recognised in Administration and Personnel costs in the Consolidated Statement of Comprehensive Income.

On 3 January 2021, 1,000,000 PSAs were granted to Directors and key personnel with a fair value of £164,063. An expense of £54,688 was recognised in Administration and Personnel costs in the Consolidated Statement of Comprehensive Income.

On 1 October 2021, 2,108,000 PSAs were granted to Directors and key personnel with a fair value of £671,926. An expense of £223,771 was recognised in Administration and Personnel costs in the Consolidated Statement of Comprehensive Income.

On 1 October 2022, 3,954,700 PSA's were granted to Directors and key personnel with a fair value of £840,376. An expense of £139,935 was recognised in Administration and Personnel costs in the Consolidated Statement of Comprehensive Income.

At 31 March 2023, 13,727,700 (31 March 2022:12,298,000) PSAs were outstanding. The weighted average remaining vesting period of these awards outstanding was 1.2 years (2022 - 1.5 years).

Other share-based payments

During the year ended 31 March 2023, the Company issued 205,128 (2022: 104,576) shares to members of the Investment Committee in recognition of the significant contribution made during the previous financial year and for voluntarily forgoing service fees. The fair value of the shares was determined to be £80,000 being the share price at the date of the awards. The expense was recognised in full in the Consolidated Statement of Comprehensive Income during that year.

19.     Distributable reserves

Pursuant to the Companies (Guernsey) Law, 2008 (as amended), all reserves (including share capital) can be designated as distributable. However, in accordance with the Admission Document, the Company shall not make any distribution of capital profits or capital reserves except by means of capitalisation issues in the form of fully paid Ordinary Shares or issue securities by way of capitalisation of profits or reserves except fully paid Ordinary Shares issued to the holders of its Ordinary Shares.

20.     Dividends

The following interim dividends have been recorded in the periods to 31 March 2022 and 31 March 2023:

A further quarterly dividend was paid post year end, refer to Note 25 for details.

Rights to dividends have been waived in respect of shares held by the Group's Employee Benefit Trust (see note 17).

21.     Deferred tax

The temporary differences for deferred tax are attributable to:

A deferred tax asset has been recognised as it is expected that future available taxable profits will be available against which the Group can use against the current year tax losses.

22.     Related parties

Directors' fees

The following fees were payable to the Directors during the period:

Fees relating to Charles Cannon Brookes are paid to Arlington Group Asset Management Limited.

Directors' fees include the following expenses relating to awards granted under the Group's Long Term Incentive Plan (see note 18):

At 31 March 2023, no Directors' fees were outstanding (2022: no fees outstanding).

Investment Committee fees

The Group's Investment Committee assists in analysing and recommending potential royalty transactions and its members are considered to be key management along with the Directors.

The following fees were payable to the members of the Investment Committee during the year:

Investment Committee fees include the following expenses relating to shares issued as remuneration (see note 18):

Investment Committee fees include the following expenses relating to awards granted under the Group's Long Term Incentive Plan (see note 18):

Support services administration fees

The following amounts were payable to related parties during the year in respect of support services fees:

Support Service Agreements with Abingdon Capital Corporation ("Abingdon"), a company of which Neil Johnson is a director, and Arlington Group Asset Management Limited ("Arlington"), a company of which Charles Cannon Brookes is a director, were signed on 16 June 2015. The services to be provided by both Abingdon and Arlington include global deal origination, vertical partner relationships, office rental and assisting the Board with the selection, execution and monitoring of royalty partners and royalty performance. Abingdon fees also includes fees relating to remuneration of staff residing in North America.

Share options and LTIP awards

The Group's related parties, either directly or beneficially, held share options issued under the Group's share option scheme and Long-Term Incentive Plan as follows:

Dividends

The following dividends were paid to related parties:

¹ Includes dividends paid to Abinvest Corporation, a wholly owned subsidiary of Abingdon

² Includes dividends paid to Arlington Group Asset Management

23.     Fair value measurements

Fair value hierarchy

IFRS 13 requires disclosure of fair value measurements by level of the following fair value hierarchy:

Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities that the entity can readily observe.

Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly.

Level 3: Inputs that are not based on observable market date (unobservable inputs).

The Group has classified its financial instruments into the three levels prescribed as follows:

The following table presents the changes in level 3 items for the years ended 31 March 2023 and 31 March 2022:

Valuation techniques used to determine fair values

The fair value of the Group's royalty financial instruments is determined using discounted cash flow analysis and all the resulting fair value estimates are included in level 3. The fair value of the equity instruments is determined applying an EBITDA multiple to the underlying businesses forward looking EBITDA. All resulting fair value estimates are included in level 3.

Valuation processes

The main level 3 inputs used by the Group are derived and evaluated as follows:

Annual adjustment factors for royalty investments and royalty participation liabilities

These factors are estimated based upon the underlying past and projected performance of the royalty investee companies together with general market conditions.

Discount rates for financial assets and liabilities

These are initially estimated based upon the projected internal rate of return of the royalty investment and subsequently adjusted to reflect changes in credit risk determined by the Group's Investment Committee.

EBITDA multiples

These multiples are based on comparable market transactions

Forward looking EBITDA

These are estimated based on the projected underlying performance of the royalty investee companies together.

Changes in level 3 fair values are analysed at the end of each reporting period and reasons for the fair value movements are documented.

Valuation inputs and relationships to fair value

The following summary outlines the quantitative information about the significant unobservable inputs used in level 3 fair value measurements:

Royalty investments

The unobservable inputs are the annual adjustment factor and the discount rate. The range of annual adjustment factors used is -6.0% to 6.0% (2022: 1.9%% to 6.0%) and the range of risk-adjusted discount rates is 14.7% to 17.70% (2022: 14.8% to 17.35%).

An increase in the annual revenue growth rates (subject to the collars set under the terms of the royalty financing agreements) of 5% would increase the fair value by £929,000 (2022: £891,000).

A reduction in the discount rate of 25 basis points would increase the fair value by £2,289,000 (2022: £2,302,000).

A decrease in the annual revenue growth rates (subject to the collars set under the terms of the royalty financing agreements) of 5% would decrease the fair value by £1,263,000 (2022: £1,296,000).

An increase in the discount rate of 25 basis points would decrease the fair value by £2,230,000 (2022: £2,232,000).

Equity investments

The unobservable inputs are the EBITDA multiples and forward looking EBITDA. The range of EBITDA multiples used is 5.3x to 10.0x (5.0x to 7.8x).

An increase in the EBITDA multiple of 25 basis points would increase fair value by £1,378,000 (2022: £1,560,000)

A decrease in the EBITDA multiple of 25 basis points would decrease fair value by £1,378,000 (2022: £1,560,000)

An increase in the forward looking EBITDA of 5% would increase the fair value by £1,575,000 (2022: £1,695,000)

A decrease in the forward looking EBITDA of 5% would decrease fair value by £1,575,000 (2022: £1,695,000)

Royalty participation instruments

The unobservable inputs are the annual adjustment factor and the discount rate used in the fair value calculation of the royalty investments. The range of annual adjustment factors used is -0.37% to 6.0% (2022: 1.9% to 6.0%) and the range of risk-adjusted discount rates is 16.3% to 17.3% (2022: 16.3% to 17.3%).

An increase in the annual adjustment factor (subject to the collars set under the terms of the royalty financing agreements) of 5% would increase the fair value of the liability by £5,000 (2022: £6,000).

A reduction in the discount rate of 25 basis points would increase the fair value of the liability by £9,000 (2022: £14,000).

A decrease in the annual adjustment factor (subject to the collars set under the terms of the royalty financing agreements) of 5% would decrease the fair value of the liability by £9,000 (2022: £10,000).

An increase in the discount rate of 25 basis points would decrease the fair value of the liability by £14,000 (2022: £13,000).

24.     Financial risk management

The Group's royalty financing activities expose it to various types of risk that are associated with the investee companies to which it provides royalty finance. The most important types of financial risk to which the Group is exposed are market risk, liquidity risk and credit risk. Market risk includes price risk, foreign currency risk and interest rate risk. The Board of Directors has overall responsibility for risk management and the policies adopted to minimise potential adverse effects on the Group's financial performance.

Principal financial instruments

The principal financial instruments used by the Group from which financial instrument risk arises, are as follows:

The policies and processes for measuring and mitigating each of the main risks are described below.

Market risk

Market risk comprises foreign exchange risk, interest rate risk and other price risk.

Foreign exchange risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. The functional and presentation currency of the Group is Sterling.

The Group is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the Euro. Foreign exchange risk arises from future commercial transactions in recognised assets and liabilities denominated in a currency that is not the functional currency of the Company and its subsidiary.

The Board monitors foreign exchange risk on a regular basis. The Group's exposure to this risk is outlined below.

The Group's exposure to foreign currency risk at the end of the reporting period was as follows:

If Sterling strengthens by 10% against the Euro, the net Euro-denominated assets would reduce by £844,000 (2022: £965,000). Conversely, if Sterling weakens by 5% the assets would increase by £932,000 (2022: £1,066,000).

If Sterling strengthens by 5% against the US Dollar, the net US Dollar-denominated assets would reduce by £1,228,000 (2022: £715,000). Conversely, if Sterling weakens by 5% the assets would increase by £1,357,000 (2022: £790,000).

If Sterling strengthens by 5% against the Canadian Dollar, the net Canadian Dollar-denominated assets would reduce by £606,000 (2022: £568,000). Conversely, if Sterling weakens by 5% the assets would increase by £670,000 (2022: £627,000).

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial asset will fluctuate because of changes in market interest rates.

The Group's main interest rate risks arise in relation to its royalty investments, which are carried at fair value through profit or loss, and its borrowings, which are subject to an interest charge of one-month UK SONIA +5.00%. The Group's royalty investments have a fair value at the reporting date of £191,333,000 (31 March 2022: £160,479,000). A sensitivity analysis in respect of these assets is presented in note 23.

The Group's borrowings at the reporting date are £53,930,000, see Note 15 (31 March 2022: £47,740,000). A movement in the rate of SONIA of 100bps impacts loan interest payable by £539,000 (31 March 2022: £477,000).

Other price risk

Other price risk is the risk that the fair value of future cash flows of a financial asset will fluctuate because of changes in market prices (other than those arising from interest rate risk or foreign exchange risk).

The fair value of the Group's royalty investments fluctuates due to changes in the expected annual adjustment factors applied to the royalties payable by each of the investee companies, which are based upon the revenue growth of the investee company.

A sensitivity analysis in respect of the annual adjustment factors applied to the royalty investments is presented in note 23.

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Group's maximum exposure to credit risk is as follows:

Royalty investments

The royalty investments relate to the Group's 15 royalty financing agreements. At the reporting date, there was £4,423,000 of royalty cash payments outstanding (31 March 2022: £2,439,000) from three royalty partners (31 March 2022: 2). Of this, £nil (31 March 2022: £nil) was received in the month post year-end. Payment plans have been agreed to recover the £4,423,000 from all three royalty partners over the next five years.

The Group monitors the credit worthiness of the investee companies on an ongoing basis and receives regular financial reports from each investee company. These reports are reviewed by the Board on a semi-annual basis. The credit risk relating to these investments is taken into account in calculating the fair value of the instruments.

The Group also has security in respect of the royalty investments which can be called upon if the counterparty is in default under the terms of the agreement.

Loan investments

The Group's loan investments are held at amortised cost. All loans have been reviewed by the directors. The Board considered the credit risk, both at issue and at the year-end, and has determined that there have been no significant movements. Consequently, any loss allowance is limited to 12 months' expected losses and such allowances are considered to be immaterial.

Cash and cash equivalents

The credit quality of the Group's cash and cash equivalents can be assessed by reference to external credit ratings as follows:

The Group considers that the credit risk relating to cash and cash equivalents is acceptable.

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments.

The Group maintains sufficient cash to pay accounts payable and accrued expenses as they fall due. The Group's overall liquidity risks are monitored on a quarterly basis by the Board.

At the year end the Group had access to an undrawn borrowing facility of £42,000,000 (2022: £6,800,000 (see note 15).

The table below analyses the Group's royalty investments and financial liabilities into relevant maturity groupings based on their undiscounted contractual maturities.

Capital management

The Board manages the Company's capital with the objective of being able to continue as a going concern while maximising the return to Shareholders through the capital appreciation of its investments. The capital structure of the Company consists of equity as disclosed in the Consolidated Statement of Financial Position

25.     Events after the financial reporting date

Dividends

On 12 April 2023 the Company paid a quarterly dividend of 0.70 pence per share.

Exits

On 24 May 2023, Duke announced that it had exited its investments in Instor Solutions, Inc ("Instor"). The total cash return was £8.7 million.

New royalty investments

On 23 June 2023, the Group announced a £1,800,000 follow-on investment into Tristone.

On 30 June 2023, the Group announced a £1,900,000 follow-on investment into New Path Fire & Security.

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