Update & Investment Review

2010

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Many people will be aware of the success of Brian Souter, Chief Executive and co-founder of Stagecoach Group PLC, one of the

world’s largest transport groups. Starting with just two buses, he founded Stagecoach with his sister, Ann Gloag in 1980. Stagecoach floated on the London Stock Exchange in 1993 and, as a major bus and rail operator, today employs more than 40,000 people worldwide.

In addition to his business interests, Brian Souter and his wife Betty have established and funded the Souter Charitable Trust. The Trust assists projects engaged in the relief of human suffering in the UK and overseas, particularly but not exclusively, those promoting spiritual welfare. In the last three years, the Trust has awarded over 2,700 grants worth more than £20 million.

What is less well known is the extent of the Souter family’s investments beyond Stagecoach.

Since Stagecoach’s flotation, Brian Souter has built up a significant portfolio of investments outside of Stagecoach. Whilst always open to opportunities across all asset classes, the portfolio concentrated, until the formation of Souter Investments in late 2006, primarily on managed fund investments.

In December 2006 Brian Souter and Andy Macfie formed Souter Investments. Andy had previously spent 20 years in private equity, investing in early stage companies through to large, highly leveraged global organisations in a multitude of sectors.

In December 2008, recognising that more resource was required to actively evaluate, lead and manage an increasing number of private equity opportunities, the team was expanded with the recruitment of two investment managers, Calum Cusiter and John Berthinussen. Calum and John are both qualified CAs and have a background in property and unquoted investments.

Together with Janice Bailey and Lynn Robertson, Souter Investments LLP now has a team of five people with offices in Edinburgh and Perth.

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Contents

Introduction by Brian Souter ....................................4

Report by Andy Macfie ............................................6

Our Larger Unquoted Investments (Appendix A) .....10

Our Smaller Unquoted Investments (Appendix B) ....18

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When we launched Souter Investments in December

2006, my vision was to create a wide-ranging investment portfolio that would be resilient to economic downturns and demonstrate a healthy level of growth over the long term.

At that time we did not have an inkling that the world was heading for the biggest financial crisis since the Great Depression.

So how have we fared since Souter Investments was formed? Have we invested wisely and does our current investment portfolio offer good growth prospects?

Whilst we have had a few under performers the vast majority of our investments have proved resilient over the economic downturn.

Between March 2007 and March 2010, the net value of our investments has increased by 41%. This compares well against Britain’s largest quoted companies forming the FTSE 100 as can be seen from the chart shown on the right. This performance is particularly encouraging given that it is after we have paid all living and management expenses, corporation and income tax, and made charitable donations of £20m.

Introduction By Brian Souter

At Souter Investments we follow a number of guidelines. Our focus is to invest in:

• A diversified portfolio of managed funds and sound private companies

• Unique transport related opportunities that are of no interest to Stagecoach

We do not invest in companies involved in alcohol, gambling, tobacco or armaments.

Over the years, individual investments in the portfolio have changed but at March 2010, half of our portfolio was in Stagecoach, a quarter in unquoted companies with most of the remainder split between private equity funds and quoted companies.

A balanced portfolio reduces risk, but it’s also important to read the markets and be versatile. We intentionally took the decision to reduce our commitment to commercial property activities from 2003 and in recent times we have deliberately focused on private equity investments where we have considerable experience.

In particular, the Souter team has recently found a number of

“Like many entrepreneurs, I have historically been discreet about my family’s investment portfolio. However, given the extent of the portfolio and an increasing level of public interest, I have decided that, going forward, we should produce a report on activities on a regular basis.”

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interesting opportunities to invest in good companies which required funds to finance growth and/or strengthen their balance sheets.

Today our unquoted portfolio spans companies involved in transport, luxury goods, support services, infrastructure services, financial services, healthcare, biofuels, power generation and the environmental sector. Many are Scottish-based but we have investments as far afield as New Zealand. We look out for the right people and attractive dynamics.

The companies in our unquoted portfolio have a combined turnover approaching £1.3bn and employ nearly 7,000 people. The majority are long-established corporations but we have a healthy number of early-stage businesses. Some of the names you will recognise, including the bus and coach manufacturer, Alexander Dennis, the luxury yacht builder, Sunseeker International, insurance specialists, esure, and internet price comparison site, gocompare.

The outlook is positive for Souter Investments as we continue to focus on value-creating opportunities where sound cash flows already exist

and the portfolio should benefit significantly as the economy recovers.

Andy Macfie and his team at Souter Investments have a substantial war chest to invest in situations which match our criteria of low risk and high returns.

I am personally of the view that a double dip recession is now unlikely but liquidity problems will persist for years. Recovery could be slow with ‘cash remaining king’ for some time to come.

Many asset prices have still to adjust down and lower multiples of valuation will be necessary.

New banking models need to be clarified and it is likely that debt facilities available to small and medium sized companies will remain in short supply for some time to come. We should see the return of a strong IPO market as we did in the 1990s and Souter Investments is well placed to capitalise on the opportunities which should emerge from this process.

So, don’t hesitate to get in touch with Andy Macfie and his team at Souter Investments if you have an opportunity that matches our investment profile and may whet our appetite.

Brian Souter

200

150

100

50

2007 20102008 2009

FTSE100 Rebased Net Asset Value Rebased£m

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The last four years have been a rollercoaster the extent of

which was difficult to predict. Much of the emphasis has been on the banking sector. The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, went bankrupt, were taken over or were bailed-out by the US government.

In the UK it was a similar story with Lloyds and HBoS merging, whilst Northern Rock, Lloyds and RBS all benefited from very significant equity injections by the government. The FTSE 100 and the S&P 500 (the US equivalent) fell from the pre- crisis peak in October 2007 to the trough in March 2009 by 52% and 57% respectively. Valuations of other asset classes also tumbled. Some recovery has taken place but markets have continued to be volatile this summer and we are still well below peak valuations.

Report by Andy Macfie

Despite this unfavourable economic and investment background the net asset value of investments held by the Souter family, its trusts and the Souter Charitable Trust has risen by 41% over the last three years whilst the FTSE 100 was down 10%.

How has this been achieved? First, Stagecoach Group is the bedrock of the portfolio. Souter Investments has no role in the management of Stagecoach, but it has proved to be a defensive and resilient stock, producing a healthy dividend stream and a very significant return of value to shareholders in 2007. This provided us with the opportunity to increase our investments in other assets.

LocationTurnover

£mEmployees

Investment Date

Transport Operations

Buses Howick & Eastern Auckland, New Zealand 11 190 2008

Mana Wellington, New Zealand 9 150 2007

Ferries Fullers Auckland, New Zealand 16 275 2009

Transport Related

Bus & Coach Manufacturing

Alexander Dennis Falkirk, Guildford, Scarborough

295 2,000 2004

Bio Fuels Argent Motherwell 28 55 2009

Recycling Nutrafeed Corby and Wrexham 3 19 2010

Lawrence Waste Recycling Kidderminster 6 50 2009

Luxury Brands Sunseeker Yachts Poole, Dorset 306 2,200 2010

Support Services First Scottish Group Dunfermline 10 133 2009

SPH One Search Glasgow 22 99 2007

Financial Services esure Reigate, Glasgow, Manchester, Portsmouth and Plymouth

453 1,500 2010

gocompare Newport, Wales 95 50 2010

Infrastructure Wireless Infrastructure Group

Bellshill 15 27 2007

1,269 6,748

Fifth, we shied away from commercial property investments which we perceived in general to be overvalued and structures over leveraged.

As you can see, Stagecoach represented 50% of the gross investment value at March 2010 compared to nearly 67% in 2007. Unquoted investments increased from 7% to 24% of gross assets.

We have also, in the meantime, had exposure to other asset classes. In late 2007 we increased our commitment to hedge funds significantly. Although the performance of those hedge funds was in line with the market (-18%) in 2008, we were disappointed by the degree of correlation to equity markets. We, therefore, took the decision to exit our US Dollar denominated hedge funds in early 2009 and in so doing benefited from the very significant appreciation in the US Dollar against Sterling.

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Second, beyond our investment in Stagecoach we have a highly diversified portfolio of investments.

Third, we have invested through the cycle, acquiring equity stakes in a number of established private businesses. These stakes represent between 4% and 98% of the equity, and vary in size from small investments in earlier stage companies up to £15m in larger more mature businesses. We have seen significant increases in valuations of a number of these businesses despite the global recession.

Fourth, we have benefited from having a global investment strategy, with our assets in US Dollars, Euros and NZ Dollars all increasing in value as a result of the significant Sterling devaluation.

Unquoted InvestmentsThe unquoted investment portfolio continues to evolve with more acquisitions made since March 2010. Most of the current portfolio is, as you can see, in larger companies with a total valuation of £100m. Our individual investments between £1m and £15m are shown far left.

We have invested directly in some of these companies, in others

The changes in the distribution of the investment portfolio between March 2007 and 2010 can be seen in the graph below

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%2007 2010

Stagecoach

Family Assets

Loans/Bonds

Quoted Investments

Property Investments

PE Fund Investments

Hedge Funds

Unquoted

through a holding company. In some we have invested alone while in others we are part of a syndicate led by Penta Capital, FL Partners, or Maven Capital. Further details on these investments are contained within Appendix A.

We have also £4m invested in a number of smaller early stage businesses, which we believe have the potential to grow using patented technology. These investments include companies involved in a diverse range of activities including drug discovery, medical devices, semi-conductors, mudflaps and water filtration. We have a number of smaller investments in syndicates led by Archangel, the Edinburgh-based angel network, and MMC Ventures. Details of some of the smaller investments we have are set out in Appendix B.

Unlike many private equity funds, which have a limited life, we can have a flexible exit strategy. We may hold some of our investments for decades to come, accepting dividends as the companies grow and expand while we anticipate exiting from others through trade sales or stock market flotations.

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Property As we previously indicated, Brian reduced his commitment to commercial property in 2003, and we have invested only selectively in residential property (mainly in Cape Verde, Dubai and Scotland) and commercial property since then. However we have recently started to invest in both commercial and residential property once more, albeit in a small way.

A Diverse Portfolio of Funds Souter Investments also has a significant portfolio of fund investments spanning private equity, hedge and property funds.

We carefully select funds by sector and fund manager, benefiting from their larger firepower, sector expertise and geographical reach. This enables further diversification and provides access to deals that would not otherwise be available to us.

Funds covered include Alpha German Property, Charterhouse Capital Partners VII, VIII and IX , Credit Suisse Secondaries, ePlanet Ventures I and II, EMAC Capital, Morgan Stanley, Paradigm, Pentech Ventures I and II, Permira, SEP I, II and III, SL Capital Partners, Tosca Fund and the Virgin Green Fund. We also have invested in many funds managed by Goldman Sachs, including Distress Debt, Mezzanine Debt, Private Equity, Property and Hedge funds.

Listed InvestmentsListed equity investments make up the final strand of the portfolio which, as an asset class, is dominated by Stagecoach Group.

These investments provide liquidity and diversity, and typically we adopt an opportunistic approach to equity investing. That said we are not a team of day traders, and continue to have relationships and significant holdings in quoted companies which Brian backed prior to them becoming listed, including Bowleven the oil exploration business, Raven Russia the property company and Optos which makes and distributes patented retinal imaging devices. We also actively invest in what we perceive to be undervalued global markets mainly through Exchange Traded Funds. Right now our foreign market focus is on China, Russia, Brazil, India and Turkey.

Although we have not allocated significant funds to discretionary quoted fund managers, we have such investments with Aberforth Small Companies Trust and the Tosca Mid Cap fund.

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“We have been very active since Souter Investments was formed four years ago and are very happy with the quality of our portfolio. We believe that it should continue to grow strongly in the years to come and we are always on the lookout for new opportunities.”

Andy Macfie

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Appendix A

Souter Holdings (NZ) has three operations in New Zealand – Mana Coach Services which runs 133 buses in Wellington, Howick & Eastern with 124 buses in Auckland, and Fullers Ferries which operates 15 ferries from Auckland Harbour as well as 16 buses. Fullers’ vessels are an attractive and well-known feature of the Auckland Harbour vista.

Souter Holdings (NZ) is a sizeable transport operator in New Zealand. The three companies carry 12.5 million passengers a year and provide a vital lifeline to locals and tourists alike.

Bill Rae is the executive chairman of Souter Holdings (NZ). He and his Finance Director, Treena Martin, both worked for Brian prior to becoming involved with Souter Holdings.

Bill commented: “I am pleased to say that all three operations are performing well. We have been successful in growing our businesses by investing in our fleets and our routes.

“Looking to the future, our philosophy is to continue our current growth strategy but we are constantly looking to seize upon opportunistic openings and we recently made a bolt on acquisition for Fullers – 360 Discovery, a water-based tour business.”

www.manacoach.co.nzwww.howbus.co.nzwww.fullers.co.nzwww.360discovery.co.nz

Transport Portfolio

Our Larger Unquoted Investments

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2

1

3

Mana Coach Services

Howick & Eastern

Fullers Ferries

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3

New Zealand

Argent Energy operates the largest biodiesel plant in the UK, producing 50 million litres of biodiesel a year. The company transforms waste and residues, primarily animal by-products and cooking fat, into biodiesel which can be used on its own or blended with mineral diesel to reduce carbon emissions and boost fuel efficiency in buses, lorries and cars. The biodiesel also acts as a lubricant in engines, burns more completely thereby reducing emissions and is virtually sulphur free. Argent was named Sustainable Biodiesel Producer 2009 at the World Biofuels Market Expo.

Customers include Shell, Mabanaft, Greenergy and Harvest Energy.

www.argentenergy.com

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Alexander Dennis is Britain’s biggest bus and coach manufacturer with a UK heritage stretching back to the 1890s. It is the UK’s most successful bus builder with a market share approaching 40%.

The company has three brands – Alexander, which builds a wide range of single and double deck buses, Dennis which was the pioneer of low floor buses and the creator of the midi bus together with Plaxton, the UK’s leading coach builder, which it acquired in 2007.

Employing 1,850 people and building 1,750 vehicles a year, the company is gearing up to extend its international reach. It already has products operating in 30 countries, clocking up 2.5 billion miles a year, along with sub-assembly operations in the United States, Hong Kong and mainland China, while the company’s aftercare teams have a global reach.

Colin Robertson, Chief Executive Officer, believes that innovation is a key differentiator and that Alexander Dennis leads the industry when it comes to the design and production of low carbon vehicles that can make a difference to town and city environments. Alexander Dennis was the first manufacturer in the UK to successfully introduce hybrid-electric buses. It won £40m of new business in this sector during the past year and is now Europe’s leading supplier of hybrid-electric buses. The company believes there is a significant opportunity to penetrate international markets with new-generation hybrids and is set to introduce a left-hand-drive, 18 tonne single deck, hybrid-electric designed specifically for continental Europe.

www.alexander-dennis.comwww.plaxtonlimited.co.uk

Transport Related

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Alexander Dennis

Argent Energy

Nutrafeed

Lawrence Waste Recycling

Sunseeker Yachts

First Scottish Group

SPH One Search

esure

gocompare

Wireless Infrastructure Group

1

1

1

1

2

2

3

3

3

4

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88

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UK

In February 2010, Souter Investments was part of a syndicate which supported the management buy-out of esure by Executive Chairman and serial insurance entrepreneur, Peter Wood.

esure, which includes the Sheilas’ Wheels brand, was founded in 2000 as a joint venture between Peter Wood and Halifax plc.

It now offers home, motor, travel and pet insurance, using the internet as a primary sales channel and has 1.8 million motor insurance policy holders, with hundreds of thousands more using esure’s home, pet and travel insurance. Unlike others, it has focussed on UK-only call centres where it employs 1,500 people.

www.esure.comwww.sheilaswheels.com

Independent research carried out recently indicated that 90% of all people looking for car insurance, and 81% looking for home insurance, used a comparison site to find the best deal. Gocompare is the largest insurance aggregator in the UK having a healthy 20% of the online market where rivals include moneysupermarket and comparethemarket. We were pleased to have been given the opportunity to support Hayley Parsons, the Chief Executive of gocompare, in continuing to grow this exciting business.

www.gocompare.com

Insurance

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Sunseeker is considered one of the world’s leading luxury and iconic motoryacht brands. This year marks the 50th anniversary of the founder, Robert Braithwaite CBE starting up in business, initially as a dinghy and outboard sales company.

Today Sunseeker builds some of the most luxurious semi-customised motoryachts in the world varying in length between 38 feet and 40 metres. These vessels are sold throughout the world and are known for their effortless combination of heart-pounding performance and jaw-dropping beauty. They are considered true innovators and have this year launched two new boats, the Manhattan 63 and the 40 metre Sunseeker yacht. Stewart McIntyre, Managing Director, believes that Sunseeker leads the market on design and innovation. Its new IPS engines improve maneuverability and fuel consumption whilst also creating more accommodation. Further innovation is expected in the next year again reducing weight, whilst improving fuel consumption and performance.

The company employs 2,200 staff including 500 carpenters and 300 electricians. It builds 200 yachts a year to meet advance customer orders. With a particularly strong order book from all over the world, Stewart McIntyre is confident that Sunseeker will continue to perform strongly.

www.sunseeker.com

Luxury Goods

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Nutrafeed is a nationwide by-product and waste recycling management business focused on the food and drink sector, with plants in Wrexham and Corby. It turns food by-product into animal and fish food. It also provides a complete waste and recycling management service for its clients, enabling them to achieve zero landfill. Souter Investments bought out this business in the summer of 2010 alongside the management team. Clients include PepsiCo, Kellogg’s, Silverspoon, Greene King, Lidl and Ryvita.

www.nutrafeed.co.uk

Lawrence started life as a family skip hire business in 1984. Today it provides a total waste management solution, operates Europe’s largest indoor Materials Recycling Facility, The Forge, and is a one-stop-shop for the collection, processing and management of waste. It specialises in three different types of waste - construction and demolition, commercial and industrial, soils and aggregates and serves commercial and industrial companies across the country. The company generates recycled products and tradable commodities such as top soil, cardboard, paper, plastics and bio-mass feedstock from these waste materials.

Souter Investments has provided capital to fund expansion.

www.forge-recycling.co.ukwww.lawrenceskiphire.co.uk

Environmental Businesses

Given Brian’s experience with Stagecoach taking a lead on environment matters it is hardly surprising that the portfolio includes a good number of green investments.

Our green portfolio includes biodiesel, waste management and recycling companies, water purification companies and a green mudflap business. Through the Virgin Green Fund we also get exposure to a number of new environmentally friendly technologies.

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First Scottish is a leading Scottish business services provider. The Company has four interesting profit streams; Legal Post, a document exchange service for legal and corporate customers; First Scottish Searching Services, a legal and property search business targeting conveyancing lawyers and other professionals; First Scottish Document Management, a document storage, scanning and secure destruction business; and First Post which is a nascent postal business. Under the leadership of John Yorkston and Gavin Masterton it has grown its profits significantly and increased market share since our investment.

www.firstscottish.com

WIG has a network of telecommunications towers which it provides to mobile phone operators. Its portfolio of over 1,000 active sites makes it the second largest tower company in the UK and its geographic presence extends across much of the UK. This company has continued to perform well throughout the recession and expects to continue its growth as a result of the increasing demand for voice and data traffic.

www.wirelessinfrastructure.co.uk

One Search provides searches to the property industry in England. We provided funding to SPH One Search to finance expansion and refinance bank facilities. Under the leadership of Ronnie Park, Chief Executive, the company succeeded in taking 40% of the HIPS market and repaying all bank debt and most of our investment.

www.onesearchdirect.co.uk

Business Services Infrastructure

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Appendix B

CBX Biosciences

CXR Biosciences was a spin out from Dundee University in 2001. It combines proprietary technologies and world-class scientific expertise to provide two key services. By understanding the pathways that define the sensitivity of cells to chemicals, the company can evaluate the actual hazard to humans of drugs and chemicals. In addition, the company has helped customers of all sizes solve issues relating to the selection of drug candidates and the safety of compounds.

www.cxrbiosciences.com

Electro-Flow Controls

Electro-Flow Controls is a leading designer and manufacturer of hazardous area instrumentation, monitoring and control systems and also mechanical handling solutions to the global oil & gas industry. An MBI, the deal involved the combination of the established Electro-Flow business and the fast growing start-up Celeris Engineering. The Company is based in Aberdeen and the deal completed in December 2009.

www.efcgroup.net

Elonics

Elonics is a leading-edge silicon tuner business with patented radio frequency technology. The company’s silicon tuners are smaller, more cost effective and use less power than competing products, and are sold into manufacturers of electronic goods including TVs, radios and mobile phones. We provided seed funding and the company recently secured over £6 million of new funding which will be used to drive the business forward. This round was led by SEP, one of our venture fund managers.

www.elonics.com

Neoss

Neoss manufactures dental implants. The simplicity of the product is its competitive advantage. Neoss implants contain about 250 parts whereas competitor implants can have up to 2,000 parts. The simplicity of technology means Neoss implants are easier to install and patients experience lower rates of rejection. Germany is the number one market for Neoss but with the growth in the US market and cosmetic dentistry around the world, the potential is enormous.

www.neoss.com

Our Smaller Unquoted Investments

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Filter Clear

Filter Clear owns a patented, deep-bed, multilayer filtration technology that can be used in any process that needs a dependable quality of water inflow or output.

The business is focussed on serving water companies, food and drinks producers, and desalination plants but it has huge potential to market its product range to lots of other sectors including agriculture and mining. So far, the business has mainly concentrated on the UK market but is planning to roll out sales, marketing and maintenance to customers around the world. Orders have already been secured for a desalination plant in Saudi Arabia.

www.filterclear.com

MPathy Medical

MPathy Medical is a medical device company which has a patented mesh used in women’s pelvic health operations. The mesh is extremely lightweight, thin and physiologically compatible leading to lower rejection rates and trauma and improved recovery times. Mpathy is headquartered in Glasgow but has operations both in the UK and US.

www.mpathymedical.com

Spraydown

Spraydown has developed and patented mudflap technology for HGVs that improves safety and boosts fuel efficiency by reducing the spray and drag from large vehicles. Tests have proven that Spraydown mudflaps cut spray by 40% while improving fuel efficiency by 3.5%. Spraydown’s mudflaps are today installed by Tesco, ASDA, Morrisons, DHL, Sainsbury’s and Homebase. Although it is still early days for Spraydown, it is also making progress in the US where it has an exclusive licensing partner.

www.spraydown.comwww.spraydownusa.com

EdinburghSouter Investments LLP35 Melville Street, Edinburgh, EH3 7JFPhone: +44 (0) 131 225 7688Fax: +44 (0) 131 225 7369

PerthSouter Investments LLPAlgo Business Centre, Glenearn Road, Perth, PH2 0NJPhone: +44 (0) 1738 450 475Fax: +44 (0) 1738 450 476

info@souterinvestments.com www.souterinvestments.com