FAIR OAKS INCOME LIMITED
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Contents
Company Overview
Highlights 1
Summary Information 2
Strategic Review
Chairman’s Statement 4
Investment Adviser’s Report 7
Strategic Report 14
Governance
Board of Directors 19
Disclosure of Directorships in Public Companies
Listed on Recognised Stock Exchanges 20
Directors’ Report 21
Corporate Governance 25
Statement of Directors’ Responsibilities 30
Directors’ Remuneration Report 31
Report of the Audit Committee 32
Management Engagement Committee Report 35
Financial Report
Independent Auditor’s Report 36
Statement of Comprehensive Income 41
Statement of Changes in Shareholders’ Equity 42
Statement of Financial Position 43
Statement of Cash Flows 44
Notes to the Financial Statements 45
Additional Information
Portfolio Statement (unaudited) 75
Management and Administration 76
Appendix – Alternative Performance Measures
used in the Financial Statements 77
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
1
COMPANY OVERVIEW
Highlights
• Fair Oaks Income Limited’s (the “Company”) Net Asset
Value (“NAV”) return per 2021 Share was -0.9%
1
(31
December 2021: +22.7%) for the year ended 31 December
2022 on a total return basis (with dividends reinvested). The
NAV return per Realisation Share was 0.5%
1
(31 December
2021: 22.7%) for the year ended 31 December 2022 on the
same basis.
• As at 31 December 2022, the Company’s total market
capitalisation was US$228.7 million, comprising US$197.3
million of 2021 Shares and US$31.4 million of Realisation
Shares.
• The 2021 Shares closed at a mid-price of US$0.4900 on
31 December 2022. The 2021 Shares traded at an average
discount to NAV of -9.88% during the year ended 31
December 2022.
• The Realisation Shares closed at a mid-price of US$0.5650
on 31 December 2022. The Realisation Shares traded at an
average premium to NAV of 1.33% during the year ended
31 December 2022.
• The Company declared dividends of 9.50 US cents per
2021 Share and Realisation Share in the year ended 31
December 2022 (31 December 2021: 9.75 US cents per
2021 Share and Realisation Share).
Financial Highlights
31 December 31 December
2022 2021
2021 Shares
Net Assets US$20,390,880 US$270,738,076
Net Asset Value per share US$0.5721 US$0.6682
Share mid-price at year end US$0.4900 US$0.6225
Discount to Net Asset Value
1
(14.35%) (6.84%)
Ongoing charges ?gure
(2021 Shares only)
2
0.34% 0.25%
Ongoing charges ?gure
(look through basis)
3
1.38% 1.35%
31 December 31 December
2022 2021
Realisation Shares
Net Assets US$31,954,409 US$41,786,970
Net Asset Value per share US$0.5749 US$0.6679
Share mid-price at year end US$0.5650 US$0.7000
(Discount)/premium to
Net Asset Value
1
(1.73%) 4.80%
Ongoing charges ?gure
(Realisation Shares only)
2
0.35% 0.25%
Ongoing charges ?gure
(look through basis)
3
1.34% 1.34%
1
See “Appendix” on pages 77 - 80.
2
Total ongoing charges, calculated in accordance with the AIC guidance, is at the Company level only for the year divided by the average NAV for the year. Charges of the underlying
Master Funds are not included. See “Appendix” on pages 77 - 80.
3
Total ongoing charges, calculated in accordance with the AIC guidance, including the Company and the underlying funds divided by the average NAV for the year. See “Appendix”
on pages 77 - 80.
2
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
COMPANY OVERVIEW
Summary Information
Principal Activity
Fair Oaks Income Limited (the “Company”) was registered in
Guernsey under the Companies (Guernsey) Law, 2008 on 7
March 2014. The Company’s registration number is 58123 and
it is regulated by the Guernsey Financial Services Commission
as a registered closed-ended collective investment scheme
under The Registered Collective Investment Scheme Rules
2021. The Company began trading on the Specialist Fund
Segment (“SFS”) of the London Stock Exchange on 12 June
2014.
Reorganisation
On 19 April 2021, the Company announced the result of its
reorganisation proposal, being that 62,562,883 2017 Shares
had been elected for re-designation as Realisation Shares (the
“Realisation Shares”), representing 13.4% of the 2017 Shares
in issue, and 405,815,477 2017 Shares were redesignated as
2021 Shares (the “2021 Shares”), representing the balance of
86.6% of the 2017 Shares in issue (including 650,000 shares
held in Treasury). The Company makes its investments through
FOIF II LP (the “Master Fund II”) and FOMC III LP (the “Master
Fund III”), in both of which the Company is a limited partner (the
“Master Fund II” and the “Master Fund III” together the “Master
Funds”). The Master Fund II was registered in Guernsey on
24 February 2017 and the Master Fund III was registered in
Guernsey on 10 March 2021 under The Limited Partnerships
(Guernsey) Law, 1995. The purpose of the reorganisation was
to allow those Shareholders who wished to extend the life of
their investment in the Company beyond the planned end date
of the Master Fund II, to be able to do so by having their 2017
Shares re-designated as 2021 Shares, with such 2021 Shares
investing in the new Master Fund III, which has a planned end
date of 12 June 2028 and an investment objective and policy
substantially similar to that of the Master Fund II.
On 12 September 2022, the Company returned US$3,999,990
by way of a compulsory partial redemption of Realisation
Shares, which amounted to 6,984,442 Realisation Shares. At
31 December 2022, the Company has 55,578,441 Realisation
Shares (31 December 2021: 62,562,883 Realisation Shares)
and 402,709,500 2021 Shares (31 December 2021:
405,165,477 2021 Shares) in issue. The Realisation Shares
invest solely into the Master Fund II and the 2021 Shares invest
solely into the Master Fund III. At 31 December 2022, the
Company had direct holdings of 9.59% (31 December 2021:
9.59%) in the Master Fund II and 95.32% (31 December 2021:
100%) holding in Master Fund III, which in turn had a holding
of 62.21% (31 December 2021: 62.21%) in the Master Fund
II. Together, the Company held a direct and indirect holding of
68.89% (31 December 2021: 71.80%) in the Master Fund II.
The Master Funds
At 31 December 2022, the Master Fund II had six limited
partners, including Fair Oaks Founder II LP, a related entity.
During the year ended 31 December 2022, the Master Fund III
allowed one new limited partner to enter the partnership and
at 31 December 2022, the Master Fund III had three limited
partners, including Fair Oaks Founder VI LP. The General
Partner of the Master Fund II and Master Fund III is Fair Oaks
Income Fund (GP) Limited (the “General Partner” or “GP”).
Cycad and Wollemi
The Master Fund II is also invested into Cycad Investments
LP (“Cycad”). Cycad is a Limited Partnership registered in
the United States of America on 2 June 2017. Aligned with
the Company’s investment policy, Cycad also invests into
Collateralised Loan Obligations (“CLOs”). On 9 March 2021,
a new Guernsey limited partnership was established called
Wollemi Investments I LP (“Wollemi”). On 23 March 2021, the
Master Fund II transferred its investment in Cycad to Wollemi
in exchange for limited partnership interests in Wollemi. In
addition, since 2021, the Master Fund II also transferred its
investments in FOAKS 1X CLO, FOAKS 2X CLO, FOAKS 3X
CLO and FOAKS 4X CLO (the “Fair Oaks CLOs”) to Wollemi
in exchange for limited partnership interests in Wollemi. At
31 December 2022, the Master Fund II holds 100.00% (31
December 2021: 100%) of the commitment capital of Wollemi.
Founder Partners
Fair Oaks Founder II LP, a Guernsey limited partnership, has
been established to act as the Founder Limited Partner of
Master Fund II. Fair Oaks Founder VI LP, a Guernsey limited
partnership, has been established to act as the Founder
Limited Partner of Master Fund III.
Investment Objective and Policy
The investment objective of the Company is to generate
attractive, risk-adjusted returns, principally through income
distributions.
The investment policy of the Company is to invest (either
directly and/or indirectly through the Master Fund II and/
or Master Fund III) in US, UK and European CLOs or other
vehicles and structures which provide exposure to portfolios
consisting primarily of US and European ?oating-rate senior
secured loans and which may include non-recourse ?nancing.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
3
COMPANY OVERVIEW
Summary Information (continued)
Investment Objective and Policy (continued)
The Company implements its investment policy by:
1. with respect to those assets of the Company attributable to
the Realisation Shares: investing in Master Fund II; and
2. with respect to those assets of the Company attributable
to the 2021 Shares and any future C Shares: investing in
Master Fund III.
If at any time the Company holds any uninvested cash, the
Company may also invest on a temporary basis in the following
Qualifying Short Term Investments:
• cash or cash equivalents;
• government or public securities (as de?ned in the Financial
Conduct Authority (“FCA”) Rules);
• money market instruments;
• bonds;
• commercial paper; or
• other debt obligations with banks or other counterparties
having a single A rating or (if a fund) investing with no
leverage in assets rated at least single A, according to at
least one internationally recognised rating agency selected
by the Board of Directors (the “Board”) (which may or may
not be registered in the EU).
The aggregate amount deposited or invested by the Company
with any single bank or other non-government counterparty
(including their associates) shall not exceed 20% of the Net
Asset Value (“NAV”) in aggregate, and also of the NAV of each
share class, at the time of investment. The Company cannot
make any other types of investments without shareholder
consent to a change of investment policy by ordinary resolution
at a general meeting of the Company.
4
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
STRATEGIC REVIEW
Chairman’s Statement
The independent Board of the Company is pleased to present
its Annual Report and Financial Statements for the ?nancial
period ended 31 December 2022.
The Company’s 2021 Share NAV and share price generated
a total return (with dividends reinvested) of -0.9% and -6.5%
respectively in 2022. The Company’s 2021 Shares closed
at a mid-price of 49.0 US cents as of 31 December 2022,
representing a discount to NAV of -14.4%.
The Company’s Realisation Share NAV and share price
generated a total return (with dividends reinvested) of +0.5%
and -5.9% respectively. The Company’s Realisation Shares
closed at a mid-price of 56.5 US cents as of 31 December
2022, representing a discount to NAV of -1.7%.
Figure 1.1 – Total return: 2021 Shares NAV and share price in
2022
1
-15%
-10%
-5%
0%
5%
10%
Dec 21 Feb 22 Apr 22 Jun 22 Aug 22 Oct 22
Dec 22
Company 2021 share price Company 2021 NAV
By comparison, the total return for the JP Morgan US Leveraged
Loan index in 2022 was +0.06%
2
. In the same period, the JP
Morgan US High Yield total return was -10.57%
2
while the JP
Morgan CLO B rated index returned -6.39%
3
.
Table 1.2 – Total returns in 2022
FY 2022
total return
Company’s 2021 Share price -6.51%
Company’s 2021 NAV -0.88%
JP Morgan US Leveraged Loan index +0.06%
JP Morgan US High Yield index -10.57%
JP Morgan Post-Crisis CLOIE B rated index -6.39%
Cash ?ow and dividends
The CLOs in which the Master Funds hold control CLO
equity investments experienced an annualised default rate of
0.17%
4
and had CCC and below exposure of 4.27%
5
as at 31
December 2022, both below the market’s average of 0.72%
and 5.76%. As a result of the strong fundamental performance
of the portfolio, all CLO equity and debt investments made
their scheduled distributions in 2022.
The Company paid 9.50 US cents in dividends per 2021 share
in respect of the year ending 31 December 2022. Subsequent
to the year end, the Company declared a dividend of 2.0 US
cents per Realisation Share and 2.0 US cents per 2021 Share in
February 2023, consistent with the Q3 2022 dividend amount.
The dividend yield for the 2021 Shares and Realisation was
+16.3% and 14.2% respectively as of the end of December,
based on the closing share prices.
Figure 1.3 – Cumulative dividends per share since inception
(US cents per 2021 Share):
c
10c
20c
30c
40c
50c
60c
70c
80c
90c
Jun 14
Dec 14
Jun 15
Dec 15
Jun 16
Dec 16
Jun 17
Dec 17
Jun 18
Dec 18
Jun 19
Dec 19
Jun 20
Dec 20
Jun 21
Dec 21
Jun 22
Dec 22
All positions are in compliance with their BB over-
collateralisation tests, with the average test value for CLO
equity positions 4.2% above its threshold. Assuming 70c
recovery in case of default, it would require 14% cumulative
defaults to generate the par loss required to breach the test,
before any cash-?ow diversion.
1
Data as at 31 December 2022.
2
Source: JP Morgan. Data as at 31 December 2022.
3
Source: JP Morgan. Post-Crisis Single-B rated composite (Unhedged USD). Data as at 31 December 2022.
4
Fair Oaks’ data.
5
Intex: CCC+, CCC and CCC- rated assets (S&P). Based on loan facility rating (S&P).
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
5
STRATEGIC REVIEW
Chairman’s Statement (continued)
Cash ?ow and dividends (continued)
The quality of the Master Funds’ portfolios and the robustness
of the CLO structure are evidenced by its resilience. As an
example, the expected gross returns for the Master Funds
(based on current NAV) under stress scenarios based on the
2000 and 2008 periods are +8.5% and +12.0% respectively
(noting that defaults around 2000 were concentrated in
telecom and technology sector so diversi?ed CLOs would
have su?ered lower default rates). These scenarios apply
actual historical defaults, recovery rates, CCC balances/
prices, prepayment rates, interest rates and reinvestment
assumptions for each period.
Material events
On 31 January 2022, the Company announced that Fair Oaks
Income Fund (GP) had purchased 200,885 2021 Shares in the
secondary market. The Company’s 2021 Prospectus states
that in the event that the 2021 Shares trade at a discount
to any quarter end NAV, calculated on the date the NAV is
published, 25% of that quarter’s investment management fees
(in respect of the 2021 Shares) will be reinvested to purchase
2021 Shares in the secondary market.
On 7 February 2022, the Company declared an interim
dividend of 2.50 US cents per 2021 Share and 2.50 US cents
per Realisation Share in respect of the quarter ended 31
December 2021. The ex-dividend date was 17 February 2022
and the dividend was paid on 18 March 2022.
On 4 May 2022, the Company announced that Fair Oaks
Income Fund (GP) had purchased 197,640 2021 Shares in the
secondary market.
On 13 June 2022, the Company declared an interim dividend
of 2.50 US cents per 2021 Share and 2.50 US cents per
Realisation Share in respect of the quarter ended 31 March
2022. The ex-dividend date was 23 June 2022 and the
dividend was paid on 25 July 2022.
On 14 June 2022, the Company was pleased to announce the
appointment of Fionnuala Carvill as a non-executive Director
of the Company. The Company went on to state that one of
the original Directors of the Company, Nigel Ward, intended
to retire from the Board by the end of 2022 and, in order to
ensure an orderly transfer of responsibilities, Ms Carvill has
been appointed as chair of the Risk Committee ahead of Mr
Ward’s retirement.
Further to the announcement made on 14 June 2022, and in
line with the Board’s succession plan, the Company announced
that Nigel Ward had resigned as a Non-Executive Director of
the Company and Chair of the Nomination & Remuneration
Committee e?ective close of business on 8 December 2022.
Jon Bridel has replaced him as Chair of the Nomination &
Remuneration Committee with immediate e?ect.
On 28 July 2022, the Company announced that Fair Oaks
Income Fund (GP) had purchased 239,044 2021 Shares in the
secondary market.
On 12 August 2022, the Company declared an interim
dividend of 2.50 US cents per 2021 Share and 2.50 US cents
per Realisation Share in respect of the quarter ended 30 June
2022. The ex-dividend date was 18 August 2022 and the
dividend was paid on 15 September 2022.
On 25 August 2022, the Company announced that it would
return US$4 million (equivalent to 6.3936 US cents per share)
on 12 September 2022 (the “Redemption Date”) by way of a
compulsory partial redemption of Realisation Shares (the “First
Redemption”).
The First Redemption was e?ected at 57.27 cents per share,
being the NAV per Realisation Share as at 29 July 2022 of
59.77 cents per share less the dividend for the period to 30
June 2022 of 2.50 cents per share. The First Redemption
was e?ected pro rata to holdings of Realisation Shares on
the register at the close of business on the Redemption
Record Date, being 12 September 2022. At the time of the
announcement, the Company had 62,562,883 Realisation
Shares in issue of which none are held in treasury. On this
basis 11.16 per cent. of each registered shareholding was
redeemed on the Redemption Date. All shares that were
redeemed were cancelled with e?ect from the Redemption
Record Date.
On 20 September 2022, the Board announced that it had
resolved to enhance the Company’s aggregate distributions
to holders of the 2021 Shares, with the objective of being
meaningfully accretive to 2021 Shareholders and positively
in?uencing the discount to NAV and trading liquidity of the
2021 Shares.
In relation to this, the Board authorised:
• Share buyback programme. The Board resolved to
commence buybacks of 2021 Shares in the secondary
market, initially for aggregate consideration of up to US$20
million (equivalent to c.47 million shares at mid-market
price at the time of the announcement) funded from the
Company’s material cash balance. It was also intended that
buybacks would be used by the Company on an ongoing
basis, subject to the level of the prevailing price relative to
N AV.
6
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
STRATEGIC REVIEW
Chairman’s Statement (continued)
Material events (continued)
• Dividend guidance and additional resource for
buyback programme. The Board considers that, in addition
to deploying current cash to the buyback programme, it
will be accretive to 2021 Shareholder value, for as long as
the discount to NAV remains wide, to direct a portion of
net income into funding share buybacks rather than fully
distributing as dividend. The Board therefore guided that it
intended to declare future quarterly dividends on the 2021
Shares at a consistent rate of 2.00 US cents with any excess
net income available to fund share buybacks. Establishing a
consistent level of dividend provides greater certainty about
future income for existing and prospective shareholders;
based on the second quarter’s portfolio cash?ows the 2.00
US cents quarterly dividend was healthily covered.
On 19 October 2022, the Company announced that Fair Oaks
Income Fund (GP) had purchased 232,474 2021 Shares and
30,599 Realisation Shares in the secondary market.
On 3 November 2022, the Company declared an interim
dividend of 2.00 US cents per 2021 Share and 2.00 US
cents per Realisation Share in respect of the quarter ended
30 September 2022. The ex-dividend date was 10 November
2022 and the dividend was paid on 9 December 2022.
Following the Distribution Policy announcement on 20
September 2022 and the general authority granted by
shareholders of the Company on 14 June 2022 to make market
purchases of its own Ordinary Shares, the Company went on
to repurchase 2,455,977 2021 Shares during the period to
31 December 2022, to be held in treasury, at average cost of
US$0.4848 per Share. At 31 December 2022, the Company
held 3,105,977 Ordinary Shares in treasury.
Subsequent events
On 30 January 2023, the Company announced that following
the announcement of the NAV as at 31 December 2022, Fair
Oaks Income Fund (GP) had purchased 23,920 Realisation
Shares and 211,952 2021 Shares in the secondary market.
On 23 February 2022, the Company declared an interim
dividend of 2.00 US cents per 2021 Share and 2.00 US cents
per Realisation Share in respect of the quarter ended 31
December 2022. The ex-dividend date was 2 March 2023 and
the dividend was paid on 31 March 2023.
Pursuant to the general authority granted by shareholders of
the Company on 14 June 2022 to make market purchases of
its own Ordinary Shares, the Company went on to repurchase
7,548,317 2021 Shares in the post year end period, to be held
in treasury, at average cost of US$0.4904 per Share.
Professor Claudio Albanese
Chairman
17 April 2023
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
7
Portfolio Review
As at 31 December 2022, Master Funds
1
held 19 CLO
equity positions and 15 CLO mezzanine investments o?ering
exposure to 1,494 loan issuers and 21 CLO managers. Control
CLO equity positions represented 84.3% of the portfolio’s
market value.
Figure 2.1 – Portfolio composition of Master Funds
2
Subordinated note
84.3% (2021: 87.0%)
BB Rated CLO Notes
1.6% (2021: nil)
B Rated CLO Notes
14.1% (2021: 13.0%)
CLO subordinated note exposure decreased from 87.0% at
the end of 2021 to 84.3% as of December 2022, with the
remaining 15.7% representing BB and B-rated CLO notes.
This was due to the opportunistic purchases of BB-rated
notes in the secondary market by Master Fund III in late 2022.
Figure 2.2 – Historical rating breakdown (excl. cash)
3
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sep-19
Dec-19
Mar-20
Jun-20
Sep-20
Dec-20
Mar-21
Jun-21
Sep-21
Dec-21
Mar-22
Jun-22
Sep-22
Dec-22
Subordinated notes B BB
As reported last year, the CLO notes for Fair Oaks Loan Funding
IV were priced in November 2021 and settled in January 2022.
There were no other new CLO Equity investments completed in
2022. The Master Fund III purchased two BB-rated mezzanine
CLO notes in 2022:
• Fair Oaks CLO II
o CLO backed by a portfolio of European broadly-
syndicated secured loans.
o The manager of this CLO’s portfolio is Fair Oaks Capital
Limited, the Investment Adviser to the Company and the
Master Funds.
o This CLO’s portfolio had a principal value of c.€350
million across 129 unique bank loan issuers, with a
weighted average exposure per issuer of 0.97%.
• OakTree Capital CLO 2021-2
o CLO backed by a portfolio of US broadly-syndicated
secured loans.
o The manager of this CLO’s portfolio is OakTree Capital.
o This CLO’s current target portfolio has a principal value of
c.US$400 million across 233 unique bank loan issuers,
with a weighted average exposure per issuer of 0.42%.
Figure 2.3 – Currency breakdown (excl. cash)
4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sep-19
Dec-19
Mar-20
Jun-20
Sep-20
Dec-20
Mar-21
Jun-21
Sep-21
Dec-21
Mar-22
Jun-22
Sep-22
Dec-22
USD EUR
The active management of the portfolio was instrumental to
allow the Master Funds to de-risk while taking advantage
of tactical market opportunities in 2016 and 2020, which
generated e?cient risk-adjusted and asymmetric returns.
Going forward we expect this dynamic approach to continue
to bene?t the Master Funds as volatility increases in broader
markets.
STRATEGIC REVIEW
Investment Adviser’s Report
1
The Master Fund II and the Master Fund III together the “Master Funds”.
2
Breakdown by market value of the CLO investments held by the Master Funds, which includes its share of Wollemi Investments I LP (“Wollemi”). Percentages may not add up to
100% because of rounding errors. Data as at 31 December 2022.
3
Fair Oaks’ data on Original CLO ratings at month-end. NAV weighted. Historical breakdown excludes cash.
4
Fair Oaks’ data at month-end. NAV weighted, excluding cash.
8
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
STRATEGIC REVIEW
Investment Adviser’s Report (continued)
Portfolio Review (continued)
ESG considerations also impacted the Master Funds’ asset
allocation. All control CLO equity investments (including reset
and re?nancings) completed since July 2019 have included
ESG exclusion criteria in the CLO’s documentation. CLO
investments subject to ESG investment criteria represented
69.8% of all CLO equity investments in the portfolio as of the
end of 2022.
Figure 2.4 – CLO equity investments subject to ESG investment
restrictions
5
CLO Equity subject to
ESG investment restric?ons
69.8% (2021: 58%)
Other CLO Equity
30.2% (2021: 42%)
Figure 2.5 – CLO manager diversi?cation of Master Funds
6
37%
10%
8%
7%
6%
5%
4%
4%
3%
3% 2%
2%
2%
1%
1% 1% 1% 1% 1%
1% 1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Fair Oaks (6)
Axa IM (2)
Well?eet (2)
Mariner (4)
Post Advisory (1)
King Street (1)
AIMCO (1)
HPS (2)
Alcentra (1)
Ares Capital (1)
Pruden?al (2)
Octagon (1)
Arrowmark (1)
Symphony (1)
Investcorp (2)
CSAM (1)
CVC (1)
PineBridge (1)
Oak Tree (1)
Oak Hill (1)
GSO Blackstone (1)
Figure 2.6 – Geographical (top ?ve) and currency breakdown
7
68.9%
7.8%
6.2%
3.8%
3.4%
0% 10% 20% 30% 40% 50% 60% 70%
80%
United States
France
United Kingdom
Netherlands
Germany
USD
70.7%
EUR
29.3%
Figure 2.7 - Industry diversi?cation by Moody’s (top 10)
8
13.0%
9.1%
8.9%
6.9%
5.7%
5.0%
5.0%
4.6%
4.2%
3.9%
0% 2% 4% 6% 8% 10% 12% 14%
Healthcare & Pharmaceu?cals
Services: Business
High Tech Industries
Banking, Finance, Insurance & Real Estate
Telecommunica?ons
Construc?on & Building
Services: Consumer
Beverage, Food & Tobacco
Chemicals, Plas?cs & Rubber
Hotel, Gaming & Leisure
Figure 2.8 – Rating breakdown
9
0.0%
0.1%
0.1%
0.9%
4.5%
7.0%
9.4%
19.7%
39.6%
14.4%
2.2%
1.6%
0.3%
0.2%
0.2%
0.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Aaa Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca
CN
R
The focus on originating and controlling CLO subordinated
note investments has resulted in superior fundamental
performance. Origination and control allowed the Master Funds
to veto speci?c loans when the transactions were launched
and to monitor and in?uence the CLOs over time. Lower fees in
primary investments also allowed CLO managers to construct
more conservative portfolios with no need to “stretch for yield”.
As a result, the Master Funds have below-average exposure to
sectors such as retail or energy.
Quarterly distributions remained strong, totalling US$57.4
million for in 2022 vs. US$49.4 million for 2021.
10
5
Fair Oaks’ data.
6
Based on market value of the CLO investments, as at 31 December 2022. Percentages may not add up to 100% because of rounding. The number of investments is shown in
parentheses after each manager name.
7
Based on loan par value weighted by Master Funds’ ownership of Income Notes. Source: Intex.
8
Based on Moody’s sectors and loan par value weighted by Master Funds’ ownership of Income Notes. Source: Intex.
9
Based on loan par value weighted by Master Funds’ proportional ownership of Income Notes. Source: Intex. Based on S&P deal ratings. Due to rounding, the percentages may
not sum to 100%.
10
Master Fund III’s share of distributions received by Master Fund II, Wollemi and Cycad.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
9
STRATEGIC REVIEW
Investment Adviser’s Report (continued)
Portfolio Review (continued)
Figure 2.9 highlights the annualised equity distributions for
transactions present in the portfolio in Q2 2019 and compares
it with the market. In terms of relative performance, the Master
Funds’ equity investments produced 15.4% annualised equity
distributions in 2022, compared to the market median of
14.5%.
Figure 2.9 – Annualised Equity Distributions (over par)
11
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Q2-19 Q4-19 Q2-20 Q4-20 Q2-21 Q4-21 Q2-22 Q4-22
Median - Master Funds Median - Market
Figure 2.10 – Overcollateralisation (“OC”) test headroom
12
0%
1%
2%
3%
4%
5%
6%
AIMCO 2017-AA SUB
AWPT 2017-6A SUB
SPEAK 2014-1A SUB
SPEAK 2015-1A SUB
SPEAK 2016-3A SUB
SPEAK 2017-4A SUB
ALLEG 2017-2A SUB
POST 2018-1A SUB
WELF 2018-12A SUB
SHACK 2018-12A SUB
ARES 2015-35RA SUB
HLM 13A-18 SUB
FOAKS 1X SUB
FOAKS 2X SUB
FOAKS 3X SUB
ALLEG 2021-1A SUB
ROCKT 2021-2A SUB
WELF 2021-2A SUB
FOAKS 4X SUB
28-Jan-22
28-Apr-22
28-Jul-22 28-Oct-22 28-Jan-23
Looking at the sustainability of these cash?ows, the OC test
headroom, which determines whether distributions may be
temporarily diverted from the CLO Equity, remains well covered,
reducing the potential for any future cash-?ow diversion.
US Loan Market Update
The trailing 12-month loan default rate rose to 0.72% in the
US (from 0.29% in December 2021). The US distressed ratio
(loans trading below 80c, a potential indicator of the direction
of future defaults) increased from 1.63% in December 2021 to
8.77% in December 2022.
13
Figure 2.11 – US loan default rate
13
0%
1%
2%
3%
4%
5%
6%
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19
Sep-19
Dec-19
Mar-20
Jun-20
Sep-20
Dec-20
Mar-21
Jun-21
Sep-21
Dec-21
Mar-22
Jun-22
Sep-22
Dec-22
The average bid price of the Morningstar US leveraged loan
index was 92.44c at the end of 2022, compared with 98.64c
at the end of 2021.
Figure 2.12 – US loan price distribution
13
0%
10%
20%
30%
40%
50%
60%
70%
Dec-19 Apr-20 Aug-20 Dec-20 Apr-21Aug-21Dec-21 Apr-22 Aug-22 Dec-22
Below 90c
Below 80c
Below 70c
Figure 2.13 – Average bid price of US leveraged loans, BB and
B rated loans
14
70c
75c
80c
85c
90c
95c
100c
105c
Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22
Dec-22
LSTA LLI BB loans B loans
2022 saw a return to negative net in?ows into Prime loan
funds. Total 2022 out?ows totalled US$13.5 billion compared
to US$47.5 billion of in?ows in 2021.
11
Source: Intex, Barclays. Based on annualised quarterly distributions of US equity notes over par.
12
Source: Intex. Latest available data on OC test headroom to 31 December 2022 is 28 January 2023.
13
Morningstar PitchBook LCD, LSTA US leveraged loan index. Distress ratio and default rate by principal amount. Data as at 31 December 2022.
14
Source: Morningstar LSTA US Leveraged Loan Index.
10
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
STRATEGIC REVIEW
Investment Adviser’s Report (continued)
US Loan Market Update (continued)
Figure 2.14 – Flows into loan funds by year
15
-60
-40
-20
0
20
40
60
80
100
JanuaryFebruary March April May June July August SeptemberOctoberNovember
December
$bn
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
The number of loans due to be repaid in the next few years is
limited. The notional of US loans maturing in 2023-2024 has
fallen from US$176 billion as of year-end 2021 to US$83 billion
as of year-end 2022 (Figure 2.15).
Figure 2.15 – Maturity wall of the US loan market of performing
loans (US$billion)
16
$33bn
$143bn
$244bn
$258bn
$221bn
$443bn
$8bn
$75bn
$198bn
$235bn
$249bn
$642bn
0
100
200
300
400
500
600
700
2023 2024 2025 2026 2027 2028 or later
$bn
As of 31 Dec 2021 As of 31 Dec 2022
European Loan Market Update
The number of expected Fed rate hikes over the next 12
months has increased from 1 in December 2021 to over 4
at the end of December 2022 and the market now expects
over 5 rate increases in the Eurozone before the end of
2023.
17
According to Morningstar LCD’s December 2022
quarterly survey of market participants, the expectation is that
the US loan default rate will be between 2.0% and 2.49% in
2023.
18
The trailing 12-month loan default rate fell to 0.42% in Europe
(from 0.62% in December 2021). The European distressed
ratio (loans trading below 80c, a potential indicator of the
direction of future defaults) increased from 0.6% in December
2021 to 8.2% in December 2022.
19
Figure 2.16 – European loan default rate
20
0%
1%
2%
3%
4%
5%
6%
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19
Sep-19
Dec-19
Mar-20
Jun-20
Sep-20
Dec-20
Mar-21
Jun-21
Sep-21
Dec-21
Mar-22
Jun-22
Sep-22
Dec-22
The average bid price of the Morningstar European Leveraged
Loan Index was 91.34 on 31 December 2022, compared to
98.77 on 31 December 2021.
Figure 2.17 – European Leveraged Loan Index (“ELLI”) distress
ratio
21
0%
5%
10%
15%
20%
25%
30%
35%
40%
Dec 2016
Mar 2017
Jun 2017
Sep 2017
Dec 2017
Mar 2018
Jun 2018
Sep 2018
Dec 2018
Mar 2019
Jun 2019
Sep 2019
Dec 2019
Mar 2020
Jun 2020
Sep 2020
Dec 2020
Mar 2021
Jun 2021
Sep 2021
Dec 2021
Mar 2022
Jun 2022
Sep 2022
Dec 2022
Figure 2.18 – Average bid price of EUR leveraged loans, BB
and B rated loans
22
70
75
80
85
90
95
100
105
Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22
ELLI BB rated loans B rated loans
15
Source: Morningstar PitchBook LCD.
16
Source Morningstar PitchBook LCD, LSTA US LLI maturity breakdown. Data as at 31 December 2022.
17
Source: Bloomberg, at at 31 December 2022.
18
Source: Morningstar PitchBook LCD. LCD’s Quarterly Leverage Finance Survey and 2023 Outlook for European leveraged loans.
19
Morningstar PitchBook LCD, European leveraged loan index. Distress ratio and default rate by principal amount. Data as at 31 December 2022.
20
Source: Morningstar PitchBook LCD. Data as at 31 December 2022.
21
The distressed ratio (loans trading below 80c, a potential indicator of the direction of future defaults).
22
Source: Morningstar European Leveraged Loan Index.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
11
STRATEGIC REVIEW
Investment Adviser’s Report (continued)
European Loan Market Update (continued)
In Europe, the notional of EUR loans maturing in 2023-2024
has fallen from €35 billion as of year-end 2021 to €22 billion as
of year-end 2022 (Figure 2.19).
Figure 2.19 – Maturity wall of the EUR loan market of performing
loans (€ billion)
23
!6bn
!29bn
!49bn
!62bn
!34bn
!83bn
!3bn
!19bn
!42bn
!63bn
!38bn
!110bn
0
20
40
60
80
100
120
2023 2024 2025 2026 2027 2028 or later
!
bn
As of 31 Dec 2021 As of 31 Dec 2022
According to Morningstar LCD’s, the expectation is that the
European loan default rate will be 1.7% and 2.2% in 2023.
24
US CLO Market Update
US primary CLO new issuance was US$129 billion, 31%
below the total new-issue seen in 2021. 2022 re?nancings
and resets totalled US$8.4 billion (22 deals) and US$24.6
billion (45 deals), compared to US$113.3 billion (285 deals)
and US$137.6 billion (266 deals) in 2021. Forecast for CLO
new issuance in 2022 are US$115 billion – US$125 billion and
forecasts for re?/reset volume are around US$55 billion.
25
Figure 2.20 – US CLO new issue volume
26
$bn
$20bn
$40bn
$60bn
$80bn
$100bn
$120bn
$140bn
$160bn
$180bn
$200bn
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Figure 2.21 – US AAA primary spreads (bps)
27
0
50
100
150
200
250
300
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
Libor + (bps)
USD - CLO AAA Primary Spread Historical Average
Pre-March 2020 high
Figure 2.22 – USD AAA CLOs vs US bank loans (yield)
28
0%
2%
4%
6%
8%
10%
12%
14%
16%
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
US Primary AAA CLO running yield US leveraged loan yield
European CLO Market Update
The European CLO market saw new issuance of €27.8 billion
in 2022, compared to €38.6 billion in 2021. 2022 re?nancings
and resets totalled €1.1 billion (3 deals) and €4.7 billion (11
deals), compared to €19.1 billion (61 deals) and €41.9 billion
(99 deals) in 2021.
29
Forecasts for European CLO new issuance
in 2023 range from €15 billion - €27 billion and forecasts for
re?/resets are €3 billion - €7 billion. There were between 30-40
warehouses open in Europe at the start of 2023 and at least
15 deals currently in the pipeline.
30
23
Source: Morningstar PitchBook LCD European Leveraged Loan Index, 31 December 2022. Distribution by year of maturity.
24
Source: Morningstar PitchBook LCD. LCD’s Quarterly Leverage Finance Survey and 2023 Outlook for European leveraged loans.
25
Source: Bloomberg and Morningstar PitchBook LCD. Barclays, JP Morgan, Deutsche Bank, Credit Suisse, BofA Securities and Morgan Stanley. Reset/Re? forecasts include
Mid-market CLOs.
26
Source: Morningstar PitchBook LCD. LCD’s Quarterly Leverage Finance Survey and 2023 Outlook for European leveraged loans.
27
Source: JP Morgan. US CLO AAA Primary spreads. Data as at 31 December 2022.
28
Source: JP Morgan. Primary US - CLO AAA. LLI summary yield ?at-3yrs. Data as at 31 December 2022.
29
Source: Morningstar PitchBook LCD CLO databank. Data as at 31 December 2022.
30
Source: Bloomberg and Morningstar PitchBook LCD. BofA Global Research, BNP Paribas, Barclays, Deutsche Bank, JP Morgan, Morgan Stanley.
12
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
STRATEGIC REVIEW
Investment Adviser’s Report (continued)
European CLO Market Update (continued)
Figure 2.23 – EUR CLO new issue volume
31
!0bn
!5bn
!
10bn
!
15bn
!
20bn
!
25bn
!
30bn
!
35bn
!
40bn
!45bn
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
As in the US, European AAA CLO spreads were stable in
2022, despite decreased issuance.
Figure 2.24 – EUR AAA primary spreads (bps)
32
0
50
100
150
200
250
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
Libor + (bps)
EUR - CLO AAA Primary Spread Historical Average
Pre-March 2020 high
Figure 2.25 – European AAA CLOs vs European bank loans
(yield)
33
0%
2%
4%
6%
8%
10%
12%
14%
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
EUR Primary AAA CLO running yield EUR leveraged loan yield
We believe that investor interest in ?oating rate assets
will continue to support demand for CLO paper, given its
relative value and operational simplicity (whereas CLO notes
can be settled on a T+2 basis using Clearstream or DTC,
loan settlements are challenging and have been subject to
increased delays).
CLO spreads are also likely to be supported by lower primary
CLO volumes expected in 2023.
Outlook
Despite the impacts of the ongoing war in Ukraine, the
challenges of high in?ation, rising rates and the bank failures
seen in March 2023, we believe that the Company and the
Master Funds are well positioned to generate attractive risk-
adjusted returns in 2023:
• Stable and attractive dividend yield: current dividend yield
of 16.3%.
34
• Interest rate expectations: Fed and ECB rate hikes will
continue to support investor demand for ?oating rate
assets, potentially supporting CLO liabilities. The potential
for lower CLO ?nancing rates will support new CLO equity
investments and the optimisation of the capital structure of
existing CLO equity investments.
• Existing, high-quality portfolio and strong sourcing ability:
CLO new issue supply in 2023 could be signi?cantly below
levels seen in 2022 and 2021, generating a demand-
supply imbalance in CLO equity and debt given increasing
demand for ?oating rate assets. The Master Funds bene?t
from strong, long-term relationships with CLO managers,
including preferential access to Fair Oaks-managed CLOs.
• Structural advantages: Supported by the Master Funds
rigorous valuation policy, ?xed life of the underlying Master
Funds and discount management provisions, including
quarterly reinvestment of 25% of management fees if the
Company does not trade at or above NAV. The Company
will also continue to implement its buy-back program, with
the objective of reducing the current discount to NAV and
bid-o?er spread.
31
Source: Morningstar PitchBook LCD CLO databank. Data as at 31 December 2022.
32
Source: JP Morgan.EUR CLO AAA Primary spreads. Data as at 31 December 2022.
33
Source: JP Morgan. Primary EUR - CLO AAA. ELLI summary yield ?at-3yrs. Data as at 30 December 2022.
34
As at 31 December 2022.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
13
STRATEGIC REVIEW
Investment Adviser’s Report (continued)
Outlook (continued)
We continue to believe that the 16.3% dividend yield o?ered by
the Company, supported by a high-quality portfolio of primarily
?rst-lien, senior secured loans with very attractive term, non-
mark-to-market ?nancing represents one of the most attractive
risk-adjusted opportunities available to investors in the current
market environment.
Fair Oaks Capital Limited
17 April 2023
14
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Risks and uncertainties
The Board of Directors is responsible for and has in place a rigorous risk management framework and risk matrix to identify,
assess, mitigate, manage, review and monitor those risks. This is all reviewed at least quarterly by the board and on a much more
frequent basis by the Investment Adviser.
The Directors have carried out a robust assessment of the principal, secondary and emerging risk areas relevant to the performance
of the Company including those that would threaten its business model, future performance, solvency and liquidity. The principal
risks are detailed below.
Throughout the year, due regard has been paid to emerging risks, although during the period changes to the identi?ed risks can be
characterised as being more of an evolving nature than new and previously unidenti?ed risks. After considering the risks associated
with relevant uncertainties created by emerging risks (including the impact on markets and supply chains of geo-political risks
such as the current crisis in Ukraine, and continuing macro-economic factors and in?ation), the Board believes that the Company
and the Master Funds are well placed to manage its business risks successfully. The Board is in regular communication with the
Investment Adviser who continues to closely monitor the performance of the respective investments of the Master Funds and
update the Company on current and emerging risks.
In respect of the Company’s system of internal controls and reviewing its e?ectiveness, the Directors:
• are satis?ed that they have carried out a robust assessment of the principal risks facing the Company, including those that
would threaten its business model, future performance, solvency or liquidity; and
• have reviewed the e?ectiveness of the risk management and internal control systems including material ?nancial, operational
and compliance controls (including those relating to the ?nancial reporting process) and no signi?cant failings or weaknesses
were identi?ed.
The Risk Committee reviews the Company’s overall risks at least four times a year and monitors the risk control activity designed
to mitigate these risks.
Principal and emerging risks
The principal and emerging risks associated with the Company include:
Risk/Description Control / Mitigation
Investment and ?nancial risk - Market risk -
Increased
Market risk is the risk of changes in market prices
a?ecting the Company’s income and/or the value
of its investments. This is impacted by a variety
of factors including macro-economic conditions,
increased default rates, higher interest rate spreads,
exchange rates, in?ation and general market pricing
of similar CLO investments which will all e?ect the
Company and its Net Asset Value.
The Company’s exposures to market risk mainly
comes from movements in the fair value of its
investments in the Master Funds and on a look-
through basis to the underlying CLO investments.
This risk cannot be mitigated in full but the impact can be reduced
by diversi?cation of the underlying CLO portfolio. The Company’s
objective of market risk management is to manage and control
market risk exposures within acceptable parameters while
optimising the return on investments.
The Company’s market risk is monitored closely and managed
and mitigated as far as possible by the Investment Adviser through
active portfolio management and the maintenance of a diversi?ed
investment portfolio.
The Risk Committee formally monitors the investment performance
of the Company at least four times a year, including when the
Investment Adviser reports on the performance of the Company’s
portfolio at the Board meetings. The investment guidelines and
restrictions, as detailed in the prospectus of the Company,
ensures adequate diversi?cation of the Master Funds’ underlying
investments.
STRATEGIC REVIEW
Strategic Report
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
15
STRATEGIC REVIEW
Strategic Report (continued)
Principal and emerging risks (continued)
Risk/Description (continued) Control / Mitigation (continued)
Investment and ?nancial risk - Credit risk -
Increased
Credit risk arises principally from debt securities
held. The risk is that underlying CLO investments
or ?nancial assets held by the Company default,
leading to investment losses, a reduction in cash
?ows receivable by the Master Funds and a fall in the
Company’s NAV. For the Company this is impacted
by a variety of factors including deterioration in
underlying credit ratings and credit ratings of
counterparties and the secondary market for CLO
investments maybe less liquid. The Company
considers and aggregates all elements of credit risk
exposure, such as individual obligation default risk,
country risk and sector risk.
The Company’s policy on credit risk mirrors that of the Master
Funds’, which is to minimise its exposure to counterparties with
perceived higher risk of default by dealing only with counterparties
that meet the credit standards set out in the Company’s prospectus,
and by taking collateral.
The high rates of global in?ation seen in 2022 and early 2023 have
increased the cost of raw materials and labour for many companies.
While most companies have demonstrated a strong ability to pass
costs on to their customers, continued high rates of in?ation increase
the risk of a drop in pro?t margins and cash ?ow and an increase
in the risk of default. Simultaneously, the sharp increase in USD
and Euro interest rates seen in 2022 and early 2023 has increased
the interest cost for borrowers of the loans held by CLOs. This is
likely to contribute to an increase in ?nancial distress at borrowers
and a resulting increase in the loan default rate. While the valuation
and the projected returns of CLO investments always assume some
loan defaults, a prolonged period of elevated defaults could have
a signi?cant negative impact on the cash ?ows received from and
the valuations of CLO investments held by the Master Funds. The
Investment Adviser carries out extensive due diligence on the Master
Funds’ underlying CLO investments and monitors credit ratings
performance regularly. Credit risk is mitigated as far as possible
by the Investment Adviser through active portfolio management
and the maintenance of a diversi?ed investment portfolio. The
Investment Adviser seeks to achieve this diversi?cation of the
portfolio for this risk in terms of underlying assets, issuer section,
geography and maturity pro?le, please see the Investment Adviser’s
Report and the Note 5 of the Financial Statements for further details
of this diversi?cation.
Financial risk – Counterparty risk – Increased
Counterparty risk can arise through the Company’s
exposure to particular counterparties for executing
transactions and the risk that the counterparties will
not meet their contractual obligations.
Counterparty exposures are monitored by the Investment Adviser
and movements reported regularly to the Board. The Company’s
cash management policy ensures cash and cash equivalents are
only to be placed with designated institutions that meet the credit
standards set out in the Company’s prospectus. In addition, the
aggregate amount deposited or invested by the Company with any
single bank or other non-government counterparty (including their
associates) shall not exceed 20% of the NAV in aggregate, and
also of the NAV of each Share class, at the time of investment.
Neither the Company nor the Master Funds have any exposure to
any banks which experienced ?nancial distress in March 2023 but
the Investment Adviser is vigilant for any secondary impacts of bank
distress on the Master Funds’ investments.
16
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
STRATEGIC REVIEW
Strategic Report (continued)
Principal and emerging risks (continued)
Risk/Description (continued) Control / Mitigation (continued)
Financial risk – Liquidity risk – Stable
Liquidity risk is the risk that the Company will
encounter di?culty in meeting the obligations
associated with its ?nancial liabilities that are settled
by delivering cash or another ?nancial asset.
The Master Funds’ CLO investments are not publicly
traded or freely marketable, and there may be limited
or no secondary market liquidity, as a result the
realising assets to create liquidity in a timely manner
maybe di?cult.
The Administrator and Investment Adviser review the Company’s
income and cash ?ow forecasts on a monthly or ad hoc basis as
required to ensure, as far as possible, the Company will always
have su?cient liquidity to meet its liabilities when due.
The Board reviews cash ?ow forecasts quarterly and ad hoc as
required for buy-backs and distributions. Solvency tests are required
prior to the Company making any distributions.
Operational risk – Stable
This is the risk of loss resulting from inadequate or
failed internal processes, people and systems or
from external events. This can include, but is not
limited to, internal/external fraud, business disruption
and system failures, data entry errors and damage to
physical assets.
The Board is ultimately responsible for all operational facets of
performance including cash management, asset management,
regulatory and listing obligations. The Company has no employees
and so enters into a series of contracts/legal agreements with a series
of service providers to ensure that both operational performance
and regulatory obligations are met. The Board performs ongoing
internal monitoring of operational processes and controls and
receives regular reports from the administrators of the Company
and other service providers, along with a report from the Auditors.
Compliance and regulatory risk – Stable
Compliance and regulatory risk can arise where
processes and procedures are not followed correctly
or where incorrect judgement causes the Company
to be unable to meet its objectives or obligations,
exposing the Company to the risk of loss, sanction or
action by Shareholders, counterparties or regulators.
The Company is required to comply with the Prospectus Rules, the
Disclosure Guidance and Transparency Rules and the Market Abuse
Directive (as implemented in the UK through Financial Services and
Markets Authority). Any failure to comply could lead to criminal or
civil proceedings. The Investment Adviser and Administrator monitor
compliance with regulatory requirements and the Administrator
presents a report at quarterly Board meetings.
Political and economic risk – Increased
Geopolitical events may have an adverse e?ect on
the Company and its operations.
The invasion of Ukraine by Russia in February
2022 has been an emerging risk which has caused
increased volatility in global ?nancial markets and
increased expectations of supply chain disruption
and cost in?ation for oil, gas, metals, grains,
vegetable oils and other raw materials.
The Risk Committee monitors geopolitical risks on an ongoing basis
with independent advice received on emerging developments likely
to a?ect the Company.
The Investment Adviser will continue to monitor the economic
impacts of the invasion of Ukraine by Russia. As detailed further in
the Investment Adviser’s Report, while loan and CLO valuations may
be impacted by increased risk premiums across ?nancial markets,
it is not currently expected the CLOs in which the Master Funds
invest to experience a signi?cant increase in credit losses as a result
of the invasion and its e?ect on the global economy.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
17
STRATEGIC REVIEW
Strategic Report (continued)
Principal and emerging risks (continued)
Risk/Description (continued) Control / Mitigation (continued)
Environmental, Social and Governance (ESG)
risk – Stable
Failure of the Company to identify potential future
ESG requirements could lead to the Company’s
shares being less attractive to investors.
The Investment Adviser has been a signatory to the UN Principles
for Responsible Investment (“UN PRI”) since July 2016 and is
committed to applying the UN PRI to all stages of its investment
criteria. All CLO equity investments completed by the Master Funds
since 2019 have included ESG-related investment criteria that
prohibit investment in certain industry sectors which are considered
to be environmentally or socially harmful.
The Board, the Investment Adviser and all other service providers
continue to monitor developments in the ESG regulatory and
reporting requirements and is committed to increasing awareness
in credit markets.
Going Concern
The Directors have assessed the ?nancial position of the Company as at 31 December 2022 and the factors that may impact
its performance (including the potential impact on markets and supply chains of geo-political risks such as the current crisis in
Ukraine, the continuing macro-economic factors and rising rates of in?ation) in the forthcoming year.
Russia/Ukraine crisis
The Master Funds’ CLO investments do not hold any securities in the Russia/Ukraine region and as such the performance or
creditworthiness of the underlying CLOs have not been signi?cantly impacted. Commodity prices due to the invasion of Ukraine
(mainly oil/gas, metals and wheat) have impacted some of the companies to which the CLOs have loans but many companies
were already subject to input price in?ation before the Ukraine invasion and it is not expected that the additional cost in?ation
will signi?cantly impact the performance of the CLOs. The Directors with the Company’s Investment Adviser, continue to closely
monitor the situation and the resulting disruption to supply chains, particularly with regard to energy prices.
The Investment Adviser continues to carefully monitor the performance of the Master Funds’ investments, working closely with the
Directors on current and emerging risks to the Company.
Following due consideration and after a review of the Company’s holdings in cash and cash equivalents, investments and a
consideration of the income deriving from, and the viability of, the investment in the Master Funds the Directors believe that it
is appropriate to adopt the going concern basis in preparing the Financial Statements, as the Company has adequate ?nancial
resources to meet its liabilities as they fall due.
Viability Statement
The Directors have conducted a robust assessment of the viability of the Company over a three-year period from the date of
signing this report to April 2026, taking account of the Company’s current position and the potential impact of the principal and
emerging risks documented above.
In making this statement, the Directors have considered the resilience of the Company, taking into account its current position,
the principal risks facing the Company in severe but plausible scenarios and the e?ectiveness of any mitigating actions. This
assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity
over the period.
The Directors have determined that the three-year period to April 2026 is an appropriate period over which to provide its viability
statement as this is a reasonable period over which risks relating to the asset class should be considered.
18
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Viability Statement (continued)
At 31 December 2022, the Company is primarily invested into the Master Fund III. The Master Fund III has a planned end date of
12 June 2028. The Company is also invested into the Master Fund II which has a planned end date of June 2026.
In making their three-year assessment, various factors were taken into consideration by the Directors, which included the
Company’s NAV, net income, capital repayments and resulting cash ?ows and dividend cover over the period. These metrics
were subjected to stress tests which, in light of the ongoing uncertainty in economies and markets caused by the Ukraine/Russia
con?ict, continuing macro-economic factors and rising rates of in?ation, involved ?exing a number of main assumptions underlying
the forecast and default rates signi?cantly higher than the ?ve-year average. Where appropriate, this analysis was carried out to
evaluate the potential impact of the Company’s principal risks actually occurring, primarily, severe changes to macro-economic
conditions, increased defaults, deterioration in underlying credit ratings and downgrading or illiquidity of non-investment grade
loans. Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the period to April 2026.
Management Arrangements
Investment Adviser
The Directors are responsible for the determination of the Company’s investment policy and have overall responsibility for the
Company’s activities. The Company has, however, entered into an Investment Advisory Agreement with the Investment Adviser
under which the Investment Adviser has been appointed to provide investment advisory services, which include analysing the
progress of all assets and investments of the Company and advising the Company on liquidity and working capital retention issues,
subject to the overriding supervision of the Directors.
The Directors consider that the interests of shareholders, as a whole, are best served by the continued appointment of the
Investment Adviser to achieve the Company’s investment objectives. A summary of these terms, including the investment advisory
fee and notice of termination period, is set out in note 8 of the Financial Statements.
Custody Arrangements
The Company’s underlying assets in Master Fund II are held in custody by BNP Paribas Securities Services S.C.A., Guernsey
Branch, (“BNP”) pursuant to an agreement dated 9 March 2017 and the Company’s underlying assets in Master Fund III are held
in custody by U.S. Bank Global Corporate Trust Services, UK Branch (“US Bank”) (together the “Custodians”), pursuant to an
agreement dated 26 March 2021.
The Company’s underlying assets in the Master Fund II and the Master Fund III are registered in the name of the respective
Custodian in each case within a separate account designation and may not be appropriated by the Custodian for its own account.
The Board conducts an annual review of the custody arrangements as part of its general internal control review. The Board also
monitors the credit rating of the Custodians, to ensure the ?nancial stability of the Custodians are being maintained to acceptable
levels. As at 31 December 2022, the credit rating of BNP was Aa3 as rated by Moody’s (31 December 2021: Aa3) and A+ by
Standard & Poor’s (31 December 2021: A-) and the credit rating of US Bank was A1 (31 December 2021: A1) as rated by Moody’s
and AA- (31 December 2021: AA-) by Standard & Poor’s.
Administrator
Administration and Company Secretarial services are provided to the Company by Sanne Fund Services (Guernsey) Limited (the
“Administrator”). The Administrator also provides these services to Master Fund II, Master Fund III, Wollemi, Cycad and the General
Partner to these funds. Other services which the Administrator provides the Company include assisting with the AIFMD, Common
Reporting Standard and FATCA reporting. A summary of the terms, including fees, is set out in note 8 of the Financial Statements.
STRATEGIC REVIEW
Strategic Report (continued)
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
19
The Directors of the Company, all of whom are non-executive
and independent, are listed as follows:
Professor Claudio Albanese (Chairman of the Board and
Chairman of the Management Engagement Committee)
is the Head of Analytics at Global Valuation. He received a
PhD in Theoretical Physics from ETH Zurich in 1988. He
has held faculty positions at numerous academic institutions
including ETH Zurich, UCLA, the Courant Institute at NYU,
and Princeton University. In 1994 he joined the University of
Toronto as Associate Professor of Mathematical Physics and
in that year he redirected his career towards Mathematical
Finance. In 1998 he spent one year at Morgan Stanley at
the credit derivatives trading desk. In 2004 he joined Imperial
College London as Professor of Mathematical Finance and
has then been Honorary Professor at King’s College and the
CASS School of Business. Claudio consults for several banks,
speaks at numerous conferences and has published over 50
articles in academic and professional journals. Claudio founded
Global Valuation, a software ?rm dedicated to the simulation of
banks’ OTC portfolios, XVA metrics, stress testing and model
risk. Claudio was non-executive director at Carador Income
Fund Plc from 2006 to 2013. Claudio is an Italian resident.
Jonathan (Jon) Bridel (Chairman of the Audit Committee
and, with e?ect from 9 December 2022, Chairman of the
Nomination and Remuneration Committee) is currently a non-
executive chairman or director of various listed investment
funds. He was until 2011 Managing Director of Royal Bank of
Canada’s investment businesses in Guernsey and Jersey. This
role had a strong focus on corporate governance, oversight,
regulatory and technical matters and risk management. After
qualifying as a Chartered Accountant in 1987, Jon worked
with Price Waterhouse Corporate Finance in London and
subsequently served in a number of senior management
positions in Australia and Guernsey in corporate and o?shore
banking and specialised in credit. He was also chief ?nancial
o?cer of two private multi-national businesses, one of which
raised private equity. He holds quali?cations from the Institute
of Chartered Accountants in England and Wales where he is a
Fellow, the Chartered Institute of Marketing and the Australian
Institute of Company Directors. He graduated with an MBA
from Durham University in 1988. Jon is a chartered marketer
and a member of the Chartered Institute of Marketing, a
chartered director and fellow of the Institute of Directors and is
a chartered fellow of the Chartered Institute for Securities and
Investment. Jon is a Guernsey resident.
Fionnuala Carvill (appointed 14 June 2022) (Chair of the
Risk Committee with e?ect from 14 June 2022) is a Non-
Executive Director of Investec Bank (Channel Islands) Limited,
Princess Private Equity Holding Limited and The Chartered
Institute for Securities & Investment Future Foundation.
Previous executive positions held include Managing Director of
Kleinwort Benson (Channel Islands) Investment Management
Limited, Director of Kleinwort Benson (Channel Islands)
Limited, Commission Secretary and Head of Innovation at
the Guernsey Financial Services Commission, and Director of
Rothschild Bank (CI) Limited. She is a former board member of
The Chartered Institute for Securities & Investment, a Liveryman
of the Worshipful Company of International Bankers, and was
granted Freedom of the City of London in 2007.
Fionnuala holds a Master’s degree in Corporate Governance
(Distinction), is a Chartered Fellow of The Chartered Institute
for Securities & Investment; a Fellow of the London Institute
of Banking & Finance (Chartered Institute of Bankers);
a member of the Institute of Directors; a Fellow of The
Chartered Governance Institute and a Chartered Governance
Professional. In addition, she sits on the board of several
charities, holding roles from fundraising and capacity building
to governance and impact assessment. Fionnuala is a
Guernsey resident.
GOVERNANCE
Board of Directors
20
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
The following summarises the Directors’ directorships in other public companies:
Company Name Stock Exchange
Professor Claudio Albanese
None
Jon Bridel
DP Aircraft 1 Limited London Stock Exchange – SFS
Fionnuala Carvill (appointed 14 June 2022)
Princess Private Equity Holding Limited London Stock Exchange – Main Market
GOVERNANCE
Disclosure of Directorships in Public Companies
Listed on Recognised Stock Exchanges
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
21
The Directors of the Company are pleased to submit their Annual Report and the Audited Financial Statements (the “Financial
Statements”) for the year ended 31 December 2022. In the opinion of the Directors, the Annual Report and Audited Financial
Statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s
performance, business model and strategy.
The Company
The Company was incorporated and registered in Guernsey on 7 March 2014 under the Companies (Guernsey) Law, 2008.
The Company’s registration number is 58123 and it is regulated by the Guernsey Financial Services Commission (“GFSC”) as
a registered closed-ended collective investment scheme. The Company’s ordinary shares were listed on the Specialist Fund
Segment (“SFS”) of the London Stock Exchange (“LSE”) on 12 June 2014.
Results and Dividends
The results for the year are shown in the Statement of Comprehensive Income on page 41.
The Board declared dividends of US$44,301,785 during 2022 (2021: US$45,580,951) followed by an additional dividend
declaration of US$7,952,233 declared on 23 February 2023 in relation to the year ended 31 December 2022 (dividends declared
in relation to the year ended 31 December 2021: US$11,250,380). Further details of dividends declared or paid are detailed in
note 4.
The Board paid or declared dividends to shareholders representing an amount in aggregate at least equal to the gross income
from investments, which are received from the Master Fund II and the Master Fund III in the relevant ?nancial period attributable
to the Company’s investment in the Master Fund II and the Master Fund III, and Qualifying Short Term Investments less expenses
of the Company.
Independent Auditor
KPMG Channel Islands Limited were appointed on 12 May 2014 and continued to serve as Auditor during the ?nancial year.
A resolution to re-appoint KPMG Channel Islands Limited as Auditor will be put to the forthcoming Annual General Meeting
(“AGM”).
Directors and Directors’ Interests
The Directors, all of whom are independent and non-executive, are listed on page 19.
None of the Directors has a service contract with the Company and no such contracts are proposed. Each independent non-
executive Director is entitled to a basic fee of £45,000 (31 December 2021: £43,000) each per annum.
The Directors had the following interests in the Company at 31 December 2022 and 31 December 2021, held either directly or
bene?cially:
31 December 2022 31 December 2021
Name No. of 2021
Shares Percentage
No. of 2017
Shares Percentage
Claudio Albanese (Chairman) 9,697 0.00% 9,697 0.00%
Jon Bridel
1
40,000 0.01% 40,000 0.01%
Fionnuala Carvill (appointed 14 June 2022) – – N/A N/A
Nigel Ward (resigned on 8 December 2022) N/A N/A 60,000 0.01%
GOVERNANCE
Directors’ Report
1
All shares held by a person closely associated to Jon Bridel.
22
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Substantial Shareholdings
As at 31 March 2023, being the date of the latest shareholder analysis prior to the publication of these Financial Statements, the
following 2021 Shareholders had holdings in excess of 5% of the issued 2021 Share Capital:
Name No. of 2021 Shares Percentage of 2021 Shares
Vidacos Nominees Limited 44,788,005.00 11.04%
Nortrust Nominees Limited 34,412,860.00 8.48%
Vidacos Nominees Limited 27,184,806.00 6.70%
There were no signi?cant shareholder changes in the period from 31 March 2023 and the date of signing this report.
Related Parties
Details of transactions with related parties are disclosed in note 8 to these Financial Statements.
Regulatory Requirements
Since being admitted to the SFS on 12 June 2014, the Company has complied with the Prospectus Rules, the Disclosure
Guidance and Transparency Rules and the Market Abuse Directive (as implemented in the UK through Financial Services and
Markets Authority).
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (“FATCA”) became e?ective on 1 January 2013. The legislation is aimed at determining
the ownership of US assets in foreign accounts and improving US tax compliance with respect to those assets. On 13 December
2013, the States of Guernsey entered into an intergovernmental agreement (“IGA”) with US Treasury, in order to facilitate the
requirements under FATCA. The Company registered with the Internal Revenue Service (“IRS”) on 21 November 2014 as a Foreign
Financial Institution (“FFI”).
Common Reporting Standard
The Common Reporting Standard (“CRS”), formerly the Standard for Automatic Exchange of Financial Account Information,
became e?ective on 1 January 2016. CRS is an information standard for the automatic exchange of information developed by
the Organisation for Economic Co-operation and Development (“OECD”). CRS is a measure to counter tax evasion and it builds
upon other information sharing legislation, such as FATCA, the UK-Guernsey IGA for the Automatic Exchange of Information and
the European Union Savings Directive, and has superseded the UK-Guernsey Intergovernmental Agreement for the Automatic
Exchange of Information with e?ect from 1 January 2016. Reporting under CRS in Guernsey is completed on an annual basis.
Alternative Investment Fund Managers Directive (“AIFMD”)
The Company is categorised as a non-EU Alternative Investment Fund (as de?ned in the AIFMD) (“AIF”) and the Board of the
Company is a non-EU Alternative Investment Fund Manager (“AIFM”) (as de?ned in the AIFMD) for the purposes of the AIFMD and
as such neither it nor the Investment Adviser will be required to seek authorisation under the AIFMD. However, following national
transposition of the AIFMD in a given EU member state, the marketing of ordinary shares in AIFs (as de?ned in the AIFMD) that are
established outside the EU (such as the Company) to investors in that EU member state will be prohibited unless certain conditions
are met. Certain of these conditions are outside the Company’s control as they are dependent on the regulators of the relevant third
country and the relevant EU member state entering into regulatory co-operation agreements with one another.
The Directors have appointed the Risk Committee to manage the relevant disclosures to be made to investors and the necessary
regulators. On 18 February 2015, the FCA con?rmed that the Company was eligible to be marketed via the FCA’s National Private
Placement Regime and the Company complied with Article 22 and 23 of the AIFMD for the year ended 31 December 2022. In
January 2017, the Company was authorised to market in Sweden, Finland and Luxembourg. As the Board of the Company is the
AIFM, the details of the Company’s remuneration policy for the Directors is outlined on page 31 and accords with the principles
established by AIFMD.
GOVERNANCE
Directors’ Report (continued)
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
23
Non-Mainstream Pooled Investments
The Company’s ordinary shares are considered as “excluded securities” for the purposes of the FCA Rules regarding the de?nition
and promotion of non-mainstream pooled investments (“NMPI”) because the returns to investors holding the Company’s ordinary
shares are, and are expected to continue to be, predominantly based on the returns from ordinary shares and debentures held
indirectly by the Company. The Board therefore believes that independent ?nancial advisers can recommend the Company’s
ordinary shares to retail investors, although ?nancial advisers should seek their own advice on this issue.
Reporting Fund Regime
The Company was accepted into the UK Reporting Fund regime with e?ect from 7 March 2014. Under this regime, which
e?ectively replaced the UK Distributor Status regime, an o?shore investment fund operates by reference to whether it opts into the
reporting regime (“Reporting Funds”) or not (“Non-reporting Funds”).
A UK investor who disposes of an interest in a Reporting Fund should be subject to tax on any gains realised as capital gains
rather than income. Such investors will also be subject to income tax on the distributions received from the o?shore fund and
their share of the excess of the o?shore fund’s reported income over the distributions made (i.e. they will be subject to income tax
on their share of the o?shore fund’s income regardless of whether this is distributed or not). Shareholders should seek their own
professional advice as to the tax consequences of the UK Reporting Fund regime.
Anti-bribery and Corruption
The Board acknowledge that the Company’s international operations may give rise to possible claims of bribery and corruption.
In consideration of The Bribery Act 2010, enacted in the UK, at the date of this report the Board had conducted an assessment
of the perceived risks to the Company arising from bribery and corruption to identify aspects of business which may be improved
to mitigate such risks. The Board has adopted a zero tolerance policy towards bribery and has reiterated its commitment to carry
out business fairly, honestly and openly.
Criminal Finances Act
The Board of the Company has a zero tolerance commitment to preventing persons associated with it from engaging in criminal
facilitation of tax evasion. The Board has satis?ed itself in relation to its key service providers that they have reasonable provisions
in place to prevent the criminal facilitation of tax evasion by their own associated persons and will not work with service providers
who do not demonstrate the same zero tolerance commitment to preventing persons associated with it from engaging in criminal
facilitation of tax evasion.
UK Modern Slavery Act
The Board acknowledges the requirement to provide information about human rights in accordance with the UK Modern Slavery
Act. The Board conducts the business of the Company ethically and with integrity, and has a zero tolerance policy towards modern
slavery in all its forms. As the Company has no employees, all its Directors are non-executive and all its functions are outsourced,
there are no further disclosures to be made in respect of employees and human rights.
Employee Engagement & Business Relationships
The Company conducts its core activities through third-party service providers and does not have any employees. The Board
recognises the bene?ts of encouraging strong business relationships with its key service providers and seeks to ensure each is
committed to the performance of their respective duties to a high standard and, where practicable, that each provider is motivated
to adding value within their sphere of activity. Details on the Board’s approach to service provider engagement and performance
review are contained in the Management Engagement Committee Report.
Whistleblowing
The Board has considered the AIC Code recommendations in respect of arrangements by which sta? of the Investment Adviser,
Custodian or Administrator may, in con?dence, raise concerns within their respective organisations about possible improprieties
in matters of ?nancial reporting or other matters. It has concluded that adequate arrangements are in place for the proportionate
and independent investigation of such matters and, where necessary, for appropriate follow-up action to be taken within their
organisation.
GOVERNANCE
Directors’ Report (continued)
24
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
GOVERNANCE
Directors’ Report (continued)
Environmental and Social Policy
Over the course of the last decade, renewable energy has grown materially as governments and investors started to realise the
need for sustainable energy sources. In 2022, countries worldwide continued to pursue decarbonisation plans and the renewable
growth trend is expected to continue going forward as more countries join the Paris Climate Accord which aims to achieve the
goal of net-zero carbon emissions by 2050.
The Company is a closed-ended investment company which has no employees or o?ces and therefore its own direct environmental
impact is minimal. The Company operates by outsourcing signi?cant parts of its operations to reputable professional companies,
who are required to comply with all relevant laws and regulations and take account of social, environmental, ethical and human
rights factors, where appropriate.
The Board notes that the underlying entities which the CLOs are invested in will have a social and environmental impact over which it
has limited control. Europe, however, has seen the emergence of CLOs subject to Environmental, Social and Corporate Governance
(“ESG”) investment criteria. The inclusion of ESG language in CLOs has become more prevalent and is likely to develop from sector-
based negative screening towards ESG scoring. The Master Funds have been at the forefront of these developments and, as of the
end of December 2022, 69.8% of all CLO equity investments in the Master Funds’ portfolio included ESG investment restrictions. These
restrictions exclude any underlying collateral debt obligation whose primary business activity is, amongst others, oil, gas or thermal coal
extraction, upstream palm oil production, trade in weapons or ?rearms, hazardous chemicals, pesticides and wastes, ozone-depleting
substances, endangered or protected wildlife or wildlife products, tobacco and predatory lending.
The Company has no direct greenhouse gas emissions to report from its operations, nor does it have responsibility for any other
emissions-producing sources, including those within its underlying CLOs portfolio.
In carrying out its investment activities and in relationship with suppliers, the Company aims to conduct itself responsibly, ethically
and fairly.
In addition, the Investment Adviser has been a signatory to the UN Principles for Responsible Investment (“UN PRI”) since July
2016 and is committed to applying the UN PRI to all stages of its investment criteria and to increasing awareness in credit markets.
EU Sustainable Finance Disclosure Regulation – Article 6 – Sustainability risk
A sustainability risk is an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential
material negative impact on the value of an investment. The Investment Adviser integrates sustainability risks into its investment
decisions in two ways. Firstly, its analysis of the managers of the CLOs in which the Company/Master Funds invest considers any
sustainability risks at the manager level that could impact either the e?ective management of the CLO or the secondary market
value of the CLO securities. Secondly, the Investment Adviser considers sustainability risks at the level of the borrowers of the
loans in the CLOs’ portfolios. The realisation of sustainability risks at these borrowers could increase the probability of borrowers
defaulting on loans held by the CLOs and a consequent erosion of the CLOs’ collateral pools.
The Investment Adviser has determined that sustainability risks, while relevant to the Company’s and Master Funds’ portfolio,
present a very limited risk to the value of its investments. The manager-related sustainability risks are mitigated by the tight
controls enforced on CLO managers by the CLO indenture and trustee, the manager replacement provisions in the indenture and
the fact that CLO investors are ultimately protected by their security over the CLO collateral. The sustainability risks related to the
borrowers of loans in the CLO portfolios are mitigated by the diversi?cation of the CLO portfolios and by the analysis undertaken
on the loan borrowers by equity investors, lenders and rating agencies.
“Sustainability factors” are environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery
matters. Due to a current lack of detailed relevant information available from the borrowers of loans in CLO portfolios, the Investment
Adviser does not consider the adverse impacts of investment decisions on sustainability factors. The investments underlying this
?nancial product do not take into account the EU criteria for environmentally sustainable economic activities.
By order of the Board
Jon Bridel
Director
17 April 2023
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
25
Compliance
The Board has taken note of the Code of Corporate Governance issued by the Guernsey Financial Services Commission
(“Guernsey Code”). The Guernsey Code provides a governance framework for GFSC licensed entities, authorised and registered
collective investment schemes. Companies reporting in compliance with the UK Corporate Governance Code (the “UK Code”)
or the Association of Investment Companies Code of Corporate Governance (“AIC Code”), which was last published in February
2019, are deemed to satisfy the provisions of the Guernsey Code. The UK Code is available on the Financial Reporting Council
website, www.frc.org.uk.
As a Guernsey incorporated company and under the SFS Rules for companies, it is not a requirement for the Company to comply
with the UK Code. However, the Directors place a high degree of importance on ensuring that high standards of corporate
governance are maintained and have considered the principles and recommendations of the AIC Code. The AIC Code addresses
all the principles and provisions set out in the UK Code as well as setting out additional provisions on issues that are of speci?c
relevance to the Company. The Board considers that reporting against the principles and provisions of the AIC Code will provide
more relevant information to shareholders. The AIC code is available on the AIC website, www.theaic.co.uk.
For the year ended 31 December 2022, the Company complied substantially with the relevant provisions of the AIC Code and it
is the intention of the Board that the Company will comply with those provisions throughout the year ending 31 December 2023,
with the exception of the provisions listed below:
• The appointment of a Senior Independent Director: Given the size and composition of the Board it is not felt necessary to
separate the roles of Chairman and Senior Independent Director. The Board considers that all the independent Directors have
di?erent qualities and areas of expertise on which they may lead where issues arise and to whom concerns can be conveyed.
• Internal audit function: The Board has reviewed the need for an internal audit function and due to the size of the Company and
the delegation of day-to-day operations to regulated service providers, an internal audit function is not considered necessary.
The Directors will continue to monitor the systems of internal controls in place in order to provide assurance that they operate
as intended.
• The appointment of Executive Directors: Due to the broad range of experience of the Board and given the nature of the
Company’s activity and that the majority of Directors are deemed to be independent under the AIC Code, it is not considered
necessary to appoint executive Directors.
Composition and Independence of Directors
On 6 May 2022, the Company announced in the notice of Annual General Meeting for 14 June 2022, that Nigel Ward intended to
retire from the Board by the end of 2022. As a result, the Company commenced a recruitment process with the intention to appoint
a new Director by the end of the ?rst half of 2022 to allow an orderly transfer of responsibilities prior to Nigel Ward’s retirement.
On 14 June 2022, the Board were subsequently pleased to announce the appointment of Fionnuala Carvill as a non-executive
Director of the Company. In order to ensure an orderly transfer of responsibilities, Ms Carvill was appointed as chair of the Risk
Committee ahead of Nigel Ward’s retirement. On 8 December 2022, the Company announced that Nigel Ward had resigned as a
Non-Executive Director of the Company and Chair of the Nomination & Remuneration Committee e?ective close of business on 8
December 2022. Jon Bridel replaced him as Chair of the Nomination & Remuneration Committee with immediate e?ect.
As at 31 December 2022, the Board of Directors comprised three non-executive and independent Directors as set out below. The
Company has no executive Directors or any employees. The biographies of the Board are disclosed on page 19.
Professor Claudio Albanese is the Chairman of the Board and the Management Engagement Committee.
Jon Bridel is the Chairman of the Audit Committee and, with e?ect from 9 December 2022, the Nomination and Remuneration
Committee.
Fionnuala Carvill is, with e?ect from 14 June 2022, the Chair of the Risk Committee.
GOVERNANCE
Corporate Governance
26
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Composition and Independence of Directors (continued)
Nigel Ward was the Chair of the Risk Committee until 13 June 2022 and the Chair of Nomination and Remuneration Committee
until 8 December 2022.
In considering the independence of the Chairman, the Board has taken note of the provisions of the AIC Code relating to
independence and has determined that Professor Claudio Albanese is an Independent Director. As Chairman, Professor Albanese
is responsible for the leadership of the Board and ensuring e?ectiveness in all aspects of its role.
Under the terms of their appointment, all non-executive Directors are subject to re-election annually at the Annual General Meeting
(“AGM”). At the Annual General Meeting of the Company on 14 June 2022, shareholders re-elected all the Directors of the
Company.
The Board are mindful of the length of service of the Directors, some of whom have been in place since the inception of the
Company in 2014. To that end, Nigel Ward announced his intention to retire during 2022 and the Company commenced a
recruitment process with the intention to appoint a new Director as his replacement. During the recruitment process, while any
new Director appointments are made on merit, the Board was also mindful of the bene?ts of diversity and looked to ensure that
the Board has an appropriate range of skills, knowledge and experience, as well considering factors such as gender. Fionnuala
Carvill was subsequently appointed to the Board in June 2022. The Board is committed that there is an equal balance of gender
in candidates for ?nal interviews and the Board’s objective was that by 30 June 2022 a woman would be appointed to the Board
so 33% of the Board comprises women at 31 December 2022. Going forward, Professor Claudio Albanese and Jon Bridel are
expected to retire in December 2023 and December 2024 respectively with a succession plan underway to appoint new directors.
Within the recruitment process, further consideration will be given to industry best practice and recognised guidance including,
but not limited to, the requirements on listed companies arising from the Hampton Alexander review and the Parker Review. The
succession planning will continue to be kept under review to ensure an orderly transfer of knowledge and responsibilities as the
Directors continue to look to refresh the Board with these new appointments in the coming few years.
Although no formal training is given to Directors by the Company, the Directors are kept up to date on various matters such as
Corporate Governance issues through bulletins and training materials provided from time to time by the Company Secretary, the
AIC and other professional ?rms.
The Board receives quarterly reports and meets at least quarterly to review the overall business of the Company and to consider
matters speci?cally reserved for its disposal. At these meetings the Board monitors the investment performance of the Company.
The Directors also review the Company’s activities every quarter to ensure that it adheres to the Company’s investment policy.
Additional ad hoc reports are received as required and Directors have access at all times to the advice and services of the Company
Secretary, who is responsible for ensuring that the Board procedures are followed and that applicable rules and regulations are
complied with.
The Board monitors the level of the share price premium or discount to determine what action is desirable (if any). As detailed
further in the Chairman’s Statement on page 6, the Board announced that it had resolved to enhance the Company’s aggregate
distributions to holders of the 2021 Shares, with the objective of being meaningfully accretive to 2021 Shareholders and positively
in?uencing the discount to NAV and trading liquidity of the 2021 Shares.
The Board and relevant personnel of the Investment Adviser acknowledge and adhere to the Market Abuse Regulation which was
implemented on 3 July 2016.
Board Diversity
At 31 December 2022, the Board of Directors of the Company comprises two male directors and one female director.
The Board is committed to diversity and is supportive of increased gender and ethnic diversity. As referred to above, during
2022, Fionnuala Carvill was appointed as the Company’s ?rst female Director. Going forward the Board will ensure there is an
equal balance of gender in candidates for ?nal interviews and, as mentioned above, the Company will also consider industry best
practice and recognised guidance including the requirements on listed companies arising from the Hampton Alexander review and
the Parker Review.
GOVERNANCE
Corporate Governance (continued)
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
27
Board Diversity (continued)
The Nomination and Remuneration Committee regularly reviews the structure, size and composition required of the Board,
taking into account the challenges and opportunities facing the Company. The Board is also committed to appointing the most
appropriate available candidates taking into account the skills and attributes of both existing members and potential new recruits
and thereby the balance of skills, experience and approach of the Board as a whole which will lead to optimal Board e?ectiveness.
In considering future candidates, appointments will be based on merit as a primary consideration, with the aim of bringing an
appropriate range of the speci?c skills, experience, independence, and knowledge needed to ensure a rounded Board and the
diversity bene?ts each candidate can bring to the overall Board composition.
Directors’ Performance Evaluation
The Board has established an informal system for the evaluation of its own performance and that of the Company’s individual
Directors. It considers this to be appropriate having regard to the non-executive role of the Directors and the signi?cant outsourcing
of services by the Company to external providers.
The Directors undertake, on an annual basis by means of an internal questionnaire, an assessment of the e?ectiveness of the
Board, particularly in relation to its oversight and monitoring of the performance of the Investment Adviser and other key service
providers. The evaluations consider the balance of skills, experience, independence and knowledge of the Company. The Board
also evaluates the e?ectiveness of each of the Directors. The Company Secretary collates the results of the questionnaires and the
consolidated results are reviewed by the Board as a whole.
In respect of the AGM, which will be held on 8 June 2023, the Board is of the view that each Director seeking re-election should
be re-elected and Fionnuala Carvill should be elected for the ?rst time, given their extensive knowledge of international ?nancial
markets, funds and risk management. This experience is evidenced within the biographies of the Board as disclosed on page 27.
Collectively, the blend of skillsets demonstrates the importance of the contribution of each Director and why they should each be
re-elected at the forthcoming AGM.
The Chairman also has responsibility for assessing the individual Board members’ training and development requirements.
Directors’ Remuneration
With e?ect from 27 August 2015, it is the responsibility of the Nomination and Remuneration Committee to determine and approve
the Directors’ remuneration, having regard to the level of fees payable to non-executive Directors in the industry generally, the role
that individual Directors ful?l in respect of Board and Committee responsibilities and the time committed to the Company’s a?airs.
The Chairman’s remuneration is decided separately and is approved by the Board as a whole.
No Director has a service contract with the Company and details of the Directors’ remuneration can be found in the Directors’
Remuneration Report on page 31.
Directors’ and O?cers’ Liability Insurance
The Company maintains Directors’ and O?cers’ liability insurance on behalf of the Directors in relation to the performance of their
duties as Directors.
Relations with Shareholders
The Company reports to shareholders twice a year by way of the Interim Report and Unaudited Condensed Financial Statements
and the Annual Report and Audited Financial Statements. In addition, NAVs are published monthly and the Investment Adviser
publishes monthly reports to shareholders on its website www.fairoaksincome.com.
The Board receives quarterly reports on the shareholder pro?le of the Company and regular contact with major shareholders
is undertaken by the Company’s corporate brokers and the executives of the Investment Adviser. Any issues raised by major
shareholders are reported to the Board on a regular basis.
The Chairman and individual Directors are willing to meet major shareholders to discuss any particular items of concern regarding
the performance of the Company. Members of the Board, including the Chairman and the Audit Committee Chairman, and the
Investment Adviser are also available to answer any questions which may be raised by any shareholder at the Company’s Annual
General Meeting.
GOVERNANCE
Corporate Governance (continued)
28
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
GOVERNANCE
Corporate Governance (continued)
Stakeholders and Section 172
Whilst directly applicable to UK domiciled companies, the intention of the AIC Code is that matters set out in section 172 of the
Companies Act, 2006 (“s172 of the Companies Act”) are reported. The Board considers the view of the Company’s other key
stakeholders as part of its discussions and decision making process. As an investment company, the Company does not have any
employees and conducts its core activities through third-party service providers. Each provider has an established track record
and, through regulatory oversight and control, are required to have in place suitable policies to ensure they maintain high standards
of business conduct, treat customers fairly, and employ corporate governance best practice.
The Board’s commitment to maintaining the high-standards of corporate governance recommended in the AIC Code, combined
with the directors’ duties incorporated into the Companies (Guernsey) Law, 2008, the constitutive documents, the Disclosure
Guidance and Transparency Rules, and Market Abuse Regulation, ensures that shareholders are provided with frequent and
comprehensive information concerning the Company and its activities.
Whilst the primary duty of the Directors is owed to the Company as a whole, the Board considers as part of its decision making
process the interests of all stakeholders. Particular consideration being given to the continued alignment between the activities of
the Company and those that contribute to delivering the Board’s strategy, which include the Investment Manager and Administrator.
The Board respects and welcomes the views of all stakeholders. Any queries or areas of concern regarding the Company’s
operations can be raised with the Secretary.
Directors’ Meetings and Attendance
The table below shows the attendance at Board and Committee meetings during the year. There were four formal Board meetings,
three Audit Committee meetings, four Risk Committee meetings, one Management Engagement Committee meetings, three
Nomination & Remuneration Committee meeting and one ad hoc Board meeting held during the year ended 31 December 2022.
Name Board
Audit
Committee
Risk
Committee
Management
Engagement
Committee
Nomination &
Remuneration
Committee
Number of meetings held
5 3 4 1 3
Professor Claudio Albanese (Chair of the Board
and Management Engagement Committee)
5 N/A 4 1 N/A
Jon Bridel (Chair of the Audit Committee and
the Nomination & Remuneration Committee)
5 3 4 1 3
Fionnuala Carvill (Chair of the Risk Committee)
1
4 2 3 1 1
Nigel Ward (former Chair of the Risk Committee
and the Nomination & Remuneration Committee)
2
5 3 4 1 3
The Chairman is responsible for ensuring the Directors receive complete information in a timely manner concerning all matters
which require consideration by the Board. Through the Board’s ongoing programme of shareholder engagement and the reports
produced by each key service provider, the Directors are satis?ed that su?cient information is provided so as to ensure the matters
set out in s172 of the Companies Act are taken into consideration as part of the Board’s decision-making process.
1
Appointed to the Board and as Chair of the Risk Committee on 14 June 2022.
2
Resigned from the Board on 8 December 2022.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
29
GOVERNANCE
Corporate Governance (continued)
Board Committees
Audit Committee
During the year ended 31 December 2022, the Audit Committee has comprised of Jon Bridel, Nigel Ward and Fionnuala Carvill,
and meets at least three times a year. Fionnuala Carvill became a member of the Audit Committee on her appointment to the
Board on 14 June 2022. Nigel Ward resigned from the Board and Audit Committee on 8 December 2022. Jon Bridel is Chairman
of the Audit Committee. The key objectives of the Audit Committee include a review of the Financial Statements to ensure they
are prepared to a high standard and comply with all relevant legislation and guidelines, where appropriate, and to maintain an
e?ective relationship with the Auditor. With respect to the Auditor, the Audit Committee’s role will include the assessment of their
independence, review of the Auditor’s engagement letter, remuneration, performance and any non-audit services provided by the
Auditor. For the principal duties and report of the Audit Committee please refer to the Report of the Audit Committee on page 32.
Risk Committee
The Risk Committee meets at least four times a year. It comprises the entire Board and was chaired by Nigel Ward up until 14
June 2022 when, in order to ensure an orderly transfer of responsibilities, Fionnuala Carvill was appointed as chair ahead of Nigel
Ward’s retirement. The principal function of the Risk Committee is to identify, assess, monitor and, where possible, oversee the
management of risks to which the Company’s investments are exposed, principally to enable the Company to achieve its target
investment objective of a total return of 12% to 14% per annum over the planned life of the Company, with regular reporting to
the Board. As the Company is an internally managed non-EU AIFM for the purposes of AIFMD, the Directors have appointed the
Risk Committee to manage the additional risks faced by the Company as well as the relevant disclosures to be made to investors
and the necessary regulators. On 18 February 2015, the FCA con?rmed that the Company was eligible to be marketed via the
FCA’s National Private Placement Regime and the Company complied with Articles 22 and 23 of the AIFMD for the year ended 31
December 2022. In January 2017, the Company was authorised to market in Sweden, Finland and Luxembourg.
Management Engagement Committee
The Management Engagement Committee (“MEC”) meets at least once a year. It comprises the entire Board and is chaired by
Professor Claudio Albanese. The MEC is responsible for the regular review of the terms of the Investment Advisory Agreement and
the performance of the Administrator and the Investment Adviser and also the Company’s other service providers. For the principal
duties of the MEC, please refer to the Management Engagement Committee Report on page 35.
Nomination and Remuneration Committee
The Nomination and Remuneration Committee meets at least once a year. It comprises the entire Board and was chaired by Nigel
Ward up until his resignation on 8 December 2022 when Jon Bridel replaced him a chair. The Nomination and Remuneration
Committee is responsible for reviewing the structure, size and composition of the Board, to consider the succession planning
for directors, reviewing the leadership needs of the organisation, identifying candidates for appointment to the Board, agreeing a
framework for Director remuneration, ensuring management of the Company are appropriately incentivised to enhance performance
and reviewing the appropriateness of the remuneration policy on an on-going basis. In order to identify appropriate candidates for
appointment to the Board, the Nomination and Remuneration Committee will appoint an independent consultant for the purposes
of identifying suitable candidates for the purposes of succession planning.
Internal Control Review and Risk Management System
The Board of Directors is responsible for putting in place a system of internal controls relevant to the Company and for reviewing
the e?ectiveness of those systems. The review of internal controls is an ongoing process for identifying and evaluating the risks
faced by the Company, and which are designed to manage risks rather than eliminate the risk of failure to achieve the Company’s
objectives.
It is the responsibility of the Board to undertake risk assessment and review of the internal controls in the context of the Company’s
objectives that cover business strategy, operational, compliance and ?nancial risks facing the Company. These internal controls are
implemented by the Company’s three main service providers: the Investment Adviser, the Administrator and the Custodian. The
Board receives periodic updates from these main service providers at the quarterly Board meetings of the Company. The Board
is satis?ed that each service provider has e?ective controls in place to control the risks associated with the services that they are
contracted to provide to the Company and are therefore satis?ed with the internal controls of the Company.
The Board of Directors considers the arrangements for the provision of Investment Advisory, Administration and Custody services
to the Company on an ongoing basis and a formal review is conducted annually. As part of this review the Board considered the
quality of the personnel assigned to handle the Company’s a?airs, the investment process and the results achieved to date.
30
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
The Directors are responsible for preparing the Directors’
Report and Financial Statements in accordance with
International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board (“IASB”) and
the Companies (Guernsey) Law, 2008 which give a true and
fair view of the state of a?airs of the Company and its pro?t or
loss for that period.
In preparing the Financial Statements the Directors are
required to:
• select suitable accounting policies and apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
• state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements;
• assess the Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and
• use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or
have no realistic alternative but to do so.
The Directors are also responsible for the keeping of proper
accounting records which disclose with reasonable accuracy
at any time the ?nancial position of the Company and to enable
them to ensure that the Financial Statements comply with the
Companies (Guernsey) Law, 2008 and the Listing Rules of the
SFS of the London Stock Exchange. They are also responsible
for the system of internal controls, safeguarding the assets of
the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors con?rm that they have complied with these
requirements in preparing the Financial Statements.
The Directors are also responsible for the maintenance and
integrity of the corporate and ?nancial information included
on the Company’s website. Legislation in the United Kingdom
and Guernsey governing the preparation and dissemination
of ?nancial statements may di?er from legislation in other
jurisdictions.
So far as the Directors are aware, there is no relevant audit
information of which the Company’s auditor is unaware,
having taken all the steps the Directors ought to have taken
to make themselves aware of any relevant audit information
and to establish that the Company’s auditor is aware of that
information.
Responsibility Statement
Each of the Directors, who are listed on page 19, con?rms to
the best of their knowledge and belief:
• the Financial Statements, prepared in accordance with
IFRS as issued by the IASB, give a true and fair view of
the assets, liabilities, ?nancial position and pro?t of the
Company, as required by DTR 4.1.12R;
• the Management Report (comprising the Chairman’s
Statement, the Investment Adviser’s Report, the Directors’
Report, the Strategic Report and other Committee Reports)
includes a fair review of the development and performance
of the business during the year, and the position of the
Company at the end of the year, together with a description
of the principal risks and uncertainties that the Company
faces, as required by DTR 4.1.8R and DTR 4.1.9R; and
• the Annual Report, comprising the Financial Statements,
Strategic Review and Governance report, taken as a whole,
is fair, balanced and understandable.
Signed on behalf of the Board by:
Jon Bridel
Director
17 April 2023
GOVERNANCE
Statement of Directors’ Responsibilities
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
31
The Company’s policy in regard to Directors’ remuneration is to ensure that remuneration is competitive, aligned with shareholder
interests, relatively simple and transparent, and compatible with the aim of attracting, recruiting and retaining suitably quali?ed and
experienced directors.
No element of the Directors’ remuneration is performance related, nor does any Director have any entitlement to pensions, share
options or any long term incentive plans from the Company.
The Company’s Articles limit the fees payable to Directors in aggregate to US$400,000 per annum.
The Directors have received the following remuneration during the year in the form of Directors’ fees:
Per Annum
£
For the year from
1 January 2022
to 31 December 2022
Actual
£
For the year from
1 January 2021
to 31 December 2021
Actual
£
Professor Claudio Albanese (Chair of the Board
and Management Engagement Committee)
45,000 45,000 43,000
Jon Bridel (Chair of the Audit Committee and
the Nomination & Remuneration Committee)
45,000 45,000 43,000
Fionnuala Carvill (Risk Committee Chairman
and Nomination)
1
45,000 24,781 –
Nigel Ward (former Chair of the Risk Committee
and the Nomination & Remuneration Committee)
2
45,000 42,164 43,000
Total 180,000 156,945 129,000
For the year ended 31 December 2022, each Director is entitled to a fee of £45,000 per annum (31 December 2021: £43,000 per
annum). The remuneration policy set out above is the one applied for the years ended 31 December 2022 and 31 December 2021.
In December 2021, the Board agreed an increase in their remuneration and, with e?ect from 1 January 2022, each non-executive
Director is entitled to a basic fee of £45,000 per annum.
Directors’ and O?cers’ liability insurance cover is maintained by the Company on behalf of the Directors.
The Directors were appointed as non-executive Directors by letters issued on their respective appointments. Each Director’s
appointment letter provides that, upon the termination of their appointment, they must resign in writing. The Directors’ appointments
can be terminated in accordance with the Articles and without compensation. The notice period for the removal of Directors is
three months as speci?ed in the Director’s appointment letter. The Articles provide that the o?ce of director shall be terminated by,
among other things: (a) written resignation; (b) unauthorised absences from Board meetings for six months or more; (c) unanimous
written request of the other Directors; or (d) an ordinary resolution of the Company.
Under the terms of their appointment, each Director was subject to re-election at the ?rst Annual General Meeting (“AGM”) and
annually thereafter. At the Annual General Meeting of the Company on 14 June 2022, shareholders voted in favour of re-electing
all of the Directors. The Company may terminate the appointment of a Director immediately on serving written notice and no
compensation is payable upon termination of o?ce as a director of the Company becoming e?ective.
The amounts payable to Directors as at 31 December 2022 and 31 December 2021, shown in note 8 to the Financial Statements,
related to services as non-executive Directors.
No Director has a service contract with the Company, nor are any such contracts proposed.
Jon Bridel
Director
17 April 2023
GOVERNANCE
Directors’ Remuneration Report
1
Appointed to the Board and as Chair of the Risk Committee on 14 June 2022.
2
Resigned from the Board on 8 December 2022.
32
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
The Company has established an Audit Committee with formally delegated duties and responsibilities within written terms of
reference (which are available from the Company’s website).
Chairman and Membership
The Audit Committee is chaired by Jon Bridel, a Chartered Accountant. He and the other members who served during the year,
Nigel Ward and Fionnuala Carvill, are all independent Directors. Only independent Directors serve on the Audit Committee and
members of the Audit Committee have no links with the Company’s Auditor and are independent of the Investment Adviser. The
membership of the Audit Committee and its terms of reference are kept under review. The relevant quali?cations and experience
of each member of the Audit Committee is detailed on page 29 of these Financial Statements. The Audit Committee’s intention is
to meet at least three times a year in any full year and it meets the Auditor during those meetings.
Duties
The Audit Committee’s main role and responsibilities are to provide advice to the Board on whether the Annual Report and Audited
Financial Statements, taken as a whole, are fair, balanced and understandable and alongside the Interim Report and Unaudited
Condensed Financial Statements provide the information necessary for shareholders to assess the Company’s performance,
business model and strategy. The Audit Committee gives full consideration and recommendation to the Board for the approval of
the contents of the Interim and Annual Financial Statements of the Company, which includes reviewing the Auditor’s report.
The other principal duties include to consider the appointment of the Auditor, to discuss and agree with the Auditor the nature and
scope of the audit, to keep under review the scope, results and e?ectiveness of the audit and the independence and objectivity of
the Auditor, to review the Auditor’s letter of engagement, the Auditor’s planning report for the ?nancial year and management letter
and to analyse the key procedures adopted by the Company’s service providers.
The Audit Committee is responsible for monitoring the ?nancial reporting process and the e?ectiveness of the Company’s internal
control and risk management systems as they relate to the ?nancial reporting process. The Audit Committee also focuses
particularly on compliance with legal requirements, accounting standards and the relevant Listing Rules and ensuring that an
e?ective system of internal ?nancial and non-?nancial controls is maintained.
The Audit Committee also reviews, considers and, if thought appropriate, recommends for the purposes of the Company’s Financial
Statements valuations prepared by the Investment Adviser. These valuations are the most critical element in the Company’s
Financial Statements and the Audit Committee questions them carefully.
Financial Reporting and Signi?cant Risk
The Audit Committee has an active involvement and oversight in the preparation of both the Interim Report and Unaudited
Condensed Financial Statements and the Annual Report and Audited Financial Statements and in doing so is responsible for the
identi?cation and monitoring of the principal risks associated with the preparation of the Financial Statements. After discussion
with the Investment Adviser and KPMG Channel Islands Limited (“KPMG”), the Audit Committee determined that the key risk of
material misstatement of the Company’s Financial Statements related to the valuation of investments.
• Valuation of Master Fund III – The Company’s investment in the Master Fund III had a fair value of US$203,637,939 as at 31
December 2022 and represents substantially all the net assets of the Company and as such is the biggest factor in relation
to the accuracy of the Financial Statements. This investment is valued in accordance with the Accounting Policies set out in
note 2 to the Financial Statements. The Financial Statements of the Master Fund III for the year ended 31 December 2022
were audited by KPMG who issued an unmodi?ed audit opinion dated 17 April 2023. The Audit Committee has reviewed the
Audited Financial Statements of the Master Fund III and the accounting policies and determined the Company’s fair value of the
investment in the Master Fund III as at 31 December 2022 to be reasonable.
• Valuation of Master Fund II – The Company’s direct investment in the Master Fund II had a fair value of US$31,346,516 as at 31
December 2022 and represents a substantial portion of the net assets of the Company. This investment is valued in accordance
with the Accounting Policies set out in note 2 to the Financial Statements. The Financial Statements of the Master Fund II for the
year ended 31 December 2022 were audited by KPMG who issued an unmodi?ed audit opinion dated 17 April 2023. The Audit
Committee has reviewed the Audited Financial Statements of the Master Fund II and the accounting policies and determined
the Company’s fair value of the investment in the Master Fund II as at 31 December 2022 to be reasonable.
GOVERNANCE
Report of the Audit Committee
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
33
Financial Reporting and Audit
The Audit Committee reviews the Company’s accounting policies applied in the preparation of its Annual Financial Statements
together with the relevant critical judgements, estimates and assumptions and, upon taking the appropriate advice from the
Auditor, determined that these were in compliance with IFRS, as issued by the IASB and were reasonable. The Audit Committee
reviewed the materiality levels applied by the Auditor to the Financial Statements as a whole and was satis?ed that materiality levels
were appropriate. The Auditor reports to the Audit Committee all material corrected and uncorrected di?erences. The Auditor
explained the results of their audit and that on the basis of their audit work, there were no uncorrected di?erences proposed that
were material in the context of the Financial Statements as a whole.
The Audit Committee also reviews the Company’s ?nancial reports as a whole to ensure that such reports appropriately describe
the Company’s activities and to ensure that all statements contained in such reports are consistent with the Company’s ?nancial
results and projections. Accordingly, the Audit Committee was able to advise the Board that the Annual Report and Audited
Financial Statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the
Company’s performance, business model and strategy.
External Auditor
The Audit Committee has responsibility for making a recommendation on the appointment, re-appointment and removal of the
Auditor. KPMG was appointed as the ?rst Auditor of the Company in 2014. During the year, the Audit Committee received and
reviewed the audit plan and strategy from KPMG. It is standard practice for the Auditor to meet privately with the Audit Committee
without the Investment Adviser being present at each Audit Committee meeting.
To assess the e?ectiveness of the Auditor, the Audit Committee will review:
• The Auditor’s ful?lment of the agreed audit plan and variations from it;
• The Auditor’s assessment of its objectivity and independence as auditor of the Company;
• The Audit Committee Report from the Auditor highlighting the major issues that arose during the course of the audit; and
• Feedback from the Investment Adviser and Administrator evaluating the performance of the audit team.
Where non-audit services are to be provided to the Company by the Auditor, full consideration of the ?nancial and other implications
on the independence of the auditor arising from any such engagement will be considered before proceeding. All non-audit services
are pre-approved by the Audit Committee after it is satis?ed that relevant safeguards are in place to protect the auditors’ objectivity
and independence.
To ful?l its responsibility regarding the independence of the Auditors, the Audit Committee considered:
• a report from the Auditor describing its arrangements to identify, report and manage any con?icts of interest; and
• the extent of non-audit services provided by the Auditor.
During the year ended 31 December 2022, KPMG provided non-audit and audit services as listed on page 34. KPMG con?rmed
that the non-audit services provided during the year had not impacted their independence and outlined the reasons for this. These
non-audit services complied with permissible services under the Financial Reporting Council (“FRC”) Revised Ethical Standard
2019. The Audit Committee was satis?ed that these non-audit services had no bearing on the independence of the Auditor in the
prior year.
In addition, KPMG directors are subject to periodic rotation of assignments on audit clients under applicable laws, regulations and
independence rules. Their rotation policies comply with the FRC Revised Ethical Standard 2019 which states that the engagement
director should be rotated after serving in this capacity for the relevant period no longer than ?ve years. This rotation policy is
continually monitored, Steven Stormonth was ?rst appointed as the audit engagement director for the year ended 31 December
2019 audit.
GOVERNANCE
Report of the Audit Committee (continued)
34
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
External Auditor (continued)
The following table summarises the remuneration payable to KPMG and to other KPMG International member ?rms for audit and
non-audit services during the year ended 31 December 2022 and 31 December 2021, translated into the presentation currency
at the exchange rate prevailing at 31 December 2022 and 31 December 2021, respectively.
For the year ended
31 December 2022
US$
For the year ended
31 December 2021
US$
KPMG Channel Islands Limited
– Annual Audit of the Company and related entities 297,242 274,970
– Interim review 50,144 62,721
Other KPMG International member ?rms
– Reporting accountant services – 132,810
– Agreed upon procedures – Fair Oaks CLOs
1
19,139 41,408
Internal Controls
As the Company’s investment objective is to invest all of its assets into the Master Funds, the Audit Committee, after consultation
with the Investment Adviser and Auditor, considers the key risk of misstatement in its Financial Statements to be the valuation of
its investments in the Master Funds, but is also mindful of the risk of the override of controls by its two main service providers: the
Investment Adviser and the Administrator.
The Investment Adviser and the Administrator together maintain a system of internal control on which they report to the Board.
The Board has reviewed the need for an internal audit function and has decided that the systems and procedures employed by the
Investment Adviser and Administrator provide su?cient assurance that a sound system of risk management and internal control,
which safeguards shareholders’ investment and the Company’s assets, is maintained. An internal audit function speci?c to the
Company is therefore considered unnecessary.
The Audit Committee is responsible for reviewing and monitoring the e?ectiveness of the internal ?nancial control systems and risk
management systems on which the Company is reliant. These systems are designed to ensure proper accounting records are
maintained, that the ?nancial information on which the business decisions are made and which is issued for publication is reliable,
and that the assets of the Company are safeguarded. Such a system of internal ?nancial controls can only provide reasonable and
not absolute assurance against misstatement or loss.
In accordance with the guidance published in the ‘Turnbull Report’ by the FRC, the Audit Committee has reviewed the Company’s
internal control procedures. These internal controls are implemented by the Investment Adviser and the Administrator. The Audit
Committee has performed reviews of the internal ?nancial control systems and risk management systems during the year. The
Audit Committee is satis?ed with the internal ?nancial control systems of the Company.
On behalf of the Audit Committee
Jon Bridel
Audit Committee Chairman
17 April 2023
GOVERNANCE
Report of the Audit Committee (continued)
1
Fair Oaks CLOs as subsidiaries of the Master Fund II, are classi?ed as a?liates of the Company under the FRC Ethical Standards.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
35
The Company has established a Management Engagement Committee (“MEC”) with formally delegated duties and responsibilities
within the written terms of reference (which are available from the Company’s website www.fairoaksincome.com).
Chairman and Membership
The MEC meets at least once a year. It comprises the entire Board and is chaired by Professor Claudio Albanese. Professor
Albanese and the other members, Fionnuala Carvill and Jon Bridel, are all independent Directors. Only independent Directors
serve on the MEC and members of the MEC have no links with the Investment Adviser or any other service provider. The MEC is
responsible for the regular review of the terms of the Investment Advisory Agreement and the performance of the Administrator and
the Investment Adviser and also the Company’s other service providers. The membership of the MEC and its terms of reference
are kept under review.
Key Objectives
To review performance of all service providers (including the Investment Adviser).
Responsibilities
• To annually review the performance, relationships and contractual terms of all service providers (including the Investment
Adviser);
• reviewing the terms of the Investment Advisory Agreement from time to time to ensure that the terms thereof conform with
market and industry practice and remain in the best interests of Shareholders and making recommendations to the Board on
any variation to the terms of the Investment Advisory Agreement which it considers necessary or desirable;
• recommending to the Board whether the continuing appointment of the Advisor is in the best interests of the Company and
Shareholders, and the reasons for this recommendation;
• monitoring compliance by providers of other services to the Company with the terms of their respective agreements from time
to time;
• reviewing and considering the appointment and remuneration of providers of services to the Company; and
• considering any points of con?ict which may arise between the providers of services to the Company.
MEC Meetings
Only members of the MEC and the Company Secretary have the right to attend MEC meetings. However, representatives of the
General Partner, Investment Adviser and other service providers may be invited by the MEC to attend meetings as and when
appropriate.
Main Activities during the year
The MEC met once during the year and reviewed the performance, relationships and contractual terms of all service providers as
at 8 December 2022 including the Investment Adviser. Furthermore, the MEC reviewed the approaches to GDPR, Criminal Justice
Act, Anti-bribery, cyber security, ESG, discrimination and diversity & equality, amongst other matters, by its service providers.
Continued Appointment of the Investment Adviser and other Service Providers
The Board continually evaluates the Investment Adviser and other service providers, it reviews investment performance at each
Board meeting and a formal review of all service providers is conducted annually by the MEC. The annual third-party service provider
review process includes two-way feedback, which provides the Board with an opportunity to understand the views, experiences
and any signi?cant issues encountered by service providers during the year. As part of the Board’s annual performance evaluation,
feedback is received on the quality of service and the e?ectiveness of the working relationships with each of the Company’s key
service providers.
As a result of the 2022 annual review it is the opinion of the Directors that the continued appointment of the Investment Adviser
and the other current service providers on the terms agreed is in the interest of the Company’s shareholders as a whole. The
Board considers that the Investment Adviser has extensive investment management resources and wide experience in managing
CLOs investments and is satis?ed with the quality and competitiveness of the fee arrangements of the Investment Adviser and the
Company’s other service providers.
Professor Claudio Albanese
Management Engagement Committee Chairman
17 April 2023
GOVERNANCE
Management Engagement Committee Report
36
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Our opinion is unmodi?ed
We have audited the ?nancial statements of Fair Oaks Income Limited (the “Company”), which comprise the statement of ?nancial
position as at 31 December 2022, the statements of comprehensive income, changes in shareholder’s equity and cash ?ows for
the year then ended, and notes, comprising signi?cant accounting policies and other explanatory information.
In our opinion, the accompanying ?nancial statements:
• give a true and fair view of the ?nancial position of the Company as at 31 December 2022, and of the Company’s ?nancial
performance and cash ?ows for the year then ended;
• are prepared in accordance with International Financial Reporting Standards; and
• comply with the Companies (Guernsey) Law, 2008.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities are described below. We have ful?lled our ethical responsibilities under, and are independent of the Company in
accordance with, UK ethical requirements including the FRC Ethical Standard as required by the Crown Dependencies’ Audit
Rules and Guidance. We believe that the audit evidence we have obtained is a su?cient and appropriate basis for our opinion.
Key Audit Matters: our assessment of the risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most signi?cance in the audit of the ?nancial
statements and include the most signi?cant assessed risks of material misstatement (whether or not due to fraud) identi?ed by us,
including those which had the greatest e?ect on: the overall audit strategy; the allocation of resources in the audit; and directing the
e?orts of the engagement team. These matters were addressed in the context of our audit of the ?nancial statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion
above, the key audit matter was as follows (unchanged from 2021):
The risk Our response
Financial assets at fair
value through pro?t or loss
(“Investments”)
US$234.98 million; (2021 US$311.7
million)
Refer to pages 32 to 34 (Report
of the Audit Committee), note 2
(Signi?cant Accounting Policies),
note 3 (Use of Judgements and
Estimates) and note 6 (Financial
Assets at Fair Value Through Pro?t
or Loss)
Basis:
The Company holds investments in FOIF II LP
(“Master Fund II”) and FOMC III LP (“Master
Fund III”) (together the “Master Funds”) which
are held at fair value through pro?t or loss
and represents 89.5% of the Company’s net
assets.
The fair value of the Company’s investment
in the Master Funds re?ects the Company’s
proportionate share of the Master Funds’ net
asset value. Master Fund III’s net asset value
re?ects its proportionate share of Master Fund
II’s net asset value and its own investment
portfolio comprising Mezzanine Collateralised
Loan Obligation positions (“CLO’s”). Master
Fund II’s net asset value incorporates the fair
value of its own investment portfolio which
comprises: Mezzanine and Equity CLO’s and
a proportionate share of the net asset value of
Wollemi Investments I LP (“Wollemi”). Wollemi
is also invested principally into a portfolio of
Equity CLO positions.
Our audit procedures included:
Control evaluation:
We assessed the design and implementation of
the control over the valuation of the Company’s
Investments.
Evaluation of the Valuation Agent:
With the assistance of our KPMG valuation
specialist we:
• assessed the objectivity, capability and
competence of the Valuation Agent engaged
by the Master Funds and Wollemi to provide
Price Quotes; and
• assessed the methodology applied by the
Valuation Agent in developing fair value Price
Quotes.
Independent Auditor’s Report to the
Members of Fair Oaks Income Limited
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
37
Independent Auditor’s Report to the Members of
Fair Oaks Income Limited (continued)
The risk (continued) Our response (continued)
Basis (continued):
The fair value of 65% of the CLO’s held by the
Master Funds and Wollemi are determined
using indicative prices (“Price Quotes”)
obtained from their independent third party
valuation provider (the “Valuation Agent”). 35%
of the fair value of CLO’s held by the Master
Funds and Wollemi are determined using
internally generated models.
Risk:
The valuation of the Company’s Investments
is considered a signi?cant area of our audit,
given that it represents the majority of the
net assets of the Company. Inherent in that
valuation is the use of signi?cant estimates
and judgements in determining the fair value
of the underlying CLOs.
Our audit procedures included (continued):
Valuation procedures, including use of
KPMG valuation specialist:
• For the investments valued using the
proportionate share of net asset value we:
– assessed whether the net asset values were
representative of their fair values;
– recalculated the proportionate share of the
net asset values;
– agreed the fair value to a net asset value
statement received from that fund’s
administrator;
– obtained the coterminous audited ?nancial
statements and agreed the audited net asset
value to the net asset value statement; and
– considered the basis of preparation of the
audited ?nancial statements, together with
accounting policies applied and whether the
audit opinion was unmodi?ed.
• We independently obtained the Valuation
Agent’s pricing reports and agreed the Price
Quotes provided by the Valuation Agent to
those used in the Valuation of the CLOs held
by the Master Funds and Wollemi.
• For 98.9% of the CLO positions held by the
Master Funds and Wollemi, with the support of
our KPMG valuation specialist, we determined
independent reference prices through the use
of fundamental cash ?ow modelling sourcing
key inputs and assumptions used, such as
default rates, prepayment rates and recovery
rates from observable market data and agreed
the outcome to the prices used in the valuation
of these CLOs.
Assessing disclosures:
We also considered the Company’s disclosures
in relation to use of estimates and judgements in
determining the fair value of Investments (Note
3), the Company’s Investment valuation policies
(Note 2) and fair value disclosures (Note 6) for
compliance with IFRS.
Key Audit Matters: our assessment of the risks of material misstatement (continued)
38
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Our application of materiality and an overview of the scope of our audit
Materiality for the ?nancial statements as a whole was set at $5.5 million, determined with reference to a benchmark of net assets
of $262,345,289, of which it represents approximately 2% (2021: 2%).
In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower
threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in
individual account balances add up to a material amount across the ?nancial statements as a whole. Performance materiality for
the Company was set at 75% (2021: 75%) of materiality for the ?nancial statements as a whole, which equates to $4.1 million.
We applied this percentage in our determination of performance materiality because we did not identify any factors indicating an
elevated level of risk.
We reported to the Audit Committee any corrected or uncorrected identi?ed misstatements exceeding $275,000, in addition to
other identi?ed misstatements that warranted reporting on qualitative grounds.
Our audit of the Company was undertaken to the materiality level speci?ed above, which has informed our identi?cation of
signi?cant risks of material misstatement and the associated audit procedures performed in those areas as detailed above.
Going concern
The directors have prepared the ?nancial statements on the going concern basis as they do not intend to liquidate the Company
or to cease its operations, and as they have concluded that the Company’s ?nancial position means that this is realistic. They have
also concluded that there are no material uncertainties that could have cast signi?cant doubt over its ability to continue as a going
concern for at least a year from the date of approval of the?nancial statements (the “going concern period”).
In our evaluation of the directors’ conclusions, we considered the inherent risks to the Company’s business model and analysed
how those risks might a?ect the Company’s ?nancial resources or ability to continue operations over the going concern period.
The risks that we considered most likely to a?ect the Company’s ?nancial resources or ability to continue operations over this
period were:
• Availability of capital to meet operating costs and other ?nancial commitments; and
• The recoverability of ?nancial assets subject to credit risk.
We considered whether these risks could plausibly a?ect the liquidity in the going concern period by comparing severe, but
plausible downside scenarios that could arise from these risks individually and collectively against the level of available ?nancial
resources indicated by the Company’s ?nancial forecasts.
We considered whether the going concern disclosure in note 2 to the ?nancial statements gives a full and accurate description of
the directors’ assessment of going concern.
Our conclusions based on this work:
• we consider that the directors’ use of the going concern basis of accounting in the preparation of the ?nancial statements is
appropriate;
• we have not identi?ed, and concur with the directors’ assessment that there is not, a material uncertainty related to events or
conditions that, individually or collectively, may cast signi?cant doubt on the Company’s ability to continue as a going concern
for the going concern period; and
• we found the going concern disclosure in the notes to the ?nancial statements to be acceptable.
However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are
inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that
the Company will continue in operation.
Independent Auditor’s Report to the Members of
Fair Oaks Income Limited (continued)
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
39
Fraud and breaches of laws and regulations – ability to detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an
incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:
• enquiring of management as to the Company’s policies and procedures to prevent and detect fraud as well as enquiring
whether management have knowledge of any actual, suspected or alleged fraud;
• reading minutes of meetings of those charged with governance; and
• using analytical procedures to identify any unusual or unexpected relationships.
As required by auditing standards, we perform procedures to address the risk of management override of controls, in particular
the risk that management may be in a position to make inappropriate accounting entries. On this audit we do not believe there is a
fraud risk related to revenue recognition because the Company’s revenue streams are simple in nature with respect to accounting
policy choice, and are easily veri?able to external data sources or agreements with little or no requirement for estimation from
management. We did not identify any additional fraud risks.
We performed procedures including
• Identifying journal entries and other adjustments to test based on risk criteria and comparing any identi?ed entries to supporting
documentation; and
• incorporating an element of unpredictability in our audit procedures.
Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations
We identi?ed areas of laws and regulations that could reasonably be expected to have a material e?ect on the ?nancial statements
from our sector experience and through discussion with management (as required by auditing standards), and from inspection
of the Company’s regulatory and legal correspondence, if any, and discussed with management the policies and procedures
regarding compliance with laws and regulations. As the Company is regulated, our assessment of risks involved gaining an
understanding of the control environment including the entity’s procedures for complying with regulatory requirements.
The Company is subject to laws and regulations that directly a?ect the ?nancial statements including ?nancial reporting legislation
and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on
the related ?nancial statement items.
The Company is subject to other laws and regulations where the consequences of non-compliance could have a material
e?ect on amounts or disclosures in the ?nancial statements, for instance through the imposition of ?nes or litigation or impacts
on the Company’s ability to operate. We identi?ed ?nancial services regulation as being the area most likely to have such an
e?ect, recognising the regulated nature of the Company’s activities and its legal form. Auditing standards limit the required audit
procedures to identify non-compliance with these laws and regulations to enquiry of management and inspection of regulatory
and legal correspondence, if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant
correspondence, an audit will not detect that breach.
Context of the ability of the audit to detect fraud or breaches of law or regulation
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements
in the ?nancial statements, even though we have properly planned and performed our audit in accordance with auditing standards.
For example, the further removed non-compliance with laws and regulations is from the events and transactions re?ected in the
?nancial statements, the less likely the inherently limited procedures required by auditing standards would identify it.
In addition, as with any audit, there remains a higher risk of non-detection of fraud, as this may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material
misstatement. We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance
with all laws and regulations.
Independent Auditor’s Report to the Members of
Fair Oaks Income Limited (continued)
40
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Independent Auditor’s Report to the Members of
Fair Oaks Income Limited (continued)
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual
report but does not include the ?nancial statements and our auditor’s report thereon. Our opinion on the ?nancial statements does
not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.
In connection with our audit of the ?nancial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the ?nancial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
We have nothing to report on other matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to
you if, in our opinion:
• the Company has not kept proper accounting records; or
• the ?nancial statements are not in agreement with the accounting records; or
• we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the
purpose of our audit.
Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 30, the directors are responsible for: the preparation of the ?nancial
statements including being satis?ed that they give a true and fair view; such internal control as they determine is necessary to
enable the preparation of ?nancial statements that are free from material misstatement, whether due to fraud or error; assessing
the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the
going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the ?nancial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate,
they could reasonably be expected to in?uence the economic decisions of users taken on the basis of the ?nancial statements.
A fuller description of our responsibilities is provided on the FRC’s website at wwwhttps://protect.mimecast-offshore.com/s/aH-yCl5gQ5FkWVRLcvGEp-?domain=frc.org.ukesponsibilities.
The purpose of this report and restrictions on its use by persons other than the Company’s members, as a body
This report is made solely to the Company’s members, as a body, in accordance with section 262 of the Companies (Guernsey)
Law, 2008. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or
for the opinions we have formed.
Steven Stormonth
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors
Guernsey
17 April 2023
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
41
FINANCIAL REPORT
Statement of Comprehensive Income
For the year ended 31 December 2022
1 January 2022
to 31 December 2022
1 January 2021
to 31 December 2021
Note US$ US$
Revenue
Net gains on ?nancial assets at fair value
through pro?t or loss
6 133,228 65,240,126
Interest income 7 235,886 –
Net foreign exchange (losses)/gains (54,217) 14,843
Total revenue 314,897 65,254,969
Expenses
Investment advisory fees 8 139,855 3,820
Audit and interim review fees 176,904 117,092
Administration fees 8 127,533 116,934
Directors’ fees and expenses 8 209,522 199,437
Broker fees 136,122 130,015
Registrar fees 73,481 84,735
Listing fees 17,656 15,545
Legal and professional fees 19,008 4,261
Other expenses 102,081 115,672
Total expenses 1,002,162 787,511
(Loss)/pro?t and total comprehensive
(loss)/income for the year
(687,265) 64,467,458
Basic and diluted (losses)/earnings
per 2021 Share
11
(0.0016) 0.1377
Basic and diluted (losses)/earnings
per Realisation Share
11
(0.0005) 0.1385
All items in the above statement are derived from continuing operations.
The accompanying notes on pages 45 to 74 form an integral part of the Financial Statements.
42
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FINANCIAL REPORT
Statement of Changes in Shareholders’ Equity
For the year ended 31 December 2022
The accompanying notes on pages 45 to 74 form an integral part of the Financial Statements.
Share
capital
(Realisation
Shares)
Share
capital
(2021
Shares)
Retained
earnings
(Realisation
Shares)
Retained
earnings
(2021
Shares)
Total
equity
Note US$ US$ US$ US$ US$
At 1 January 2022 59,251,697 384,339,570 (17,464,727) (113,601,494) 312,525,046
Total comprehensive income:
Loss for the year – – (28,714) (658,551) (687,265)
Total comprehensive income
for the year
– – (28,717) (658,551) (687,265)
Transactions with Shareholders:
Dividends declared during
the year
4 – – (5,803,857) (38,497,928) (44,301,785)
Realisation Share redemptions
paid during the year
10 (3,999,990) – – – (3,999,990)
Share buy-backs
10 – (1,190,717) – – (1,190,717)
Total transactions with
Shareholders
(3,999,990) (1,190,717) (5,803,857) (38,497,928) (49,492,492)
At 31 December 2022 55,251,707 383,148,853 (23,297,298) (152,757,973) 262,345,289
Share
capital
(Realisation
Shares)
Share
capital
(2021
Shares)
Retained
earnings
(Realisation
Shares)
Retained
earnings
(2021
Shares)
Total
equity
Note US$ US$ US$ US$ US$
At 1 January 2021 444,922,074 – (149,952,728) – 294,969,346
Total comprehensive income:
Pro?t for the year – – 8,665,218 55,802,240 64,467,458
Total comprehensive income
for the year
– – 8,665,218 55,802,240 64,467,458
Transactions with Shareholders:
Redesignation of 2017 shares
into 2021 Shares during the
year, net of issue costs
10 (385,670,377) 384,339,570 – – (1,330,807)
Transfer brought forward
retained earnings from 2017
Shares to 2021 Shares
10 – – 129,923,035 (129,923,035) –
Dividends declared during
the year
4 – – (6,100,252) (39,480,699) (45,580,951)
Total transactions with
Shareholders
(385,670,377) 384,339,570 123,822,783 (169,403,734) (46,911,758)
At 31 December 2021 59,251,697 384,339,570 (17,464,727) (113,601,494) 312,525,046
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
43
FINANCIAL REPORT
Statement of Financial Position
At 31 December 2022
31 December 2022 31 December 2021
Note US$ US$
Assets
Cash and cash equivalents 27,838,142 1,294,271
Other receivables and prepayments 117,989 97,627
Financial assets at fair value through pro?t or loss 6 234,984,455 311,699,203
Total assets 262,940,586 313,091,101
Liabilities
Distributions received in advance 482,752 458,709
Trade and other payables 112,545 107,346
Total liabilities 595,297 566,055
Net assets
262,345,289 312,525,046
Equity
Retained earnings (176,055,271) (131,066,221)
Share capital 10 438,400,560 443,591,267
Total equity 262,345,289 312,525,046
Net Assets attributable to 2021 Shareholders 230,390,880 270,738,076
Number of 2021 Shares
10
402,709,500 405,165,477
Net asset value per 2021 Share 0.5721 0.6682
Net Assets attributable to Realisation Shareholders 31,954,409 41,786,970
Number of Realisation Shares
10
55,578,441 62,562,883
Net asset value per Realisation Share 0.5749 0.6679
The Financial Statements on pages 41 to 74 were approved and authorised for issue by the Board of Directors on 17 April 2023
and signed on its behalf by:
Jon Bridel
Director
The accompanying notes on pages 45 to 74 form an integral part of the Financial Statements.
44
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FINANCIAL REPORT
Statement of Cash Flows
For the year ended 31 December 2022
1 January 2022
to 31 December 2022
1 January 2021
to 31 December 2021
Note US$ US$
Cash ?ows from/(used in) operating activities
(Loss)/pro?t for the year (687,265) 64,467,458
Adjustments to reconcile (loss)/pro?t to net cash ?ows:
Net gains on ?nancial assets at fair value
through pro?t or loss
6 (133,228) (65,240,126)
Net foreign exchange losses/(gains) 54,217 (14,843)
(766,276) (787,511)
Increase in other receivables and prepayments (20,362) (68,827)
Increase in trade and other payables 5,199 22,986
Income distributions received from Master Fund II 6 7,560,302 15,876,074
Income distributions received from Master Fund III 6 48,658,678 30,750,828
Capital distributions received from Master Fund II 6 20,653,039 –
Net cash ?ow from operating activities 76,090,580 45,793,550
Cash ?ows used in ?nancing activities
Realisation Share redemptions paid 10 (3,999,990) –
Share buy-backs 10 (1,190,717) –
Costs of redesignation of 2017 Shares into 2021 Shares
and Realisation Shares
10 – (1,330,807)
Dividends paid 4 (44,301,785) (45,580,951)
Net cash ?ow used in ?nancing activities (49,492,492) (46,911,758)
Net increase/(decrease) in cash and cash equivalents 26,598,088 (1,118,208)
Cash and cash equivalents at beginning of year 1,294,271 2,397,636
E?ect of foreign exchange rate changes during the year (54,217) 14,843
Cash and cash equivalents at end of year 27,838,142 1,294,271
The accompanying notes on pages 45 to 74 form an integral part of the Financial Statements.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
45
1. GENERAL INFORMATION
Fair Oaks Income Limited (the “Company”) was registered in Guernsey under the Companies (Guernsey) Law, 2008 on 7 March
2014. The Company’s registration number is 58123 and it is regulated by the Guernsey Financial Services Commission as a
registered closed-ended collective investment scheme under The Registered Collective Investment Scheme Rules 2021. The
Company is listed and began trading on the Specialist Fund Segment (“SFS”) of the London Stock Exchange on 12 June 2014.
Reorganisation
On 19 April 2021, the Company announced the result of its reorganisation proposal, being that 62,562,883 2017 Shares had
been elected for re-designation as Realisation Shares (the “Realisation Shares”), representing 13.4% of the 2017 Shares in
issue, and 405,815,477 2017 Shares were re-designated as 2021 Shares (the “2021 Shares”), representing the balance of
86.6% of the 2017 Shares in issue (including 650,000 shares held in Treasury). The Company makes its investments through
FOIF II LP (the “Master Fund II”) and FOMC III LP (the “Master Fund III”), in both of which the Company is a limited partner
(the “Master Fund II” and the “Master Fund III” together the “Master Funds”). The Master Fund II was registered in Guernsey
on 24 February 2017 and the Master Fund III was registered in Guernsey on 10 March 2021 under The Limited Partnerships
(Guernsey) Law, 1995. The purpose of the reorganisation was to allow those Shareholders who wished to extend the life of
their investment in the Company beyond the planned end date of the Master Fund II, to be able to do so by having their 2017
Shares re-designated as 2021 Shares, with such 2021 Shares investing in the new Master Fund III, which has a planned end
date of 12 June 2028 and an investment objective and policy substantially similar to that of the Master Fund II.
At 31 December 2022, the Company has 55,578,441 Realisation Shares (31 December 2021: 62,562,883) and 402,709,500
2021 Shares (31 December 2021: 405,165,477) in issue. The Realisation Shares invest solely into the Master Fund II and the
2021 Shares invest solely into the Master Fund III. At 31 December 2022, the Company had direct holdings of 9.59% (31
December 2021: 9.59%) in the Master Fund II and 95.32% (31 December 2021: 100%) holding in Master Fund III, which in
turn had a holding of 62.21% (31 December 2021: 62.21%) in the Master Fund II. Together, the Company held a direct and
indirect holding of 68.89% (31 December 2021: 71.80%) in the Master Fund II.
The Master Funds
At 31 December 2022, the Master Fund II had six limited partners, including Fair Oaks Founder II LP, a related entity. During
the year ended 31 December 2022, the Master Fund III allowed one new limited partner to enter the partnership and at 31
December 2022, the Master Fund III had three limited partners, including Fair Oaks Founder VI LP. The General Partner of the
Master Fund II and Master Fund III is Fair Oaks Income Fund (GP) Limited (the “General Partner” or “GP”).
Cycad and Wollemi
The Master Fund II is also invested into Cycad Investments LP (“Cycad”). Cycad is a Limited Partnership registered in
the United States of America on 2 June 2017. Aligned with the Company’s investment policy, Cycad also invests into
Collateralised Loan Obligations (“CLOs”). On 9 March 2021, a new Guernsey limited partnership was established called
Wollemi Investments I LP (“Wollemi”). On 23 March 2021, the Master Fund II transferred its investment in Cycad to Wollemi
in exchange for limited partnership interests in Wollemi. In addition, since 2021, the Master Fund II also transferred its
investments in FOAKS 1X CLO, FOAKS 2X CLO, FOAKS 3X CLO and FOAKS 4X CLO (the “Fair Oaks CLOs”) to Wollemi
in exchange for limited partnership interests in Wollemi. At 31 December 2022, the Master Fund II holds 100.00% (31
December 2021: 100%) of the commitment capital of Wollemi.
Founder Partners
Fair Oaks Founder II LP, a Guernsey limited partnership, has been established to act as the Founder Limited Partner of Master
Fund II. Fair Oaks Founder VI LP, a Guernsey limited partnership, has been established to act as the Founder Limited Partner
of Master Fund III.
General Partner
The General Partner of the Master Fund II, Master Fund III, Cycad and Wollemi is Fair Oaks Income Fund (GP) Limited (the
“General Partner” or “GP”). The Master Funds’ invest in portfolios consisting primarily of CLOs. The Company may also invest
in Qualifying Short Term Investments if at any time the Company holds any uninvested cash.
With e?ect from 15 May 2014, Fair Oaks Capital Limited (the “Investment Adviser”) was appointed as the Investment Adviser.
FINANCIAL REPORT
Notes to the Financial Statements
For the year ended 31 December 2022
46
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
2. SIGNIFICANT ACCOUNTING POLICIES
Statement of Compliance
The Financial Statements, which give a true and fair view, have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and interpretations issued
by the International Financial Reporting Interpretations Committee (“IFRIC”) and are in compliance with the Companies
(Guernsey) Law, 2008 and the Prospectus Rules, the Disclosure Guidance and Transparency Rules and the Market Abuse
Directive (as implemented in the UK through the Financial Services and Markets Authority).
Basis of Preparation
The Company’s Financial Statements have been prepared on a historical cost convention, except for ?nancial assets
measured at fair value through pro?t or loss.
The preparation of Financial Statements in conformity with IFRS requires the Company to make estimates and assumptions
that a?ect the reported amounts of assets and liabilities at the date of the Financial Statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could di?er from those estimates. Signi?cant estimates
and judgements are discussed in note 3. The principal accounting policies adopted are set out below.
The Directors believe that the Annual Report and Financial Statements contain all of the information required to enable
shareholders and potential investors to make an informed appraisal of the investment activities and pro?t or loss of the
Company for the period to which it relates and does not omit any matter or development of signi?cance.
As explained below, the Company quali?es as an investment entity and is therefore not permitted to prepare consolidated
Financial Statements under IFRS.
Going Concern
The Directors have assessed the ?nancial position of the Company as at 31 December 2022 and the factors that may impact
its performance (including the potential impact on markets and supply chains of geo-political risks such as the current crisis
in Ukraine, continuing macro-economic factors and in?ation) in the forthcoming year.
Russia/Ukraine crisis
The Master Funds’ CLO investments do not hold any securities in the Russia/Ukraine region and as such the performance
or creditworthiness of the underlying CLOs have not been signi?cantly impacted. Commodity prices due to the invasion of
Ukraine (mainly oil/gas, metals and wheat) have impacted some of the companies to which the CLOs have loans but many
companies were already subject to input price in?ation before the Ukraine invasion and it is not expected that the additional
cost in?ation will signi?cantly impacted the performance of the CLOs. The Directors with the Company’s Investment Adviser,
continue to closely monitor the situation and the resulting disruption to supply chains, particularly with regard to energy
prices.
The Investment Adviser continues to carefully monitor the performance of the Master Funds’ investments, working closely
with the Directors on current and emerging risks to the Company.
Following due consideration and after a review of the Company’s holdings in cash and cash equivalents, investments and
a consideration of the income deriving from, and the viability of, the investments in the Master Funds, the Directors believe
that it is appropriate to adopt the going concern basis in preparing the Financial Statements, as the Company has adequate
?nancial resources to meet its liabilities as they fall due for at least the 12 month period from the date of the approval of the
Financial Statements.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
47
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Standards and interpretations adopted in the reporting period
The following standard and interpretation has been applied in these Financial Statements:
• IAS 37 (amended), “Provisions, Contingent Liabilities and Contingent Assets” (amendments regarding the costs to
include when assessing whether a contract is onerous, e?ective for accounting periods commencing on or after 1
January 2022).
The adoption of this amended standard has not had a material impact on the Financial Statements of the Company.
New Accounting Standards and interpretations applicable to future reporting periods
Certain new accounting standards, amendments to accounting standards and interpretations have been published that are
not mandatory for 31 December 2022 reporting periods and have not been early adopted by the Company. These standards,
amendments or interpretations are not expected to have a material impact on the entity in the current or future reporting
periods and on foreseeable future transactions.
Interest income
Interest income comprises interest income from cash and cash equivalents. Interest income is recognised on a time-
proportionate basis using the e?ective interest method.
Net gains on Financial Assets at Fair Value through Pro?t or Loss
Net gains on ?nancial assets at fair value through pro?t or loss includes all realised and unrealised fair value changes, foreign
exchange gains/(losses) and income and capital distributions received.
Net realised (losses)/gains from ?nancial assets at fair value through pro?t or loss are calculated using the average cost
method.
Expenses
Expenses of the Company are charged through pro?t or loss in the Statement of Comprehensive Income on an accruals
basis.
2021 Shares, Realisation Shares, 2017 Shares and C Shares
The 2021 shares, Realisation shares, 2017 Shares (when in issue) and C shares (when in issue) of the Company are classi?ed
as equity based on the substance of the contractual arrangements and in accordance with the de?nition of equity instruments
under IAS 32.
The proceeds from the issue of participating shares are recognised in the Statement of Changes in Shareholders’ Equity, net
of incremental issuance costs.
Financial Instruments
? Financial?assets?–?classi?cation
The Company classi?es its ?nancial assets and ?nancial liabilities into categories in accordance with IFRS 9.
On initial recognition, the Company classi?es ?nancial assets as measured at amortised cost or at fair value through pro?t or
loss (“FVTPL”).
A ?nancial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:
– it is held within a business model whose objective is to hold assets to collect contractual cash ?ows; and
– its contractual terms give rise on speci?ed dates to cash ?ows that are solely payments of principal and interest (“SPPI”).
All other ?nancial assets of the Company are measured at FVTPL.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
48
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial Instruments (continued)
? Financial?assets?–?classi?cation (continued)
In making an assessment of the objective of the business model in which a ?nancial asset is held, the Company considers all
of the relevant information about how the business is managed.
The Company has determined that it has two business models.
– Held-to-collect business model: this includes cash and cash equivalents, prepayments and distributions receivable.
These ?nancial assets are held to collect contractual cash ?ow.
– Other business model: this includes investments in the Master Funds and derivatives. These ?nancial assets are managed
and their performance is evaluated, on a fair value basis, with frequent sales taking place.
The Investment entities exception to consolidation (“Investment entities exception”) in IFRS 10 ‘Consolidated Financial
Statements’ (“IFRS 10”) requires subsidiaries of an investment entity to be accounted for at fair value through pro?t or loss in
accordance with IFRS 9 ‘Financial Instruments’ (“IFRS 9”).
Cash comprises current deposits with banks. Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash, are subject to an insigni?cant risk of changes in value, and are held for the purpose
of meeting short-term cash commitments rather than for investments or other purposes.
A non-derivative ?nancial asset with ?xed or determinable payments could be classi?ed as a loan and receivable unless it was
quoted in an active market or was an asset for which the holder may not recover substantially all of its initial investment, other
than because of credit deterioration.
? Financial?liabilities?–?Classi?cation,?subsequent?measurement?and?gains?and?losses
Financial liabilities are classi?ed as measured at amortised cost or FVTPL.
A ?nancial liability is classi?ed as at FVTPL if it is classi?ed as held-for-trading, it is a derivative or it is designated as such
on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest
expense, are recognised in pro?t or loss.
Other ?nancial liabilities are subsequently measured at amortised cost using the e?ective interest method. Interest expense
and foreign exchange gains and losses are recognised in pro?t or loss. Any gain or loss on derecognition is also recognised
in pro?t or loss.
Financial liabilities at amortised cost:
This includes trade and other payables and distributions received in advance.
? Financial?Assets?and?Liabilities?-?recognition,?measurement?and?gains?and?losses
Recognition and initial measurement
Financial assets and ?nancial liabilities are measured initially at fair value, being the transaction price, including transaction
costs for items that will subsequently be measured at amortised cost, on the trade date. Transaction costs on ?nancial assets
at fair value through pro?t or loss are expensed immediately.
? Subsequent?measurement
After initial measurement, the Company measures ?nancial instruments classi?ed at fair value through pro?t or loss at their
fair values. Changes in fair value are recognised in “Net gains/(losses) on ?nancial assets at fair value through pro?t or loss”
in the Statement of Comprehensive Income.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
49
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial Instruments (continued)
Derecognition
A ?nancial asset is derecognised when the contractual rights to the cash ?ows from the ?nancial asset expire or it transfers
the ?nancial asset and the transfer quali?es for derecognition in accordance with IFRS 9. A ?nancial liability is derecognised
when the obligation speci?ed in the contract is discharged, cancelled or expires.
Investments in the Master Fund III and the Master Fund II
The Board of Directors (the “Board”) has determined that the Company has all the elements of control as prescribed by IFRS
10 in relation to the Master Fund III, and then indirectly the Master Fund II, as the Company is the main limited partner in
the Master Fund III and indirectly (via its investment in the Master Fund III) is the main limited partner in the Master Fund II,
is exposed and has rights to the returns of the Master Fund III (and indirectly in the Master Fund II) and has the ability either
directly, or through the Investment Adviser, to a?ect the amount of its returns from the Master Fund III (and indirectly in the
Master Fund II).
The Investment entities exemption requires that an investment entity that has determined that it is a parent under IFRS 10
shall not consolidate certain of its subsidiaries; instead it is required to measure its investment in these subsidiaries at fair
value through pro?t or loss in accordance with IFRS 9.
The criteria which de?nes an investment entity are as follows:
– An entity has obtained funds from one or more investors for the purpose of providing those investors with investment
management services;
– An entity has committed to its investors that its business purpose is to invest funds solely for the returns from capital
appreciation, investment income or both; and
– An entity measures and evaluates the performance of substantially all of its investments on a fair value basis.
The Company provides investment management services and has a number of investors who pool their funds to gain access
to these services and investment opportunities that they might not have had access to individually. The Company, being listed
on the SFS of the London Stock Exchange, obtains funding from a diverse group of external shareholders.
Consideration is also given to the time frame of an investment. An investment entity should not hold its investments inde?nitely
but should have an exit strategy for their realisation. As both the Master Fund III’s and Master Fund II’s investments have
documented maturity/redemption dates or will be sold if other investments with better risk/reward pro?le are identi?ed, the
Board of Directors consider that this demonstrates a clear exit strategy.
The Master Fund III and Master Fund II measure and evaluate the performance of substantially all of their investments on a
fair value basis. The fair value method is used to represent the Company’s performance in its communication to the market,
including investor presentations. In addition, the Company reports fair value information internally to the Board of Directors,
who use fair value as a signi?cant measurement attribute to evaluate the performance of its investments and to make
investment decisions for mature investments.
The Company has determined that the fair value of the Master Fund III is the Master Fund III’s Net Asset Value (“NAV”), and
incorporated into the Master Fund III’s NAV is the Master Fund II NAV. The Company also determined that the fair value of the
Master Fund II is the Master Fund II’s NAV.
The Company, via its investments in the Master Funds, is also invested into Wollemi and Cycad. The Company has determined
that the fair value of the Wollemi is the Wollemi’s Net Asset Value (“NAV”), and incorporated into the Wollemi’s NAV is the
Cycad NAV.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
50
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments in the Master Fund III and the Master Fund II (continued)
The Company has concluded that the Master Fund III, and then indirectly the Master Fund II, for which the Company’s
commitment is detailed further in Note 13, meet the de?nition of unconsolidated subsidiaries under IFRS 12 ‘Disclosure
of Interests in Other Entities’ (“IFRS 12”) and have made the necessary disclosures in notes 5 and 6 of these Financial
Statements.
Foreign Currency
Functional and presentation currency
The Board of Directors has determined that the functional currency of the Company is US Dollar. In doing so, they have
considered the following factors: that US Dollar is the currency of the primary economic environment of the Company, the
currency in which the original ?nance was raised and distributions will be made, the currency that would be returned if the
Company was wound up, and the currency to which the majority of the underlying investments are exposed. The Financial
Statements of the Company are presented in US Dollars, which has been selected as the presentation currency of the
Company.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates
of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the
translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in
the Statement of Comprehensive Income.
Non-monetary items measured at historical cost are translated using the exchange rates at the date of the transaction (not
retranslated). Non-monetary items measured at fair value are translated using the exchange rates at the reporting date when
fair value was determined.
Dividends
Dividends payable to the holders of 2021 Shares and Realisation Shares are recorded through the Statement of Changes in
Shareholders’ Equity when they are declared to the respective shareholders. The payment of any dividend by the Company
is subject to the satisfaction of a solvency test as required by the Companies (Guernsey) Law, 2008.
Segmental Reporting
The Board has considered the requirements of IFRS 8 – “Operating Segments”. The Company has entered into an Investment
Advisory Agreement with the Investment Adviser under which the Investment Adviser is responsible for the management
of the Company’s investment portfolio, subject to the overall supervision of the Board of Directors. Subject to its terms
and conditions, the Investment Advisory Agreement requires the Investment Adviser to manage the Company’s investment
portfolio in accordance with the Company’s investment guidelines as in e?ect from time to time, including the authority
to purchase and sell securities and other investments and to carry out other actions as appropriate to give e?ect thereto.
However, the Board retains full responsibility to ensure that the Investment Adviser adheres to its mandate. Moreover, the
Board is fully responsible for the appointment and/or removal of the Investment Adviser. Accordingly, the Board is deemed to
be the “Chief Operating Decision Maker” of the Company.
In the Board of Directors’ opinion, the Company is engaged in a single segment of business, being investments into the
Master Fund II and the Master Fund III, which are Guernsey registered limited partnerships.
Segment information is measured on the same basis as that used in the preparation of the Company’s Financial Statements.
The Company receives no revenues from external customers, nor holds any non-current assets, in any geographical area
other than Guernsey.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
51
3. USE OF JUDGEMENTS AND ESTIMATES
The preparation of Financial Statements in accordance with IFRS requires the Board of Directors to make judgements,
estimates and assumptions that a?ect the application of policies and the reported amounts of assets, liabilities, income and
expenses, disclosure of contingent assets and liabilities at the date of the Financial Statements and income and expenses
during the year. The estimates and associated assumptions are based on various factors that are believed to be reasonable
under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may di?er 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 a?ects only that period, or in the period of the revision
and future periods if the revision a?ects both current and future periods.
The principal estimates and judgements made by the Board are as follows:
Judgements
Investment Entity
In accordance with the Investment Entities exemption contained in IFRS 10, the Board has determined that the Company
satis?es the criteria to be regarded as an investment entity and as a result measures its investments in the Master Fund III and
Master Fund II at fair value. This determination involves a degree of judgement (see note 2).
Estimates
Fair Value
The Company records its investments in the Master Fund III and the Master Fund II at fair value. Fair value is determined as
the Company’s share of the NAV of the investment. This share is net of any notional carried interest due to Fair Oaks Founder
VI LP (the “Founder Partner VI”), the Founder Partner of Master Fund III and Fair Oaks Founder II LP (the “Founder Partner
II”), the Founder Partner of Master Fund II. The Investment Adviser has reviewed the NAV of the investment and determined
that no adjustments regarding liquidity discounts were required.
4. DIVIDENDS
The Company’s policy is to declare dividends to 2021 and Realisation shareholders as follows:
2021 Shares
The Board intends to pay quarterly dividends to holders of 2021 Shares representing an amount in aggregate at least equal
to the gross income received by the Company from investments in the relevant ?nancial year that are attributable to the 2021
Shares’ interest in Master Fund III and qualifying short term investments, less a proportionate share of the expenses of the
Company.
Realisation Shares
The Company intends to pay dividends to holders of Realisation Shares representing an amount in aggregate at least equal
to the gross income from investments received by the Company in the relevant ?nancial period attributable to the Realisation
Shares’ interest in Master Fund II and qualifying short term Investments, less expenses of the Company.
The Company declared the following dividends per 2021 Share during the year ended 31 December 2022:
Period to Payment date
Dividend
rate per
2021 Share
(cents)
Net
dividend
payable
(US$) Record date Ex-dividend date
31 December 2021 18 March 2022 2.50 10,059,716 18 February 2022 17 February 2022
31 March 2022 25 July 2022 2.50 10,103,277 24 June 2022 23 June 2022
30 June 2022 15 September 2022 2.50 10,112,955 19 August 2022 18 August 2022
30 September 2022 9 December 2022 2.00 8,221,980 11 November 2022 10 November 2022
9.50 38,497,928
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
52
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
4. DIVIDENDS (continued)
The Company declared the following dividends per Realisation Share during the year ended 31 December 2022:
Period to Payment date
Dividend
rate per
Realisation
Share
(cents)
Net
dividend
payable
(US$) Record date Ex-dividend date
31 December 2021 18 March 2022 2.50 1,564,070 18 February 2022 17 February 2022
31 March 2022 25 July 2022 2.50 1,564,221 24 June 2022 23 June 2022
30 June 2022 15 September 2022 2.50 1,563,990 19 August 2022 18 August 2022
30 September 2022 9 December 2022 2.00 1,111,576 11 November 2022 10 November 2022
9.50 5,803,857
The Company declared the following dividends per 2021 Share during the year ended 31 December 2021:
Period to Payment date
Dividend
rate per
2021 Share
(cents)
Net
dividend
payable
(US$) Record date Ex-dividend date
31 December 2020 26 February 2021 2.50 10,148,155 12 February 2021 11 February 2021
31 March 2021 25 June 2021 2.25 9,104,882 28 May 2021 27 May 2021
30 June 2021 17 September 2021 2.50 10,108,820 20 August 2021 19 August 2021
30 September 2021 18 November 2021 2.50 10,118,842 5 November 2021 4 November 2021
9.75 39,480,699
The Company declared the following dividends per Realisation Share during the year ended 31 December 2021:
Period to Payment date
Dividend
rate per
Realisation
Share
(cents)
Net
dividend
payable
(US$) Record date Ex-dividend date
31 December 2020 26 February 2021 2.50 1,564,499 12 February 2021 11 February 2021
31 March 2021 25 June 2021 2.25 1,407,662 28 May 2021 27 May 2021
30 June 2021 17 September 2021 2.50 1,564,019 20 August 2021 19 August 2021
30 September 2021 18 November 2021 2.50 1,564,072 5 November 2021 4 November 2021
9.75 6,100,252
At 31 December 2022, the Company’s retained earnings include unrealised losses of US$173,388,035 (31 December 2021:
US$117,326,326) (see note 6). Gross income from investments excludes these unrealised losses which are capital in nature.
The default currency payment for dividends is US Dollars. However, with e?ect from 29 June 2016, shareholders could elect to
receive their dividends in British Pounds Sterling (“Sterling”) by registering under the Company’s Dividend Currency Election.
The rate per 2021 Share and Realisation Share to be used to pay shareholders who elect to receive their dividend in Sterling
is announced on the London Stock Exchange each month prior to the payment date.
Under Guernsey law, companies can pay dividends in excess of accounting pro?t provided they satisfy the solvency test
prescribed by the Companies (Guernsey) Law, 2008. The solvency test considers whether a company is able to pay its
debts when they fall due, and whether the value of a company’s assets is greater than its liabilities. The Company passed the
solvency test for each dividend paid.
Total dividends payable as at 31 December 2022 were US$Nil (31 December 2021: US$Nil).
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
53
5. FINANCIAL RISK MANAGEMENT
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management
framework. The Company’s risk management policies are established to identify and analyse the risks faced by the Company,
to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies are
reviewed regularly to re?ect changes in market conditions and the Company’s activities. Below is a non-exhaustive summary
of the risks that the Company is exposed to as a result of its use of ?nancial instruments:
Market Risk
Market risk is the risk of changes in market prices, such as foreign exchange rates, interest rates and equity prices, a?ecting
the Company’s income and/or the value of its holdings in ?nancial instruments.
The Company’s exposure to market risk comes mainly from movements in the value of its investments in the Master Funds
and on a look-through basis to the underlying loans in each CLO.
Changes in credit spreads may further a?ect the Company’s net equity or net income directly through their impact on
unrealised gains or losses on investments within the Master Funds and on a look-through basis to the underlying loans in
each CLO.
The objective of market risk management is to manage and control market risk exposures within acceptable parameters
while optimising the return on investments. The Company’s strategy for the management of market risk mirrors the strategy of
the Master Funds, driven by their investment objective to generate attractive, risk-adjusted returns, principally through income
distributions, by seeking exposure to US and European CLOs or other vehicles and structures which provide exposure to
portfolios consisting primarily of US and European ?oating rate senior secured loans and which may include non-recourse
?nancing. The Company’s market risk is managed on a daily basis by the Investment Adviser in accordance with policies and
procedures in place.
The Company intends to mitigate market risk generally by not making investments that would cause it to have exposure
to a single corporate issuer exceeding 5% of the Master Funds’ aggregate gross assets at the time of investment. Special
Purpose Vehicles such as CLOs are not considered corporate issuers. The Company’s market positions are monitored on a
quarterly basis by the Board of Directors.
Interest Rate Risk
The Company is exposed to interest rate risk through the investments held by the Master Funds and on a look-through basis
to the underlying assets in the CLOs.
Interest receivable by the Company on bank deposits or payable on bank overdraft positions will be a?ected by ?uctuations
in interest rates, however, the underlying cash positions will not be a?ected.
A majority of the Company’s ?nancial assets comprise investments into the Master Fund II and the Master Fund III, which
invest in income notes: Equity Subordinated and Mezzanine tranches of cash ?ow CLOs. The Master Fund II’s exposure, and
the Master Fund III’s exposure through its direct CLO investments and via its investment in the Master Fund II, to interest rate
risk is signi?cantly mitigated by the fact that the majority of the underlying loans in each CLO bear interest at ?oating Libor/
Term SOFR-based rates.
Interest rate benchmark reform
A fundamental reform of major interest rate benchmarks has been taking place globally. The reform aimed to replace some
interbank o?ered rates (IBORs) with alternative nearly risk-free rates (referred to as “IBOR reform”). The Master Funds exposure
to IBOR reform is through its investment in USD CLOs which hold loans referenced to USD LIBOR with one-month and three-
month settings and have rated liabilities referenced to USD LIBOR with three-month settings. These settings will cease to be
provided after 30 June 2023 as announced by the Financial Conduct Authority (“FCA”) and the alternative reference rate for
US dollar LIBOR is the Secured Overnight Financing Rate (“SOFR”).
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
54
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
5. FINANCIAL RISK MANAGEMENT (continued)
Market Risk (continued)
Interest Rate Risk (continued)
USD Subordinated CLO Notes
Subordinated Notes of USD CLOs accounted for 54% of the Partnership’s investments, on a look-through basis, as at 31
December 2022 (31 December 2021: 58%). All of these CLOs had rated liabilities that paid interest based on USD LIBOR
and the documentation of all but one of these CLOs includes provisions for the liabilities to switch to Term SOFR (as the
designated replacement rate) when USD LIBOR is no longer available or when Term SOFR is referenced by over 50% of the
loan market. The one CLO held by the Master Fund II which does not include such provisions was issued in 2017. To the
extent that the Master Fund II has not exercised its option to liquidate this CLO prior to June 2023 and no amendment has
been agreed with its rated noteholders, the CLO’s rated liabilities would continue to pay interest based on the last available
USD LIBOR rate.
As at 31 December 2022, 80% (31 December 2021: 98%) of the loans held by the CLOs (in which the Partnership holds, on
a look-through basis, Subordinated Notes) paid interest based on USD LIBOR and 20% paid interest based on Term SOFR
(31 December 2021: 2%). It is expected that the percentage of loans referencing SOFR will gradually increase during the ?rst
half of 2023 as new SOFR-based loans are issued and LIBOR-based loans are repaid or amended to reference SOFR ahead
of the cessation of all USD LIBOR in June 2023.
The quarterly distributions to holders of Subordinated Notes of a CLO depend primarily on the di?erence between the interest
received on the CLO’s loan assets and the interest paid on the CLO’s rated liabilities. Distributions on the Master Funds’ USD
Subordinated Notes during the ?rst half of 2023 may thus be in?uenced by changes in the basis (di?erence) between USD
LIBOR and Term SOFR.
USD Mezzanine CLO Notes
USD CLO Mezzanine Notes accounted for 11% of the Master Funds’ investments, on a look-through basis, as at 31
December 2022 (31 December 2021: 9%). All of these notes paid interest based on USD LIBOR as at 31 December 2022.
The majority of these notes include provisions for the liabilities to switch to Term SOFR (as the designated replacement
rate) when USD LIBOR is no longer available or when Term SOFR is referenced by over 50% of the loan market. The notes
which do not include this language will continue to pay interest based on the latest available USD LIBOR rate unless they are
redeemed or amended prior to June 2023.
EUR Subordinated and Mezzanine Notes
The EUR Subordinated and Mezzanine CLO Notes held by the Master Funds and their underlying loan assets reference
Euribor (not Euro LIBOR) so are una?ected by the cessation of LIBOR settings. There are no plans to discontinue Euribor.
The following table shows the portfolio pro?le of the Master Funds at 31 December 2022 and 31 December 2021:
31 December 2022 31 December 2021
Master Fund III
1
US$
Master Fund II
2
US$
Master Fund III
1
US$
Master Fund II
2
US$
Investments with exposure to a
?oating interest rate
203,637,939 31,346,516 269,884,334 41,814,869
Financial assets at fair value
through pro?t or loss (note 6)
203,637,939 31,346,516 269,884,334 41,814,869
1
Shows the Master Fund II’s exposure in the underlying CLO investments via the Company’s Master Fund III share through the 2021 Shares.
Source: CLO trustee reports. Based on the Master Funds exposure and weighted by CLO size and Master Funds ownership percentage.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
55
5. FINANCIAL RISK MANAGEMENT (continued)
Market Risk (continued)
Interest Rate Risk (continued)
The following table shows the Board of Directors’ best estimate of the Company’s share of the sensitivity of the portfolio of the
Master Funds to stressed changes in interest rates, with all other variables held constant. The table assumes parallel shifts in
the respective forward yield curves.
31 December 2022 31 December 2021
Possible e?ect on net assets Possible e?ect on net assets
reasonable and pro?t or loss reasonable and pro?t or loss
change in rate US$ change in rate US$
-1% (980,929) -1% 7,231,099
1% 983,637 1% 152,694
At 31 December 2021, the CLOs in which the Master Funds held equity, had liabilities with US Dollar Libor/Term SOFR ?oors
at zero and loan assets with Libor ?oors of up to 1%. With US Dollar Libor/Term SOFR at circa 0.25%, if US Dollar Libor/Term
SOFR had gone down, the interest on the liabilities would have dropped by more than the interest on the interest ?oored
loans, producing more residual cash ?ow for equity.
Currency risk
The Company is exposed to very limited currency risk, as the majority of its assets and liabilities are denominated in US
Dollars.
The Company is exposed indirectly to currency risk through its investments into the Master Funds. The Master Funds’
portfolios are denominated in US Dollar and Euro. Accordingly, the value of such assets may be a?ected, favourably or
unfavourably, by ?uctuations in currency rates which, if unhedged, could have the potential to have a signi?cant e?ect on
returns. To reduce the impact of currency ?uctuations and the volatility of returns which may result from currency exposure,
the Investment Adviser hedges any signi?cant currency exposure of the assets of the Master Funds.
The Company’s share of the Master Funds’ total net foreign currency exposure at the year end was as follows:-
31 December 2022 31 December 2021
EUR Exposure
Master Fund III
1
US$
Master Fund II
2
US$
Master Fund III
1
US$
Master Fund II
2
US$
Cash and cash equivalents
31,424 5,082 851,960 131,334
Other receivables
3,349,510 541,683 4,758,568 733,558
Trade and other payables
(8,170) (1,321) (50,180) (7,735)
Derivatives at fair value
through pro?t or loss
(72,206,685) (11,677,270) (90,553,336) (13,959,275)
Financial assets at fair value
through pro?t and loss
77,033,839 12,247,884 91,957,687 14,175,763
Net EUR Exposure 8,199,917 1,116,058 6,964,699 1,073,645
1
Shows the Master Fund II’s exposure in the underlying CLO investments via the Company’s 2021 Shares through the Master Fund III and direct exposure in Master Fund III.
Source: CLO trustee reports. Based on the Master Funds exposure and weighted by CLO size and Master Funds ownership percentage.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
56
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
5. FINANCIAL RISK MANAGEMENT (continued)
Market Risk (continued)
Currency risk (continued)
31 December 2022 31 December 2021
GBP Exposure
Master Fund III
1
US$
Master Fund II
2
US$
Master Fund III
1
US$
Master Fund II
2
US$
Cash and cash equivalents 8,232 – – –
Trade and other payables (152,270) (17,252) (110,716) (17,067)
Net GBP Exposure (144,038) (17,252) (110,716) (17,067)
NET EXPOSURE 8,055,879 1,098,806 6,853,983 1,056,578
31 December 2022
Possible change 31 December 2022 e?ect on net assets
in exchange rate net exposure and pro?t or loss
US$ US$
EUR/US Dollar +/- 20% 9,315,975 (-/+) 1,863,195
GBP/US Dollar +/- 30% (161,291) (-/+) 48,387
31 December 2021
Possible change 31 December 2021 e?ect on net assets
in exchange rate net exposure and pro?t or loss
US$ US$
EUR/US Dollar +/- 10% 8,038,345 (-/+) 808,835
GBP/US Dollar +/- 10% (127,783) (-/+) 12,778
The sensitivity rate of 20% (31 December 2021: 10%) is regarded as reasonable due to the actual volatility over the last year
of US Dollar against Euro.
The sensitivity rate of 30% (31 December 2021: 10%) is regarded as reasonable due to the actual volatility over the last year
of US Dollar against Sterling.
Other price risks
There is a risk that the fair value of future cash ?ows, on a look-through basis to the underlying CLOs, will ?uctuate due to
changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused
by factors speci?c to the individual ?nancial instrument or its issuer, or factors a?ecting all similar ?nancial instruments traded
in the market. The Board of Directors does not believe that the returns on investments are correlated to any speci?c index or
other price variable.
If the value of the Company’s investment in the Master Fund III were to increase or decrease by 25% (31 December 2021:
10%), the impact on the NAV of the Company would be +/- US$50,909,485 (31 December 2021: US$26,988,433).
If the value of the Company’s investment in the Master Fund II were to increase or decrease by 25% (31 December 2021:
10%), the impact on the NAV of the Company would be +/- US$7,836,629 (31 December 2021: US$4,181,487).
At 31 December 2022, the sensitivity rate of 25% (31 December 2021: 10%) is regarded as reasonable due to the actual
market price volatility experienced on the Master Funds’ CLO investments during the year.
1
Shows the Master Fund II’s exposure in the underlying CLO investments via the Company’s 2021 Shares through the Master Fund III and direct exposure in Master Fund III.
Source: CLO trustee reports. Based on the Master Funds exposure and weighted by CLO size and Master Funds ownership percentage.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
57
5. FINANCIAL RISK MANAGEMENT (continued)
Credit and Counterparty Risk
Credit risk is the risk that a counterparty to a ?nancial instrument will fail to discharge an obligation or commitment that it has
entered into with the Company, the Master Fund III, Master Fund II or a vehicle in which the Master Fund III or Master Fund
II invests, resulting in a ?nancial loss to the Company. Credit risk arises principally from debt securities held, and also from
derivative ?nancial assets and cash and cash equivalents. For risk management reporting purposes, the Company considers
and aggregates all elements of credit risk exposure (such as individual obligation default risk, country risk and sector risk).
The Company’s policy on credit risk mirrors that of the Master Fund III and the Master Fund II, which is to minimise its
exposure to counterparties with perceived higher risk of default by dealing only with counterparties that meet the credit
standards set out in the Company’s prospectus, and by taking collateral.
The table below analyses the Company’s maximum exposure to credit risk in relation to the components of the Statement of
Financial Position.
31 December 2022
US$
31 December 2021
US$
Cash and cash equivalents 27,838,142 1,294,271
Financial assets at fair value through pro?t or loss 234,984,455 311,699,203
262,822,597 312,993,474
At 31 December 2022, there were no ?nancial assets past due or impaired (31 December 2021: none).
At 31 December 2022, the cash and cash equivalents and other assets of the Company, excluding its investments into the
Master Fund III and Master Fund II, and substantially all of the assets of the Master Fund II are held by BNP Paribas Securities
Services S.C.A. (the “Custodian”). The cash and substantially all of the assets of the Master Fund III are held by U.S. Bank
Global Corporate Trust Services, UK Branch (the “US Bank”). Bankruptcy or insolvency of the Custodian or US Bank may
cause the Company’s rights with respect to securities held by the Custodian or US Bank to be delayed or limited. This risk
is managed by monitoring the credit quality and ?nancial positions of the Custodian or US Bank. The long-term rating of the
Custodian as at 31 December 2022 was Aa3 as rated by Moody’s (31 December 2021: Aa3) and A+ by Standard & Poor’s
(31 December 2021: A+). The long-term rating of US Bank as at 31 December 2022 was A1 (31 December 2021: A1) as
rated by Moody’s and AA- (31 December 2021: AA-) by Standard & Poor’s.
Credit risk is assessed from time to time by the Investment Adviser on a look-through basis to the underlying loans in each
CLO. The Investment Adviser seeks to manage this risk by providing diversi?cation in terms of underlying assets, issuer
section, geography and maturity pro?le. The Master Funds concentration of credit risk by industry for the CLO investments,
on a look-through basis, as at 31 December 2022 and 31 December 2021 are summarised in the table below. The Company’s
credit risk is monitored on a quarterly basis by the Board of Directors.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
58
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
5. FINANCIAL RISK MANAGEMENT (continued)
Credit and Counterparty Risk (continued)
The Master Funds have diversi?ed their exposure to industry sectors. The top 10 are as follows:
Industry
1
31 December 2022
%
31 December 2021
%
Healthcare & Pharmaceuticals 13.0 14.1
Services: Business 9.1 9.4
High Tech Industries 8.9 8.6
Banking, Finance, Insurance & Real Estate 6.9 6.9
Telecommunications 5.7 5.9
Construction & Building 5.0 4.9
Services: Consumer 5.0 4.9
Beverage, Food & Tobacco 4.6 4.9
Chemicals, Plastics & Rubber 4.2 4.5
Hotel, Gaming & Leisure 3.9 3.8
66.3 67.9
The Master Funds’ exposure to credit risk relating to the underlying CLO investments based on the country of registration (not
necessarily asset class exposure) as at 31 December 2022 and 31 December 2021 is summarised below. The Master Funds’
exposure to credit risk, also summarised below, relates to its directly held CLO investments and its investments into Wollemi
and Cycad based on the country of registration of the CLO investments and the Limited Partnerships (not necessarily asset
class exposure) as at 31 December 2022 and 31 December 2021.
31 December 2022 31 December 2021
Master Fund III
2
US$
Master Fund II
3
US$
Master Fund III
2
US$
Master Fund II
3
US$
United States of America 95,596,568 15,175,183 165,616,113 25,530,599
Europe 25,484,013 3,911,243 27,112,311 4,179,506
Guernsey 70,792,807 11,448,617 64,845,378 9,996,257
Financial assets at fair value
through pro?t or loss (note 6)
191,873,388 30,535,043 257,573,802 39,706,362
1
Shows the Company’s exposure in the underlying CLO investments through its investments in the Master Funds. Source: CLO trustee reports. Based on the Master Funds’
exposure and weighted by CLO size and Master Funds’ equity ownership percentage.
2
Shows the Company’s 2021 Shares proportionate share in the Master Fund III at 95.32% (31 December 2021: 100%) and through its investment, via the Master Fund III, in the
Master Fund II at 59.30% (31 December 2021: 62.21).
3
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
59
5. FINANCIAL RISK MANAGEMENT (continued)
Credit and Counterparty Risk (continued)
The geographical breakdown of the underlying CLO investments is as follows:
Country
31 December 2022
Master Funds
1
%
31 December 2021
Master Funds
1
%
United States of America 68.9 72.4
France 7.8 6.1
United Kingdom 6.2 5.5
Netherlands 3.8 3.6
Germany 3.4 3.0
Luxembourg 1.8 1.8
Spain 1.7 1.5
Canada 1.3 1.3
Switzerland 1.0 1.1
Italy 1.0 0.7
Other 3.1 3.0
Total 100.0 100.0
The table below summarises the Master Funds’ underlying portfolio concentrations as of 31 December 2022 and 31
December 2021:
Maximum portfolio
holdings of a single
asset % of total
portfolio
Average portfolio
holdings % of
total portfolio
31 December 2022
Master Funds 7.11% 2.11%
31 December 2021
Master Funds 7.17% 2.13%
The tables below summarises the Master Funds’ portfolio by asset class and portfolio ratings as at 31 December 2022 and
31 December 2021:
31 December 2022 31 December 2021
By asset class
Master Fund III
2
US$
Master Fund II
3
US$
Master Fund III
2
US$
Master Fund II
3
US$
Equity Subordinated CLO notes 93,836,113 15,175,183 162,543,277 25,056,905
Mezzanine CLO notes 27,244,468 3,911,243 30,185,147 4,653,200
Limited Partnerships 70,792,806 11,448,617 64,845,378 9,996,257
Financial assets at fair value
through pro?t or loss (note 6)
191,873,388 30,535,043 257,573,802 39,706,362
1
Shows the Company’s exposure in the underlying CLO investments through its investments in the Master Funds.
2
Shows the Company’s 2021 Shares proportionate share in the Master Fund III at 95.32% (31 December 2021: 100%) and through its investment, via the Master Fund III, in the
Master Fund II at 59.30% (31 December 2021: 62.21).
3
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
60
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
5. FINANCIAL RISK MANAGEMENT (continued)
Credit and Counterparty Risk (continued)
The breakdown of the underlying CLO investments by rating is as follows:
31 December 2022 31 December 2021
Rating
Master Funds
1
%
Master Funds
1
%
B 34.4 30.7
B- 25.6 27.7
B+ 15.4 14.0
BB- 8.7 7.4
BB 6.8 4.3
CCC+ 3.8 3.1
BB+ 3.1 1.8
CCC 1.0 1.2
BBB- 0.5 0.1
CCC- 0.3 0.3
NA 0.4 9.4
Total 100.0 100.0
Activities undertaken by the Company, Master Fund III and Master Fund II may give rise to settlement risk. Settlement risk
is the risk of loss due to the failure of a counterparty to honour its obligations to deliver cash, securities or other assets as
contractually agreed.
For the majority of transactions, settlement risk is mitigated by conducting settlements through a broker to ensure that a trade
is settled only when both parties have ful?lled their contractual settlement obligations. Settlement limits form part of the credit
approval and limit monitoring processes.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter di?culty in meeting the obligations associated with its ?nancial
liabilities that are settled by delivering cash or another ?nancial asset.
The Company’s policy and the Investment Adviser’s approach to managing liquidity is to ensure, as far as possible, that
the Company will always have su?cient liquidity to meet its liabilities when due, under both normal and stress conditions,
including estimated redemptions of shares, without incurring unacceptable losses or risking damage to the Company’s
reputation.
The Company’s liquidity risk is managed on a daily basis by the Investment Adviser on a look-through basis to the underlying
loans in each CLO. The Investment Adviser monitors and considers the Company’s and the Master Funds cash balances,
projected expenses and projected income from investments when making any new investment recommendations.
Given the Company’s permanent capital structure as a closed-ended fund, it is not exposed to redemption risk. However,
the Company’s ?nancial instruments include indirect investments in CLOs, and may include over-the-counter derivative
contracts, which are not traded in an organised public market and which may be illiquid.
The Company’s overall liquidity risk is monitored on a quarterly basis by the Board of Directors. Shareholders have no right of
redemption and must rely, in part, on the existence of a liquid market in order to realise their investment.
All liabilities of the Company are due within one ?nancial year.
1
Shows the Master Funds’ exposure in the underlying CLO investments via the Company’s Master Fund III share through the 2021 Shares and direct share through the
Realisation Shares.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
61
5. FINANCIAL RISK MANAGEMENT (continued)
Operational Risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the processes,
technology and infrastructure supporting the Company’s activities relating to ?nancial instruments, either internally or on the
part of service providers, and from external factors other than credit, market and liquidity risks such as those arising from legal
and regulatory requirements and generally accepted standards of investment management behaviour.
Operational risk is managed so as to balance the limiting of ?nancial losses and damage to its reputation with achieving its
investment objective of generating returns to investors.
The primary responsibility for the development and implementation of controls over operational risk rests with the Board of
Directors. This responsibility is supported by the development of overall standards for the management of operational risk,
which encompasses the controls and processes at the service providers and the establishment of service levels with the
service providers.
The Board of Directors’ assessment of the adequacy of the controls and processes in place at the service providers with
respect to operational risk is carried out via regular discussions with the service providers and a review of the service
providers’ Service Organisation Controls (“SOC”) 1 reports on internal controls, if available.
Substantially all of the assets of the Company and Master Fund II are held by BNP Paribas Securities Services S.C.A.,
Guernsey Branch, in its capacity as the Custodian. Master Fund III assets are held in custody by U.S. Bank Global Corporate
Trust Services, UK Branch (together the “Custodians”). The bankruptcy or insolvency of the Custodians may cause the
Company’s rights with respect to the securities held by the Custodians to be limited. The Investment Adviser monitors the
credit ratings and capital adequacy of the Custodians on a quarterly basis, and reviews the ?ndings documented in the SOC
1 report on the internal controls annually.
Capital Management
The Board of Director’s policy is to maintain a strong capital base so as to maintain investor, creditor and market con?dence
and to sustain future development of the Company. The Company’s capital is represented by the 2021 Shares and Realisation
Shares. Capital is managed in accordance with the investment policy, in pursuit of its investment objectives.
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
1 January 2022 to 31 December 2022
2021 Shares
US$
Realisation
Shares
US$
Total Company
US$
Cost of ?nancial assets at fair value through pro?t or loss
at the start of the period
371,719,138 57,306,391 429,025,529
Capital distributions received from Master Fund III / Master Fund II (17,949,413) (2,703,626) (20,653,039)
Cost of ?nancial assets at fair value through pro?t or loss
at the end of the year
353,769,725 54,602,765 408,372,490
Net unrealised losses on ?nancial assets at the end of the year (150,131,786) (23,256,249) (173,388,035)
Financial assets at fair value through pro?t or loss
at the end of the year
203,637,939 31,346,516 234,984,455
Movement in net unrealised loss during the year (48,296,982) (7,764,727) (56,061,709)
Income distributions declared from the Master Fund II
– 7,840,508 7,840,508
Income distributions declared from the Master Fund III
48,354,429 – 48,354,429
Net gains on ?nancial assets at fair value
through pro?t or loss
57,447 75,781 133,228
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
62
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
1 January 2021 to 31 December 2021
2021 Shares
US$
Realisation
Shares
US$
Total Company
US$
Cost of ?nancial assets at fair value through pro?t or loss
at the start of the period
– 429,025,529 429,025,529
Sale of investments in Master Fund II at cost – (371,719,138) (371,719,138)
Purchase of investments in Master Fund III at cost 371,719,138 – 371,719,138
Cost of ?nancial assets at fair value through pro?t or loss
at the end of the year
371,719,138 57,306,391 429,025,529
Net unrealised losses on ?nancial assets at the end of the year (101,834,804) (15,491,522) (117,326,326)
Financial assets at fair value through pro?t or loss
at the end of the year
269,884,334 41,814,869 311,699,203
Movement in net unrealised loss during the year 16,129,058 2,486,550 18,615,608
Income distributions declared from the Master Fund II
9,959,936 6,104,589 16,064,525
Income distributions declared from the Master Fund III
30,559,993 – 30,559,993
Net gains on ?nancial assets at fair value
through pro?t or loss
56,648,987 8,591,139 65,240,126
At 31 December 2022, the Company had a 95.32% (31 December 2021: 100%) holding of the limited partnership interests in
the Master Fund III on behalf of the 2021 Shares, which in turn had a holding of 62.21% (31 December 2021: 62.21%) in the
Master Fund II. At 31 December 2022, the Company’s 2021 Shares indirect holding of the Master II is therefore 59.30% (31
December 2021: 62.21%). The Company also retained a direct holding of 9.59% (31 December 2021: 9.59%) in the Master
Fund II on behalf of the Realisation Shares.
During the year ended 31 December 2021, the sale of Master Fund II and purchase of Master Fund III shown in the table
above are non-cash transactions following the re-designation of 2017 Shares to 2021 Shares and Realisation Shares on 22
April 2021. On this date, in accordance with the Contribution Agreement dated 26 March 2021, the Company subscribed
to a commitment amount equal to the 2021 Shares proportionate ownership of the Company into the Master Fund III. The
Company made such an advance in kind, by transferring in specie to the Master Fund III its proportionate share of the Master
Fund II.
Look-through ?nancial information: Master Funds’ pro?t or loss movements
The following tables reconcile the Company’s proportionate share of the Master Funds’ ?nancial assets at fair value through
pro?t or loss to the Company’s ?nancial assets at fair value through pro?t or loss:
31 December 2022
Master Fund III
1
US$
Master Fund II
2
US$
Total Company
US$
Financial assets at fair value through pro?t or loss 196,833,730 30,535,043 227,368,773
Add: Other net current assets/(liabilities) 6,804,209 811,473 7,615,682
Total ?nancial assets at fair value through
pro?t or loss
203,637,939 31,346,516 234,984,455
1
Shows the Company’s proportionate direct share in the Master Fund III at 95.32% (31 December 2021: 100.00%) through 2021 Shares investment only.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% (31 December 2021: 9.59%) through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
63
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
Look-through ?nancial information: Master Funds’ pro?t or loss movements (continued)
31 December 2021
Master Fund III
1
US$
Master Fund II
2
US$
Total Company
US$
Financial assets at fair value through pro?t or loss 271,170,675 39,706,362 310,877,037
Add: Other net current (liabilities)/assets (1,286,341) 2,108,507 822,166
Total ?nancial assets at fair value through
pro?t or loss
269,884,334 41,814,869 311,699,203
The Company’s proportionate share of the unrealised gains/(losses) on investments in the year comprises the following
movements within the underlying investments:
1 January 2022 to 31 December 2022
Master Fund III
1
US$
Master Fund II
2
US$
Total Company
US$
Net unrealised losses on investments at the
beginning of the year
(101,834,804) (15,491,522) (117,326,326)
Investment income – 8,596,828 8,596,828
Income distributions received from Master Fund II 43,210,172 – 43,210,172
Unrealised gains on ?nancial assets at fair value
through pro?t or loss
(42,452,889) (9,173,928) (51,626,817)
Net gains on derivative ?nancial instruments and
foreign exchange
5,218 922,785 928,003
Other income 5,183 70,713 75,896
Expenses (253,432) (340,617) (594,049)
Income distributions declared during the year (48,811,234) (7,840,508) (56,651,742)
Net unrealised losses on investments at the end
of the year
(150,131,786) (23,256,249) (173,388,035)
1 January 2021 to 31 December 2021
Master Fund III
1
US$
Master Fund II
2
US$
Total Company
US$
Net unrealised losses on investments at the
beginning of the year
– (135,941,934) (135,941,934)
Unrealised losses attributable to 2021 Shares (107,852,694) 107,852,694 –
Investment income – 17,044,052 17,044,052
Income distributions received from Master Fund II 29,465,544 – 29,465,544
Unrealised gains on ?nancial assets at fair value
through pro?t or loss
7,295,057 4,648,628 11,943,685
Realised gains on ?nancial assets at fair value
through pro?t or loss
– 2,128,755 2,128,755
Net gains on derivative ?nancial instruments and
foreign exchange
– 5,748,418 5,748,418
Other income – 3,286 3,286
Expenses (182,718) (910,897) (1,093,615)
Income distributions declared during the year (30,559,993) (16,064,525) (46,624,518)
Net unrealised losses on investments at the end
of the year
(101,834,804) (15,491,522) (117,326,326)
1
Shows the Company’s proportionate direct share in the Master Fund III at 95.32% (31 December 2021: 100.00%) through 2021 Shares investment only.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% (31 December 2021: 9.59%) through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
64
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
Look-through ?nancial information: Master Funds’ pro?t or loss movements (continued)
IFRS 13 requires that a fair value hierarchy be established that prioritises the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy under IFRS 13 are set as follows:
– Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments;
– Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as
prices) or indirectly (derived from prices). This category includes instruments valued using: quoted market prices in active
markets for similar instruments; quoted for identical or similar instruments in markets that are considered less than active;
or other valuation techniques in which all signi?cant inputs are directly or indirectly observable from market data.
– Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes
inputs not based on observable data and the unobservable inputs have a signi?cant e?ect on the instrument’s valuation.
This category includes instruments that are valued based on quoted prices for similar instruments but for which signi?cant
unobservable adjustments or assumptions are required to re?ect di?erences between the instruments.
The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the
lowest level input that is signi?cant to the fair value measurement. For this purpose, the signi?cance of an input is assessed
against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require signi?cant
adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the signi?cance of a
particular input to the fair value measurement requires judgement, considering factors speci?c to the asset or liability.
The determination of what constitutes ‘observable’ requires signi?cant judgement. Observable data is considered to be that
market data that is readily available, regularly distributed or updated, reliable, not proprietary, and provided by independent
sources that are actively involved in the relevant market.
The following table analyses within the fair value hierarchy the Company’s ?nancial assets (by class, excluding cash and cash
equivalents, prepayments, distribution receivable, dividends payable and other payables) measured at fair value:
31 December 2022
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Assets:
Financial assets at fair value through pro?t or loss – – 234,984,455 234,984,455
Total – – 234,984,455 234,984,455
31 December 2021
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Assets:
Financial assets at fair value through pro?t or loss – – 311,699,203 311,699,203
Total – – 311,699,203 311,699,203
The investments in the Master Fund III and Master Fund II (31 December 2021: Master Fund II only), which are fair valued at
each reporting date, have been classi?ed within Level 3 as they are not traded and contain unobservable inputs.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
65
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
Look-through ?nancial information: Master Funds’ pro?t or loss movements (continued)
The following table presents the movement in Level 3 instruments:
31 December 2022
US$
31 December 2021
US$
Opening Balance 311,699,203 293,083,595
Capital distributions received from Master Funds (20,653,039) –
Sale of investments in Master Fund II – (371,719,138)
Purchase of investments in Master Fund III – 371,719,138
Movement in net unrealised gain/(loss) during the year (56,061,709) 18,615,608
Closing Balance
234,984,455 311,699,203
? Transfers?between?Level?1,?2?and?3
There have been no transfers between levels during the year ended 31 December 2022 or 31 December 2021. Transfers
between levels of the fair value hierarchy are recognised as at the end of the reporting period during which the change has
occurred.
Look-through ?nancial information: Master Funds’ fair value hierarchy information
On a look-through basis, the following table analyses within the fair value hierarchy the Company’s proportionate share of
the Master Funds’ ?nancial assets and derivatives (by class, excluding cash and cash equivalents, other receivables and
prepayments, distribution payable, carried interest payable and trade and other payables) measured at fair value:
31 December 2022
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Master Fund III
1
Financial assets at fair value through pro?t or loss – 3,059,201 193,774,529 196,833,730
Total – 3,059,201 193,774,529 196,833,730
31 December 2021
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Master Fund III
1
Financial assets at fair value through pro?t or loss – – 271,170,675 271,170,675
Total – – 271,170,675 271,170,675
31 December 2022
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Master Fund II
2
Financial assets at fair value through pro?t or loss – 471,980 30,063,063 30,535,043
Derivatives at fair value through pro?t or loss – (535,493) – (535,493)
Total – (63,513) 30,063,063 29,999,550
1
Shows the Company’s proportionate direct share in the Master Fund III at 95.32% (31 December 2021: 100.00%) through 2021 Shares investment only.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
66
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
Look-through ?nancial information: Master Funds’ fair value hierarchy information (continued)
31 December 2021
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Master Fund II
1
Financial assets at fair value through pro?t or loss – 4,179,506 35,526,856 39,706,362
Derivatives at fair value through pro?t or loss – 84,802 – 84,802
Total – 4,264,308 35,526,856 39,791,164
The following table summarises the valuation methodologies used for the Company’s investments categorised in Level 3 as
at 31 December 2022:
Valuation Unobservable
Fair Value methodology inputs Ranges
Security US$
Master Fund III
2
203,637,939 NAV Zero % discount N/A
Master Fund II
1
31,346,516 NAV Zero % discount N/A
234,984,455
The following table summarises the valuation methodologies used for the Company’s investments categorised in Level 3 as
at 31 December 2021:
Valuation Unobservable
Fair Value methodology inputs Ranges
Security US$
Master Fund III
2
269,884,334 NAV Zero % discount N/A
Master Fund II
1
41,814,869 NAV Zero % discount N/A
311,699,203
1
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
2
Shows the Company’s proportionate direct share in the Master Fund III at 95.32% (31 December 2021: 100.00%) through 2021 Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
67
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
The following table summarises the valuation methodologies used for the Master Fund III’s investment in Limited Partnerships
categorised in Level 3 as at 31 December 2022:
Sensitivity to changes
Unobservable in signi?cant
Fair Value inputs Ranges Average unobservable inputs
Asset Class US$
Master Fund III
1
Limited Partnerships 25% increase/decrease
will have a fair value
N/A N/A impact of
Master Fund II 193,774,529 Zero % discount +/- US$48,443,632
193,774,529
The Master Funds have engaged an independent third party to provide valuations for its CLO investments. The following table
summarises, in the Company’s opinion, the valuation methodologies used by the independent third party to value the Master
Fund II’s investments categorised in Level 3 as at 31 December 2022:
Sensitivity to changes
Unobservable in signi?cant
Fair Value inputs Ranges Average unobservable inputs
Asset Class US$
Master Fund II
2
Income Notes CLOs 25% increase/decrease
Prices provided US$0.2900 - will have a fair value
United States by a third party US$0.8810 US$0.4718 impact of
of America 18,287,159 agent +/- US$4,571,790
25% increase/decrease
Prices provided US$0.6703 - will have a fair value
by a third party US$0.8152 US$0.7058 impact of
Europe 327,287 agent +/- US$81,822
Limited Partnerships 25% increase/decrease
will have a fair value
impact of
Wollemi 11,448,617 Zero % discount N/A N/A +/- US$2,862,154
30,063,063
1
Shows the Company’s proportionate direct share in the Master Fund III at 95.32% (31 December 2021: 100.00%) through 2021 Shares investment only.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
68
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)
The following table summarises the valuation methodologies used for the Master Fund III’s investment in Limited Partnerships
categorised in Level 3 as at 31 December 2021:
Sensitivity to changes
Unobservable in signi?cant
Fair Value inputs Ranges Average unobservable inputs
Asset Class US$
Master Fund III
1
Limited Partnerships 10% increase/decrease
will have a fair value
N/A N/A impact of
Master Fund II 271,170,675 Zero % discount +/- US$27,117,068
271,170,675
The Master Funds have engaged an independent third party to provide valuations for its CLO investments. The following table
summarises, in the Company’s opinion, the valuation methodologies used by the independent third party to value the Master
Fund II’s investments categorised in Level 3 as at 31 December 2021:
Sensitivity to changes
Unobservable in signi?cant
Fair Value inputs Ranges Average unobservable inputs
Asset Class US$
Master Fund II
2
Income Notes CLOs 10% increase/decrease
Prices provided US$0.0001 - will have a fair value
United States by a third party US$0.9866 US$0.6437 impact of
of America 25,530,599 agent +/- US$2,553,060
Limited Partnerships 10% increase/decrease
will have a fair value
impact of
Wollemi 9,996,257 Zero % discount N/A N/A +/- US$999,626
35,526,856
1
Shows the Company’s proportionate direct share in the Master Fund III at 100.00% through 2021 Shares investment only.
2
Shows the Company’s proportionate direct share in the Master Fund II at 9.59% through Realisation Shares investment only.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
69
7. INTEREST INCOME
For the year ended
31 December 2022
US$
For the year ended
31 December 2021
US$
Interest income on ?nancial assets carried at amortised cost:
Cash and cash equivalents
235,886 –
235,886 –
8. RELATED PARTIES AND OTHER KEY CONTACTS
Transactions with Investment Adviser and Investment Portfolio Investor
Investment Adviser
Fair Oaks Capital Limited (the “Investment Adviser”) is entitled to receive an investment advisory fee from the Company of
1% per annum of the NAV of the Company, in accordance with the Amended and Restated Investment Advisory Agreement
dated 9 March 2017 (the “Investment Advisory Agreement”). The investment advisory fee is calculated and payable on the
last business day of each month or on the date of termination of the Investment Advisory agreement. The base investment
advisory fee will be reduced to take into account any fees received by the Investment Adviser incurred by the Company in
respect of its investments in the Master Fund III and Master Fund II, (taking into account any rebates of such management
fees to the Company) in respect of the same relevant period.
The net investment advisory fee during the year is as follows:
For the year ended
31 December 2022
US$
For the year ended
31 December 2021
US$
Company investment advisory fee 2,282,988 2,317,886
Less: Master fund II rebate (2,046,813) (2,310,494)
Less: Master fund III rebate (96,320) (3,572)
Net Company investment advisory fee 139,855 3,820
In circumstances where, as at the date the Net Asset Value per share of the 2021 Shares with respect to the last calendar
month of a calendar quarter (the “Quarter End 2021 NAV”) is published, the price of the 2021 Shares, adjusted for any
dividends declared if required, traded at close in the secondary market below their then-prevailing Quarter End 2021 NAV,
the Investment Adviser agrees to reinvest and/or procure the reinvestment by an Associate of it of (a) 25 per cent. of the
fees which it shall receive with respect to that quarter from the Company pursuant to the agreement which is attributable to
the Net Asset Value of the 2021 Shares and (b) 25 per cent. of the management fee which the General Partner shall receive
with respect to that quarter from Master Fund II and Master Fund III which is attributable to the Net Asset Value of the 2021
Shares by, in each case, using its best endeavours to purchase or procure the purchase of 2021 Shares in the Company
in the secondary market. The obligation to purchase or procure the purchase of such 2021 Shares shall be ful?lled by the
Investment Adviser by no later than one month after the end of such calendar quarter. The Investment Adviser will have no
obligation to reinvest and/or procure the reinvestment of fees it receives with respect to a calendar quarter in circumstances
where: (i) the 2021 Shares did not trade at close in the secondary market at a discount to their then-prevailing Quarter End
2021 NAV; or (ii) where the 2021 Shares did trade at close in the secondary market at a discount to their then-prevailing
Quarter End 2021 NAV and it is unable to purchase or procure the purchase of 2021 Shares in the secondary market at a
discount to their then-prevailing Quarter End 2021 NAV despite having used its best endeavours to do so; or (iii) the Master
Fund III Commitment Period has already expired, and, in each case, the Investment Adviser shall retain all fees it receives for
such quarter.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
70
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
8. RELATED PARTIES AND OTHER KEY CONTACTS (continued)
Transactions with Investment Adviser and Investment Portfolio Investor (continued)
Investment Adviser (continued)
In circumstances where, as at the date of the Net Asset Value per share of the Realisation Shares with respect to the last
calendar month of a calendar quarter (the “Quarter End Realisation NAV”) is published, the price of the Realisation Shares,
adjusted for any dividends declared if required, traded at close in the secondary market below their then-prevailing Quarter
End Realisation NAV, the Investment Adviser agrees to reinvest and/or procure the reinvestment by an Associate of it of (a)
25 per cent. of the fees which is received with respect to that quarter from the Company pursuant to the agreement which is
attributable to the Net Asset Value of the Realisation Shares and (b) 25 per cent. of the Master Fund II Management Fee which
the General Partner shall receive in respect to that quarter from Master Fund II which is attributable to the Net Asset Value of
the Realisation Shares by, in each case, using its best endeavours to purchase or procure the purchase of Realisation Shares
in the secondary market. The obligation to purchase or procure the purchase of Realisation Shares shall be ful?lled by the
Investment Adviser by no later than one month after the end of such calendar quarter.
The Investment Adviser will have no obligation to reinvest and/or procure the reinvestment of fees it receives with respect to
a calendar quarter in circumstances where either: (i) the Realisation Shares did not trade at close in the secondary market at
a discount to their then-prevailing Quarter End Realisation NAV; or (ii) where the Realisation Shares did trade at close in the
secondary market at a discount to their then-prevailing Quarter End Realisation NAV and it is unable to purchase or procure
the purchase of Realisation Shares in the secondary market at a discount to their then-prevailing Quarter End Realisation NAV
despite having used its best endeavours to do so and, in either case, the Investment Adviser shall retain all fees it receives
for such quarter.
On 31 January 2022, 4 May 2022, 28 July 2022 and 19 October 2022, the General Partner purchased 200,885, 197.640,
239,044 and 232,474 2021 Shares respectively in the secondary market by way of reinvesting 25% of the quarter’s investment
advisory fees. On 21 April 2021, 2 August 2021 and 22 October 2021, the General Partner purchased 231,061, 186,133 and
194,000 2021 Shares respectively in the secondary market by way of reinvesting 25% of the quarter’s investment advisory
fees.
The Investment Advisory Agreement can be terminated by either party giving not less than 6 months written notice.
Fair Oaks CLOs
At 31 December 2022, the Master Fund III had an investment in Fair Oaks CLO IIX valued at €1,273,621. Wollemi had
investments in FOAKS 1X CLO, FOAKS 2X CLO, FOAKS 3X CLO and FOAKS 4X CLO Limited valued at €23,023,572,
€28,316,443, €25,494,629 and €32,102,608 respectively. At 31 December 2021, Wollemi had investments in FOAKS 1X
CLO, FOAKS 2X CLO, FOAKS 3X CLO and FOAKS 4X CLO Limited valued at €22,630,204, €27,537,544, €26,682,043 and
€32,947,186 respectively. The Investment Adviser to the Company also acts as collateral manager to the Fair Oaks CLOs.
Founder Partners
The Master Fund II and Master Fund III also pay the Founder Partner II and Founder Partner VI a carried interest equal to 15
per cent of cash available to be distributed (after payment of expenses and management fees) after limited partners have
received a Preferred Return. The threshold calculation of the Preferred Return will be based solely on distributions and not on
NAV calculations so the Master Fund II and Master Fund III will not pay any carried interest until their investors have realised
the amounts drawn down for investments and met their Preferred Returns. At 31 December 2022, no carried interest was
accrued at the Master Fund III level. At 31 December 2022, no (31 December 2021: US$nil) carried interest was accrued at
Master Fund II level in respect of the Company’s limited partnership interest.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
71
8. RELATED PARTIES AND OTHER KEY CONTACTS (continued)
Other Material Contracts
Administrator
Sanne Fund Services (Guernsey) Limited (the “Administrator”) is entitled to receive a time-based fee quarterly in arrears for
all Company Secretarial services. The Administrator is also entitled to an annual fee of US$33,888 (31 December 2021:
US$32,320), payable quarterly in arrears for Administration and Accounting services. The Administrator is also entitled to an
annual fee of £582 (31 December 2021: £500) in relation to FATCA reporting and acting as Responsible O?cer.
Custodian
BNP Paribas Securities Services S.C.A., Guernsey Branch (the “Custodian”) waived all fees on the basis that all assets are
invested into the Master Fund II.
Directors’ Fees
The Company’s Board of Directors are entitled to a fee in remuneration for their services as Directors at a rate payable of
£45,000 each per annum (31 December 2021: £43,000). The increase to £45,000 each per annum was with e?ect from 1
January 2022.
The overall charge for the above-mentioned fees for the Company and the amounts due are as follows:
For the year ended
31 December 2022
US$
For the year ended
31 December 2021
US$
CHARGE FOR THE YEAR
Investment adviser fee 139,855 3,820
Administration fee 127,533 116,934
Directors’ fees and expenses 209,522 199,437
OUTSTANDING FEES
Investment adviser fee 16,939 –
Administration fee 21,779 34,375
Shares held by related parties
The Directors had the following interests in the Company at 31 December 2022 and 31 December 2021, held either directly
or bene?cially:
31 December 2022 31 December 2021
Name No. of 2021
Shares Percentage
No. of 2017
Shares Percentage
Claudio Albanese (Chairman) 9,697 0.00% 9,697 0.00%
Jon Bridel
1
40,000 0.01% 40,000 0.00%
Fionnuala Carvill (appointed 14 June 2022) – – N/A N/A
Nigel Ward (resigned on 8 December 2022) N/A N/A 60,000 0.01%
As at 31 December 2022, the Investment Adviser, the General Partner and principals of the Investment Adviser and General
Partner held an aggregate of 4,548,868 2021 Shares (31 December 2021: 3,703,825 Shares) and 30,599 Realisation Shares,
which is 1.13% (31 December 2021: 0.91%) of the issued 2021 Share capital and 0.06% (31 December 2021: nil) of the
issued Realisation Share capital respectively.
9. TAX STATUS
The Company is exempt from Guernsey income tax and is charged an annual exemption fee of £1,200 (31 December 2021:
£1,200) under The Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989.
1
All shares held by a person closely associated to Jon Bridel.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
72
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
10. SHARE CAPITAL
The Company’s 2021 Shares and Realisation Shares are classi?ed as equity. Incremental costs directly attributable to the
issue of shares are recognised as a deduction in equity and are charged to the share capital account, including the initial set
up costs.
During April 2021, of the 468,378,360 original 2017 Shares in issue, 62,562,883 2017 Shares were re-designated as
Realisation Shares and 405,815,477 2017 Shares (including 650,000 shares held in Treasury) were re-designated as 2021
Shares.
On 22 April 2021, 405,815,477 2021 Shares and 62,562,883 Realisation Shares were admitted to trading on the Specialist
Fund Segment of the Main Market of the London Stock Exchange.
On 25 August 2022, the Company announced that it will return US$4,000,000 (equivalent to 6.3936 US cents per share)
on 12 September 2022 (the “Redemption Date”) by way of a compulsory partial redemption of Realisation Shares (the “First
Redemption”).
The First Redemption was e?ected at 57.27 cents per share, being the NAV per Realisation Share as at 29 July 2022 of 59.77
cents per share less the dividend for the period to 30 June 2022 of 2.50 cents per share. The First Redemption was e?ected
pro rata to holdings of Realisation Shares on the register at the close of business on the Redemption Record Date, being 12
September 2022. At the time of the announcement, the Company had 62,562,883 Realisation Shares in issue of which none
are held in treasury. On this basis 11.16 per cent. of each registered shareholding was redeemed on the Redemption Date.
All shares that were redeemed were cancelled with e?ect from the Redemption Record Date.
Following the Distribution Policy announcement on 20 September 2022 and the general authority granted by shareholders of
the Company on 14 June 2022 to make market purchases of its own Ordinary Shares, the Company went on to repurchase
2,455,977 2021 Shares during the period to 31 December 2022, to be held in treasury, at average cost of US$0.4848 per
Share. At 31 December 2022, the Company held 3,105,977 Ordinary Shares in treasury.
The authorised share capital of the Company is represented by an unlimited number of ordinary shares of nil par value and
have the following rights:
(a) Dividends: Shareholders of a particular class or tranche are entitled to receive, and participate in, any dividends or other
distributions relating to the assets attributable to the relevant class or tranche which are resolved to be distributed in
respect of any accounting period or other period, provided that no calls or other sums due by them to the Company are
outstanding.
(b) Winding Up: On a winding up, the shareholders of a particular class or tranche shall be entitled to the surplus assets
attributable to that class or tranche remaining after payment of all the creditors of the Company.
(c) Voting: Subject to any rights or restrictions attached to any class or tranche of shares, at a general meeting of the
Company, on a show of hands, every holder of voting shares present in person or by proxy and entitled to vote shall have
one vote, and on a poll every holder of voting shares present in person or by proxy shall have one vote for each share held
by him, but this entitlement shall be subject to the conditions with respect to any special voting powers or restrictions
for the time being attached to any class or tranche of shares which may be subject to special conditions. Refer to the
Memorandum and Articles of Incorporation for further details.
(d) Buyback: The Company may acquire its own shares (including any redeemable shares). Any shares so acquired by the
Company may be cancelled or held as treasury shares provided that the number of shares of any class held as treasury
shares must not at any time exceed ten per cent (or such other percentage as may be prescribed from time to time by
the States of Guernsey Committee for Economic Development) of the total number of issued shares of that class. Any
shares acquired in excess of this limit shall be treated as cancelled.
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
73
10. SHARE CAPITAL (continued)
Issued Share Capital
2021 Shares
31 December 2022 31 December 2021
Shares US$ Shares US$
Share capital at the beginning of the year 405,165,477 384,339,570 – –
Share buy-backs (2,455,977) (1,190,717) – –
Re-designation from 2017 Shares into 2021
Shares during the year
– – 405,165,477 385,492,327
Share capital conversion costs – – – (1,152,757)
Share capital at the end of the year
402,709,500 383,148,853 405,165,477 384,339,570
Realisation Shares
31 December 2022 31 December 2021
Shares US$ Shares US$
Share capital at the beginning of the year 62,562,883 59,251,697 467,728,360 444,922,074
Realisation Share redemptions paid during the year (6,984,442) (3,999,990) – –
Re-designation into 2021 Shares during the year – – (405,165,477) (385,492,327)
Share capital conversion/issued costs – – – (178,050)
Share capital at the end of the year
55,578,441 55,251,707 62,562,883 59,251,697
The total number of 2021 Shares in issue, as at 31 December 2022 was 405,815,477 (31 December 2021: 405,815,477),
of which 3,105,977 (31 December 2021: 650,000) 2021 Shares were held in treasury, and the total number of 2021 shares
in issue excluding treasury shares were 402,709,500 (31 December 2021: 405,165,477 2021 Shares). The total number of
Realisation Shares in issue, as at 31 December 2022 was 55,578,441 (31 December 2021: 62,562,883), of which no shares
were held in treasury.
At 31 December 2022, the Company had 458,287,941 (31 December 2021: 467,728,360) total voting rights.
11. EARNINGS PER SHARE
For the year ended 31 December 2022
2021 Shares Realisation Shares
Weighted average number of shares 404,951,213 60,457,983
Pro?t/(loss) for the ?nancial year (US$658,551) (US$28,714)
Basic and diluted earnings/(losses) per share (US$0.0016) (US$0.0005)
For the year ended 31 December 2021
2021 Shares Realisation Shares
Weighted average number of shares 405,165,477 62,562,883
Pro?t/(loss) for the ?nancial year US$55,802,240 US$8,665,218
Basic and diluted earnings/(losses) per share US$0.1377 US$0.1385
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
74
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FINANCIAL REPORT
Notes to the Financial Statements (continued)
For the year ended 31 December 2022
11. EARNINGS PER SHARE (continued)
The weighted average number of shares as at 31 December 2022 and 31 December 2021 is based on the number of 2021
Shares and Realisation Shares in issue during the period under review, as detailed in Note 10.
For the year ended 31 December 2021, pro?ts for the year have been allocated as follows:
• Expenses are apportioned 86.6% to 2021 Shares and 13.4% to Realisation Shares;
• Income for the period from 1 January 2021 to 22 April 2021, has been apportioned 86.6% to 2021 Shares and 13.4%
to Realisation Shares;
• Income for the period from 23 April 2021 to 31 December 2021, is based on the share classes’ respective ownership of,
and distributions received from, the Master Fund II and Master Fund III.
12. TRADE AND OTHER PAYABLES
31 December 2022
US$
31 December 2021
US$
Investment advisory fees payable (note 8) 16,939 –
Audit fees payable 28,281 29,476
Administration fees payable (note 8) 21,779 34,375
Sundry expenses payable 45,546 46,495
112,545 110,346
13. CONTINGENT LIABILITIES AND COMMITMENTS
The Company entered into a Subscription Agreement with Master Fund III and agreed to become a Limited Partner and made
a commitment to Master Fund III of US$264,000,000 (31 December 2021: US$264,000,000) of which US$263,875,619 (31
December 2021: US$263,875,619) had been called.
The Company entered into a Subscription Agreement with Master Fund II and agreed to become a Limited Partner and made
a commitment to Master Fund II of US$452,346,532 (31 December 2021: US$452,346,532) of which US$452,346,532 (31
December 2021: US$432,982,362) had been called.
At 31 December 2022 and 31 December 2021, the Company had no other outstanding commitments.
14. SUBSEQUENT EVENTS
On 30 January 2023, the Company announced that following the announcement of the NAV as at 31 December 2022, Fair
Oaks Income Fund (GP) had purchased 23,920 Realisation Shares and 211,952 2021 Shares in the secondary market.
On 23 February 2023, the Company declared an interim dividend of 2.00 US cents per 2021 Share and 2.00 US cents per
Realisation Share in respect of the quarter ended 31 December 2022. The ex-dividend date was 2 March 2023 and the
dividend was paid on 31 March 2023.
Pursuant to the general authority granted by shareholders of the Company on 14 June 2022 to make market purchases of its
own Ordinary Shares, the Company went on to repurchase 7,627,247 2021 Shares in the post year end period, to be held
in treasury, at average cost of US$0.4903 per Share.
There were no other signi?cant events since the year end which would require revision of the ?gures or disclosures in the
Financial Statements.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
75
ADDITIONAL INFORMATION
Portfolio Statement (unaudited)
As at 31 December 2022
CLO Equity
Security Instrument Par Value Valuation
Master Funds
1
AIMCO 2017-A SUB Subordinated Notes US$18,655,412 51.50%
ALLEG 2017-2X SUB Subordinated Notes US$27,469,888 34.00%
ALLEG 2021-1X SUB Subordinated Notes US$18,733,947 69.50%
ARES 2015-35R Subordinated Notes US$17,911,400 33.00%
AWPT 2017-6X SUB Subordinated Notes US$20,701,445 21.00%
FOAKS 1X M Subordinated Fee Notes €688,900 0.00%
FOAKS 1X SUB Subordinated Notes €19,289,200 77.06%
FOAKS 1X Z Subordinated Fee Notes €590,486 168.79%
FOAKS 2X M Subordinated Fee Notes €688,900 0.00%
FOAKS 2X SUB Subordinated Notes €32,378,300 56.73%
FOAKS 2X Z Subordinated Fee Notes €590,486 192.89%
FOAKS 3X M Subordinated Fee Notes €688,900 47.48%
FOAKS 3X SUB Subordinated Notes €24,111,500 66.42%
FOAKS 3X Z Subordinated Fee Notes €590,486 206.83%
FOAKS 4X F Subordinated Fee Notes €3,513,390 109.66%
FOAKS 4X M Subordinated Fee Notes €688,900 0.00%
FOAKS 4X SUB Subordinated Notes €19,289,200 86.68%
FOAKS 4X Z Subordinated Fee Notes €590,486 248.25%
HLM 13X-2018 SUB Subordinated Notes US$17,876,955 29.00%
Signal Peak CLO 1, Ltd. Subordinated Notes US$4,356,838 46.00%
Signal Peak CLO 2, LLC Subordinated Notes US$4,503,698 28.00%
Signal Peak CLO 3, Ltd. Subordinated Notes US$4,249,141 38.00%
POST 2018-1X SUB Subordinated Notes US$27,061,714 47.00%
ROCKT 2021-2X SUB Subordinated Notes US$16,878,050 70.00%
SHACK 2018-12 SUB Subordinated Notes US$20,667,000 37.00%
SIGNAL PEAK CLO 4, LTD Subordinated Notes US$25,179,451 42.00%
WELF 2018-1X SUB Subordinated Notes US$19,891,988 39.00%
WELF 2021-2X SUB Subordinated Notes US$19,978,100 55.50%
CLO Mezzanine
Security Instrument Par Value Valuation
Master Funds
1
APID 2018-18A F Class F Notes US$2,755,600 79.25%
DRSLF 2017-49A F Class F Notes US$3,168,940 78.82%
DRSLF 2017-53A F Class F Notes US$3,444,500 76.58%
EGLXY 2018-6X F Class F Notes €2,927,825 65.44%
FOAKS 2X ER Class E Notes €1,429,838 83.41%
HARVT 11X FR Class F Notes €1,722,250 70.50%
HARVT 7X FR Class F Notes €1,205,575 79.60%
HLM 13X-2018 F Class F Notes US$3,952,564 77.94%
JPARK 2016-1A ER Class E Notes US$1,377,800 85.81%
MDPK 2016-20A FR Class F Notes US$2,755,600 81.22%
OAKCL 2021-2A E Class E Notes US$1,906,450 90.04%
OCT39 2018-3A F Class F Notes US$6,200,100 79.96%
OHECP 2015-4X FR Class F Notes €1,749,117 67.51%
SYMP 2018-19A F Class F Notes US$3,788,950 77.35%
1
Shows the Company’s 2021 Shares proportionate share, via the Master Fund III, in the Master Fund II at 59.30% (31 December 2021: 62.21%) and the Company’s direct holding
in the Master Fund II at 9.59%. 2021 Shares and Realisation Shares proportionate share together at 68.89% (31 December 2021: 71.20%). Also includes Master Fund II’s 100%
share in Wollemi and its 14.96% interest in Cycad.
76
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
Registered O?ce and Business Address
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey GY1 2HL
Investment Adviser
Fair Oaks Capital Limited
1 Old Queen Street
London SW1H 9JA
Legal Advisers in Guernsey
Carey Olsen (Guernsey) LLP
Carey House
Les Banques
St Peter Port
Guernsey GY1 4BZ
Custodian and Principal Bankers
BNP Paribas Securities Services S.C.A.
BNP Paribas House
St Julian’s Avenue
St Peter Port
Guernsey GY1 1WA
Joint Bookrunners, Joint Brokers
and Joint Financial Advisers
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT
Liberum Capital Limited
Ropemaker Place, Level 12
Ropemaker Street
London EC2Y 9LY
Administrator and Secretary
Sanne Fund Services (Guernsey) Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey GY1 2HL
Registrar
Link Market Services (Guernsey) Limited
Mont Crevelt House
Bulwer Avenue
St Sampson
Guernsey GY2 4LH
Legal Advisers in United Kingdom
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
Independent Auditor
KPMG Channel Islands Limited
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey GY1 1WR
ADDITIONAL INFORMATION
Management and Administration
Directors
Professor Claudio Albanese (Independent non-executive Chairman)
Jon Bridel (Independent non-executive Director)
Fionnuala Carvill (Independent non-executive Director – appointed 14 June 2022)
Nigel Ward (Independent non-executive Director – resigned 8 December 2022)
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
77
ADDITIONAL INFORMATION
Appendix
Alternative Performance Measures used in the Financial Statements
• Total NAV return
Total NAV return is a calculation showing how the NAV per 2021 Share and Realisation Share has performed over a period
of time, taking into account dividends paid to shareholders. It is calculated on the assumption that dividends are reinvested,
on an accumulative basis from inception of the Company, at the prevailing NAV on the last day of the month that the shares
?rst trade ex-dividend. The performance is evaluated on a original shareholding of 1000 shares on inception of the Company
(12 June 2014). This provides a useful measure to allow shareholders to compare performances between investment funds
where the dividend paid may di?er.
2021 Shares For the year ended
31 December 2022
For the year ended
31 December 2021
Opening NAV per 2021 Share US$0.6682 US$0.6306
Opening accumulated number of 2021 Shares* (a) 2,444.4 shares 2,110.9 shares
Opening NAV valuation of shares (b)
US$1,633.4 US$1,331.1
Dividends paid during the year US$0.0950 US$0.0975
Dividends converted to shares** (c) 385.4 shares 333.5 shares
Closing NAV per 2021 share US$0.5721 US$0.6682
Closing accumulated number of 2021 Shares* (d = a + c) (d) 2,829.9 shares 2,444.4 shares
Closing NAV valuation of shares (e)
US$1,619.0 US$1,633.4
NAV valuation of shares return (f = e – b) (f) (US$14.4) US$302.2
Total NAV return (g = (f / b) x 100)
(g)
(0.9%) 22.7%
*with dividends reinvested since inception (12 June 2014)
**converted to 2021 Shares at the prevailing month end NAV ex-dividend for all dividends paid during the year.
Realisation Shares For the year ended
31 December 2022
For the year ended
31 December 2021
Opening NAV per Realisation Share US$0.6679 US$0.6306
Opening accumulated number of Realisation Shares* (a) 2,444.7 shares 2,110.9 shares
Opening NAV valuation of shares (b)
US$1,632.8 US$1,331.1
Dividends paid during the year US$0.0950 US$0.0975
Dividends converted to shares** (c) 410.6 shares 333.8 shares
Closing NAV per Realisation share US$0.5747 US$0.6679
Closing accumulated number of Realisation Shares* (d = a + c) (d) 2,855.3 shares 2,444.7 shares
Closing NAV valuation of shares (e)
US$1,641.0 US$1,632.8
NAV valuation of shares return (f = e – b) (f) US$8.2 US$301.7
Total NAV return (g = (f / b) x 100)
(g)
0.5% 22.7%
*with dividends reinvested since inception (12 June 2014)
**converted to Realisation Shares at the prevailing month end NAV ex-dividend for all dividends paid during the year.
78
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Appendix (continued)
Alternative Performance Measures used in the Financial Statements (continued)
• Total share price return
Total share price return is a calculation showing how the share price per 2021 Share and Realisation Share has performed
over a period of time, taking into account dividends paid to shareholders. It is calculated on the assumption that dividends
are reinvested, on an accumulative basis from inception of the Company, at the prevailing share price on the last day of the
month that the shares ?rst trade ex-dividend. The performance is evaluated on a original shareholding of 1000 shares on
inception of the Company (12 June 2014). This provides a useful measure to allow shareholders to compare performances
between investment funds where the dividend paid may di?er.
2021 Shares For the year ended
31 December 2022
For the year ended
31 December 2021
Opening share price per 2021 Share US$0.6225 US$0.6175
Opening accumulated number of 2021 Shares* (a) 2,422.0 shares 2,094.4 shares
Opening share price valuation of shares (b)
US$1,507.7 US$1,293.3
Dividends paid during the year US$0.0950 US$0.0975
Dividends converted to shares** (c) 454.6 shares 327.7 shares
Closing share price per 2021 share US$0.4900 US$0.6225
Closing accumulated number of 2021 Shares* (d = a + c) (d) 2,876.6 shares 2,422.0 shares
Closing share price valuation of shares (e)
US$1,409.6 US$1,507.7
Valuation of shares return (f = e – b) (f) (US$98.1) US$214.5
Total share price return (g = (f / b) x 100)
(g)
(6.5%) 16.6%
*with dividends reinvested since inception (12 June 2014)
**converted to 2021 Shares at the prevailing month end share price ex-dividend for all dividends paid during the year.
Realisation Shares For the year ended
31 December 2022
For the year ended
31 December 2021
Opening share price per Realisation Share US$0.7000 US$0.6175
Opening accumulated number of Realisation Shares* (a) 2,409.6 shares 2,094.4 shares
Opening share price valuation of shares (b)
US$1,686.7 US$1,293.3
Dividends paid during the year US$0.0950 US$0.0975
Dividends converted to shares** (c) 392.9 shares 315.3 shares
Closing share price per Realisation share US$0.5650 US$0.7000
Closing accumulated number of Realisation Shares* (d = a + c) (d) 2,810.0 shares 2,409.6 shares
Closing share price valuation of shares (e)
US$1,587.7 US$1,686.7
Valuation of shares return (f = e – b) (f) (US$99.1) US$393.5
Total share price return (g = (f / b) x 100)
(g)
(5.9%) 30.4%
*with dividends reinvested since inception (12 June 2014)
**converted to Realisation Shares at the prevailing month end NAV ex-dividend for all dividends paid during the year.
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
79
ADDITIONAL INFORMATION
Appendix (continued)
Alternative Performance Measures used in the Financial Statements (continued)
• 2021 and Realisation Share (discount)/premium to NAV
2021 and Realisation Share (discount)/premium to NAV is the amount by which the 2021 and Realisation Share price is lower/
higher than the NAV per 2021 and Realisation Share, expressed as a percentage of the NAV per 2021 and Realisation Share,
and provides a measure of the Company’s share price relative to the NAV.
• Ongoing charges ratio (“OCR”)
The ongoing charges ratio of an investment company is the annual percentage reduction in shareholder returns as a result
of recurring operational expenditure. Ongoing charges are classi?ed as those expenses which are likely to recur in the
foreseeable future, and which relate to the operation of the company, excluding investment transaction costs, gains or losses
on investments and performance fees. In accordance with the AIC guidance, the proportionate charges for the period are
also incorporated from investments in other funds. As such charges for:
1. 2021 Shares – from the Master Fund III a weighted average percentage for the period of 99.25% (31 December
2021: 100%), the Master Fund II at a weighted average percentage for the period of 61.75% (31 December 2021:
62.21%), Wollemi at a weighted average percentage for the period of 61.75% (31 December 2021: 62.21%), and Cycad
Investments LP at a weighted average percentage for the period of 9.24% (31 December 2021: 9.31%) are included.
2. Realisation Shares – from the Master Fund II a weighted average percentage for the period of 9.59% (31 December
2021: 9.59%), Wollemi at a weighted average percentage for the period of 9.59% (31 December 2021: 9.59%) and
Cycad Investments LP at a weighted average percentage for the period of 1.44% (31 December 2021: 1.44%) are
included.
Performance fees or carried interest from the underlying funds are not included. The OCR is calculated as the total ongoing
charges for a period divided by the average net asset value over that year
2021 Shares For the year ended 31 December 2022
Company
US$
Master Funds
1
US$
Total
US$
Total expenses 868,300 2,579,797 3,448,097
Non-recurring expenses (16,469) (3,710) (20,179)
Total ongoing expenses 851,831 2,576,087 3,427,918
Average NAV 248,414,527 248,414,527
Ongoing charges ratio (using AIC methodology) 0.34% 1.38%
Realisation Shares For the year ended 31 December 2022
Company
US$
Master Funds
1
US$
Total
US$
Total expenses 133,862 364,345 498,207
Non-recurring expenses (2,539) (576) (3,115)
Total ongoing expenses 131,323 363,769 495,092
Average NAV 37,050,194 37,050,194
Ongoing charges ratio (using AIC methodology) 0.35% 1.34%
1
Master Funds includes FOMC III LP, FOIF II LP, Wollemi and Cycad.
80
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Appendix (continued)
Alternative Performance Measures used in the Financial Statements (continued)
• Ongoing charges ratio (“OCR”) (continued)
2021 Shares For the year ended 31 December 2021
Company
US$
Master Funds
1
US$
Total
US$
Total expenses 682,320 3,241,427 3,923,747
Non-recurring expenses – (246,520) (246,520)
Total ongoing expenses 682,320 2,994,907 3,677,227
Average NAV 271,982,050 271,982,050
Ongoing charges ratio (using AIC methodology) 0.25% 1.35%
Realisation Shares For the year ended 31 December 2021
Company
US$
Master Funds
1
US$
Total
US$
Total expenses 105,191 470,082 575,273
Non-recurring expenses – (15,221) (15,221)
Total ongoing expenses 105,191 454,861 560,052
Average NAV 41,947,976 41,947,976
Ongoing charges ratio (using AIC methodology) 0.25% 1.34%
1
Master Funds includes FOMC III LP, FOIF II LP, Wollemi and Cycad.
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