Chairman’s statement

In what has been a turbulent time for financial markets, Candover has continued to perform strongly throughout the year. We have enjoyed record returns from realisations and good investment opportunities have continued to be sourced across our European network.

Our performance

Details of the year are set out in the operational and financial reviews which follow, but I am pleased to report that our net assets per share (NAV) increased by 37.4% to 2065p, compared to a 2.0% increase in the FTSE All-Share Index over the same period. Profits before tax increased to £21.0 million compared to £20.6 million last year.

We invested £90.5 million in the year of which £73.5 million was invested alongside the Candover 2005 Fund in four new investments, namely the buyouts of the luxury yacht manufacturer Ferretti; the theme park operator Parques Reunidos; the manufacturer of fall protection equipment, Capital Safety Group; and the French tax advisory and cost reduction business, Alma Consulting Group. Since the year-end an investment has been made in Stork, a Dutch engineering conglomerate.

Realisations and refinancings generated £162.4 million of proceeds during the year. We sold our investments in Vetco, Thule, Dakota, Minnesota & Eastern Railroad Corporation, Bureau van Dijk and Get. In addition, Wellstream was listed on the London Stock Exchange.

Our year-end cash balance net of borrowings was £114.2 million as against £29.7 million at the end of the previous year, driven by our strong realisations. Candover is making more active use of its balance sheet and consequently, as previously reported, we have raised £150.0 million in debt finance from a US private placement bond issue as part of our preparations for the Candover 2008 Fund. Of this finance, £120.0 million was received in 2007, with the remainder received after the year-end.

The strength of the euro against the pound in the second half of the year benefited the valuation of our portfolio and, combined with movements on our cash portfolio net of debt, added about 78.0p to our NAV. As a matter of policy, we see no need to hedge our currency exposures, but £120.0 million of our debt financing has been swapped into floating rate euros to match our euro-denominated commitment alongside the funds.

Our environment

Although 2007 was another record year for European buyouts, deal volumes in the second half of 2007 were significantly affected by the credit slowdown resulting from the US sub-prime mortgage crisis. The impact was felt most strongly at the largest end of the buyout market, as the lack of availability of debt finance considerably lowered levels of activity. Our part of the market has not been as badly affected and we are still able to do deals. Realistically, however, 2008 is likely to be a quieter year than 2007.

Private equity remained in the public spotlight during 2007, with intense media scrutiny focusing on taxation and transparency issues. During the year, the British Venture Capital Association (BVCA) asked Sir David Walker to undertake an independent review of the adequacy of disclosure and transparency in the private equity industry. The Guidelines resulting from that review were published in November. The Guidelines, which are a voluntary set of rules intended to be implemented on a ‘comply or explain’ basis, require greater disclosure by large private equity firms and their portfolio companies, and industry-wide data collection and dissemination. In short, we welcome these initiatives and we will comply in full.

Candover, because of its listed status, already makes much greater public disclosure regarding its investments than most private equity firms. We will be placing greater emphasis on corporate responsibility going forward and we discuss this, and our obligations under the Guidelines, more fully in our Corporate Responsibility report.

The Candover 2008 Fund

The Candover 2005 Fund is now 72% committed and Candover Partners Limited has therefore commenced marketing the Candover 2008 Fund with a target of €5.0 billion. The objectives, scope and principal terms of this new Fund are expected to be essentially the same as those of the Candover 2005 Fund.

Under the terms of a coinvestment agreement, Candover Investments plc will be committing €1.0 billion to the Fund, and dependent on the overall performance of the Fund, will be entitled to between 2% and 5% of any profit made by that Fund, depending on the investment multiple achieved by the Fund. These are the same terms as applied for the Candover 2005 Fund.

Our people and operations

We have previously reported that Nico Lethbridge, who had been on the Board of Candover since January 2003, died on 16th August, 2007 following an accidental fall. Nico was a tremendous asset to us and we miss him very much.

During the year, Stephen Curran, who retired as Chairman of Candover in 2006, stepped down from his position as a non-executive director. Stephen was one of the original architects of Candover, and together with Roger Brooke, our Life President, established the foundations upon which our success has been built. On behalf of Candover, I would like to thank Stephen very much for his great contribution to the Company for over 25 years.

Lord Jay of Ewelme was appointed as a non-executive director with effect from 1st January, 2008 and we are delighted to welcome him on to the Board. Lord Jay is a former Permanent Under-Secretary at the Foreign Office and Head of the Diplomatic Service, having previously served as British Ambassador to France. His distinguished civil service career and his subsequent commercial experience give him unrivalled insight and expertise in international affairs which will be invaluable to Candover as we develop our business further.

I am pleased to say that Nicholas Jones will be joining the Board as from 14th April, 2008. Nicholas is Vice Chairman of Lazard in London and one of the most experienced bankers in the City. His skills, knowledge and experience will add great value to the Board.

Jimmy West, who has been on the Board for over 20 years, will be stepping down at the AGM and will be succeeded as Senior Independent Director by Antony Hichens.

We have recently announced that we have recruited Jamie Paton to open our first office in Asia. Jamie, who previously spent more than seven years in Hong Kong establishing 3i’s North Asian business, will initially be based in Hong Kong while we evaluate options in the region. We already have extensive contacts and links in Asia through our European portfolio and by working with someone as experienced in the region as Jamie, we are confident that we can properly investigate the market potential. It’s a toe in the water for us, in a part of the world which we believe has the potential to develop excellent returns for us in the years ahead.

We have spent some considerable time reviewing how our business could develop using the private equity skills that we have, and Candover Asia is the first initiative to be pursued. The Board will continue to review other initiatives during the forthcoming year and if we think they can enhance shareholder value, we won’t hesitate to pursue them. I emphasise, however, that our European buyout business will remain our core focus.

During the year, we strengthened our pan-European buyout team, hiring two new directors and six investment managers. We now have 39 professionals based in our four European offices, and in addition to our investment team, have specialists focusing on origination, portfolio management and debt financing. I believe that we have one of the strongest teams in the private equity industry.

Dividends

The Board is recommending a final dividend of 40.0p per share (36.0p in 2006), making a dividend payable for the year of 60.0p per share (54.0p in 2006), an increase of 11.1%. We expect to maintain a progressive dividend policy but this will depend, of course, on the underlying revenue that is generated by our investments.

Outlook

2008 will be a challenging environment in which to operate. The tight credit market conditions show no sign of slackening, and this will inevitably have an impact on both the pricing of transactions and the overall level of activity in the buyout market. As I indicated at the half year, lower debt multiples may result in lower prices and this may cause vendors, including Candover, to delay selling businesses until a recovery is seen in the market. This is likely to mean that the record levels of realisations enjoyed in 2007 will not be a feature of 2008.

However, history has shown that a downturn in the markets can prove to be a good time for investing. Candover has a long track record of investing through market cycles and over the past 28 years our returns have been remarkably consistent. We enjoy an excellent reputation within the banking community in terms of returning debt capital, and this should ensure we are well positioned to obtain financing when we find suitable transactions.

Candover has always put a strong focus on helping management improve the operational performance of our portfolio companies and this is one of the ways in which we make our money. So even though deal activity may be less, I have no doubt that the development of the portfolio will continue to create value during 2008.

The winners in these markets will be those players that continue to focus on the fundamentals, as we do at Candover. Finding and backing high quality management teams using an investment discipline we have refined over the years has allowed us to deliver satisfactory returns to shareholders. We confidently expect this to continue.

Gerry Grimstone
Chairman
31st March, 2008