DA VINCI CIS PRIVATE SECTOR GROWTH FUND LIMITED
(Registered in Guernsey - Number 48020)
Registered Office:
MARTELLO COURT, ADMIRAL PARK
ST PETER PORT, GUERNSEY, GY1 3HB
__________________________
TELEPHONE: +44 1481 751000
FACSIMILE: +44 1481 751001
e-mail: fundadmin@gg.fortis.com
For immediate release 29 August 2008
Interim Report 2008
The Board of Directors of Da Vinci CIS Private Sector Growth Fund Limited
announce unaudited results for the period ended 30 June 2008.
Chairman's Statement
It is a pleasure to share with you the inaugural interim reports for the Da
Vinci CIS Private Sector Growth Fund Limited (the "Fund" or "DVPS"). Not only
are these the first reports for DVPS in line with our prospectus requirements,
but these are also the first reports for any company quoted on the London
Stock Exchange's Specialist Fund Market (SFM).
As a shareholder, you will be well aware that the DVPS, a Guernsey registered
closed-ended company, was the first company to be admitted to trading on the
London Stock Exchange's Specialist Fund Market on the 29th May 2008 (ticker:
DVPS LN). A total of 108.16 million shares at 1.00 USD per share were
originally admitted to trading on that day. Earlier in the year DVPS had been
admitted to listing and trading on the Channel Islands Stock Exchange (CISX),
where it raised its initial capital of 90mn USD from private and institutional
investors through a private placement at the end of January 2008.
DVPS invests in both unlisted equity and equity-related securities and other
instruments of companies that are located in Russia and the other countries of
the Commonwealth of Independent States (the "CIS" or the
"Region"). Investments may also be made in companies which are established
outside the Region but which derive a substantial portion of their revenue
from, or have substantial assets in, the Region. The Fund focuses on
investments in private companies planning an IPO, strategic sale or management
buy-out in the next two to four years, as well as small cap players already
listed on the Region's markets. DVPS is structured as an access tool for
investors seeking to invest in segments of the CIS economy which cannot be
accessed through the public capital markets, but which represent a significant
portion of the Region's GDP.
Investment Manager's Report
Despite the recent political environment and increasing global uncertainties,
the economic environment in the CIS over the last six months has remained
relatively favourable for DVPS, as many private companies, squeezed by the
credit crunch, have been forced to shift their focus from debt financing to
equity financing. As result, the pipeline of companies seeking equity
financing not only continues to grow, but those companies are in general more
flexible with the deal structures and terms they are willing to accept,
although no serious re-pricing of recent valuation levels has occurred within
the sectors we follow. Most companies still prefer to walk away from a deal,
rather than re-price at lower levels. This is partially because GDP in the CIS
has demonstrated healthy growth, and despite the global turmoil is still
forecast to provide a solid macroeconomic back-drop for business growth and
expansion within the Region. In Russia, the main investment market for DVPS so
far, economic growth decelerated slightly by mid-year, but remains very
robust. Due to a high base-effect, year-over-year figures in investments,
industrial and basic sector output slowed, nonetheless, annual real GDP growth
will come in at not less than 7% - an extraordinary performance by any
measure. In the current environment, a slight deceleration in the economy
would even be desirable, as the acceleration of growth in 2007 has generated
some unpleasant side affects, such as increased budget expenditures and higher
inflation.
The short-term objective of DVPS is to invest all remaining cash into deals
within its investment strategy. Currently 44% of the cash has been invested,
with 37% allocated to deals nearing completion. This means that DVPS has
enough cash to select and close one more deal at a total value of about 20mn
USD. The Fund expects to do so by the end of the year, as it has a strong
pipeline of projects in advanced analysis. The figures above are based on
assets under management of USD 118mn as at the beginning of July, when DVPS
issued new shares worth c10mn USD.
The medium-term objective of the Fund is to monitor the existing portfolio
thoroughly and exercise an active shareholder policy. The Fund typically
enters companies where it can add value and pre-agree an action plan with
other key shareholders. DVPS then works on the implementation of the action
plan on the level of the board of directors.
The long-term objective is to maximize the value of the holdings, prepare the
exit strategy and then execute the exit well.
The Fund's strategy of investing in private companies means that returns are
shifted to the end of the Fund's life. The Fund re-values its holdings twice a
year, but must use a cautious approach to this exercise, as the valuation of
private companies may not reflect the ultimate value received in a liquidity
event. The ultimate target of the Fund to generate an annualized IRR of 30%
over the life of the Fund.
Results for the six months ended 30 June 2008
The financial statements are presented later in this report. This section
represents the breakdown of the assets by type and sector.
Position Amount, USD mn Comment % of AUM % of AUM % of
invested
capital
(approximation)* ** 108mn (118mn USD)
USD)
Investments
EPAM 18.9 Software/IT-services 17.20% 15.70% 35.70%
RTS 17.6 Stock 16.20% 14.80% 33.60%
exchange/Finance
Lubel 16.6 Coking coal/Mining 14.60% 13.30% 30.70%
Cash management
RUR-denominated 9. 6 (excl 8.80% 8.10% n/a
bonds accrued coupon
0.3)
USD-denominated 15.5 14.20% 13.00% n/a
deposits
*Investments by cost or based on 31.01.08 value
**AUM as of 30.06.08.
The weighted annualized average yield on the cash management over the last
three months was 5.3%.
The Fund has no other revenue but from the cash management as it has not
realized any exit from the investments yet.
Status in the holdings and monitoring process
The Investment Manager communicates with portfolio companies on at least a
monthly basis. As of now all of the companies are on track with their 2008
budget targets. There were no events known to the Fund or reported to it by
its holdings, or which it discovered which would impair the value of its
holdings. On the contrary, there was limited revaluation of the holdings
upwards
After a careful review in accordance with International Private Equity
Guidelines, (i) EPAM was revalued upwards due to the organic growth of its
business and stable comparable multiples on the market, (ii) Lubel was
revalued upwards mainly due to increased long term coking coal prices and
increased comparable multiples, and (iii) RTS was revalued upwards based on a
capital market weighted average of the transactions in the market over the
last three months (the company is quoted on the indicative trading floor of
RTS).
Risks and uncertainties
There are a number of potential risks and uncertainties which could have a
material impact on DVPS over the remaining life of the Fund. For a detailed
list of the risks, please see the SFM admission prospectus. The majority of
the risks are related to investing in private companies, such as bearing the
risks of investing in low profile companies, often with limited transparency,
which may require significant efforts before they are ready to be sold to a
strategic investor or listed in an IPO. As the companies are private, it would
be very difficult to sell the Fund's holding in one of the companies, should
the situation there deteriorate. And even though the Fund is represented on
the board of the companies (directly through a representative or through an
observer seat), it generally holds a minority stake and often cannot exercise
control. There are also country-related risks - macroeconomic, political, and
taxation risks as detailed in the prospectus.
Outlook for the next 12 months
The Fund is not aware of any particular risks which have not been disclosed
already, but which could materially affect the Fund's situation over the next
12 months. As it is planned now, the Fund may, however, delay exit from two
investments - RTS and Lubel , which were initially planned for the beginning
of 2009, if market circumstances are not favourable for their planned IPOs.
Responsibility statement of the directors in respect of the interim financial
report We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting.
- the Chairman's statement meets the requirements of an interim management
report, and includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication
of important events that have occurred during the period covered by this
interim financial report and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and;
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the period covered by this interim
financial report and that have materially affected the financial position or
performance of the entity during that period; and any changes in the related
party transactions described in the financial information included in the
prospectus dated 11 April 2008 issued by the Company that could do so
D A FISHER
David A Fisher
Chairman
Date: 28 August 2008
Independent Review Report to Da Vinci CIS Private Sector Growth Fund Limited
Introduction
We have been engaged by Da Vinci CIS Private Sector Growth Fund Limited ("the
company") to review the condensed set of financial statements in the interim
financial report for the period ended 30 June 2008 which comprise the
consolidated and company Condensed Unaudited Income Statements, the
consolidated and company Condensed Unaudited Balance Sheets, the consolidated
and company Condensed Unaudited Statements of Changes in Equity, the
consolidated and Company Condensed Unaudited Cash Flow statements and the
related explanatory notes. We have read the other information contained in the
interim financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the
condensed set of financial statements. This report is made solely to the
company in accordance with the terms of our engagement to assist the company
in meeting the requirements of the Disclosure and Transparency Rules ("the
DTRs") of the UK's Financial Services Authority ("the UK FSA"). Our review has
been undertaken so that we might state to the company those matters we are
required to state to it in this 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 for our review work, for this report, or for the
conclusions we have reached.
Directors' responsibilities
The interim financial report is the responsibility of, and has been approved
by, the directors. The directors are responsible for preparing the interim
financial report in accordance with the DTRs of the UK FSA. As disclosed in
note 2, the annual financial statements of the company are prepared in
accordance with International Financial Reporting Standards. The condensed set
of financial statements included in this interim financial report has been
prepared in accordance with International Accounting Standard 34, "Interim
Financial Reporting". Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the interim financial report based on our
review. Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion. Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the interim
financial report for the period ended 30 June 2008 is not prepared, in all
material respects, in accordance with IAS 34 and the DTRs of the UK FSA.
KPMG
Channel Islands Limited
Guernsey
Date: 28 August 2008
CONDENSED UNAUDITED INCOME STATEMENT
FOR THE PERIOD FROM 12 NOVEMBER 2007 TO 30 JUNE 2008
Note Consolidated Company
USD USD
Gain on investments 2,777,948 565,693
Interest income 1,129,321 1,252,225
Net investment income 3,907,269 1,817,918
Formation expenses (2,167,691) (2,167,691)
Management fees 14 (840,147) (840,147)
Legal and professional fees (306,981) (214,310)
Directors' fees (105,228) (105,228)
Audit fees (96,911) (38,382)
Commission paid (88,586) (88,586)
Administration fees (70,321) (70,321)
Computer services (41,302) (41,302)
Other expenses (20,041) (17,674)
Loss on foreign exchange (6,664) (6,664)
Regulatory expenses (3,473) (3,473)
Fee 4 (1,193) (1,193)
(3,748,538) (3,594,971)
Net loss from operations before finance costs 158,731 (1,777,053)
Interest expense (165,837) (62,504)
Total finance costs (165,837) (62,504)
Loss for the period (7,106) (1,839,557)
Earnings per preference share -
basic and diluted (US Dollars per share) 5 (0.0001)
CONDENSED UNAUDITED BALANCE SHEET AS AT
30 JUNE 2008
Note Consolidated Company
2008 2008
USD USD
Assets
Cash and cash equivalents 37,197,595 16,985,964
Financial assets designated at fair value
through profit or loss 6 62,629,634 27,173,649
Trade and other receivables 7 3,104,412 2,842,656
Loans receivable 8 5,624,591 59,662,983
Investment in subsidiary 9 - 2,490
Total assets 108,556,232 106,667,742
Liabilities
Trade and other payables 10 (965,646) (909,607)
Total liabilities (965,646) (909,607)
Net assets 107,590,586 105,758,135
Equity
Share capital 11 1,081,577 1,081,577
Share premium 12 19,428,608 19,428,608
Distributable reserve 12 87,087,507 87,087,507
Retained earnings (7,106) (1,839,557)
Total equity 107,590,586 105,758,135
Net asset value per preference share -
(US Dollars per share) 0.9948
The condensed unaudited financial statements on pages 8 to 23 were approved by the Board of
Directors on 28 August 2008.
David Clark David Allison
Director Director
CONDENSED UNAUDITED STATEMENT OF CHANGES IN EQUITY
FOR THE PERIOD FROM 12 NOVEMBER 2007 TO 30 JUNE 2008
Consolidated
Share Distributable Retained
capital Share premium reserve Earnings Total
USD USD USD USD USD
Issue of shares 1,081,577 107,546,223 - - 108,627,800
Share issue costs - (1,030,108) - - (1,030,108)
Transfer to distributable
reserve (87,087,507) 87,087,507 -
Loss for the period - - - (7,106) (7,106)
Balance at 30 June 2008
carried forward 1,081,577 19,428,608 87,087,507 (7,106) 107,590,586
Company
Share Distributable Retained
capital Share premium reserve Earnings Total
USD USD USD USD USD
Issue of shares 1,081,577 107,546,223 - 108,627,800
Share issue costs - (1,030,108) - (1,030,108)
Transfer to distributable
reserve (87,087,507) 87,087,507 -
Loss for the period - - (1,839,557) (1,839,557)
Balance at 30 June 2008
carried forward 1,081,577 19,428,608 87,087,507 (1,839,557) 105,758,135
CONDENSED UNAUDITED CASH FLOW STATEMENT
FOR THE PERIOD FROM 12 NOVEMBER 2007 TO 30 JUNE 2008
Consolidated Company
2008 2008
USD USD
Cash flows from operating activities
Interest received 1,128,926 527,298
Interest paid (165,837) (62,504)
Operating expenses paid (3,084,028) (2,988,990)
Net cash used in operating activities (2,120,939) (2,524,196)
Cash flows from investing activities
Loan to subsidiary - (58,552,104)
Advance of loan (7,700,000) -
Repayment of loan received 1,500,000 -
Acquisition of other investments (59,529,158) (26,985,428)
-
Net cash used in investing activities (65,729,158) (85,537,532)
Cash flows from financing activities
Receipt of loan 15,000,000 -
Repayment of loan (15,000,000) -
Proceeds from issue of preference shares 106,077,800 106,103,720
Issue costs from issue of preference shares (1,030,108) (1,056,028)
Net cash generated from financing activities 105,047,692 105,047,692
Net increase in cash and cash equivalents 37,197,595 16,985,964
Cash and cash equivalents at beginning of period - -
Cash and cash equivalents at end of period 37,197,595 16,985,964
NOTES TO THE CONDENSED UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD FROM 12 NOVEMBER 2007 TO 30 JUNE 2008
1. GENERAL INFORMATION
Da Vinci CIS Private Sector Growth Fund Limited (the "Company" or "DVPS") was
incorporated in Guernsey on 12 November 2007. The investment objective of the
Company is to achieve medium-term capital growth through investments primarily
in unlisted equity and equity-related securities and other instruments of
companies in Russia and the other countries of the Commonwealth of Independent
States (the "CIS" or the "Region") or that derive a substantial portion of
their revenue from or have substantial assets within the Region.
The Company will have a term of four years from 17 December 2007, subject to
renewal for two additional successive one year periods at the absolute
discretion of the Directors. The Group comprises Da Vinci CIS Private Sector
Growth Fund Limited and its subsidiary CIPO Investments Limited (the
"Group").
The Company is listed on the Channel Islands Stock Exchange and the Specialist
Fund Market of the London Stock Exchange.
2. BASIS OF PREPARATION
(a) Compliance Statement
These interim financial statements for the period ended 30 June 2008 have been
prepared in accordance with IAS 34, 'Interim Financial Reporting' and the
Disclosures and Transparency Rules (DTRs) of the UK's Financial Services
Authority.
The interim unaudited financial statements do not include all of the
information required for full financial statements, and should be read in
conjunction with the financial information for the Company as at and for the
period ended 31 January 2008 included in the prospectus dated 11 April 2008
issued by the Company.
The financial information of the Company as at and for the period ended 31
January 2008 was prepared in accordance with International Financial Reporting
Standards ("IFRS"). The accounting policies applied for these interim
financial statements are the same as those applied for the financial
information for the period ended 31 January 2008, mentioned above.
(b) Basis of accounting
The financial information has been prepared on the historical cost basis,
except for those assets designated as fair value through profit and loss as
stated in the accounting policies set out below and on a going concern basis
which assumes that the Group and Company will continue in business for the
near future. The financial information is presented in United States Dollars,
the Company's functional currency.
(c) Use of estimates and judgements
The preparation of financial information in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making the judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
In particular, information about significant areas of estimation uncertainty
and critical judgements in applying accounting policies is described in note
3(c) - financial instruments.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the current period.
(d) New standards issued but not yet effective
A number of new standards, amendments to standards and interpretations are not
yet effective for the period ended 30 June 2008, and have not been applied in
preparing this consolidated financial information:
IFRS 8 Operating Segments introduces the "management approach" to segment
reporting. IFRS 8, which becomes mandatory for the Group's 2009 financial
statements, will require the disclosure of segment information based on the
internal reports regularly reviewed by the Group's key management in order to
assess each segment's performance and to allocate resources to them.
Management believes that other standards and interpretations which have been
issued but not yet effective are not relevant to the Group's operations at
this stage and will have no material impact on the Group's recognition and
measurement policies.
3. SIGNIFICANT ACCOUNTING POLICIES
(a) Subsidiary and basis of consolidation
The consolidated financial information comprises the financial information for
the Company and entity controlled by the Company (its subsidiary) made up to
30 June 2008. Control is achieved where the Company has the power to govern,
directly or indirectly, the financial and operating policies of an investee
entity so as to obtain benefit from its activities.
Investment in the subsidiary is stated in the Company's balance sheet at cost
less any impairment losses. The financial information for the subsidiary are
included in the consolidated financial information from the date that control
effectively commences until the date that control effectively ceases.
Where necessary, adjustments are made to the financial information of the
subsidiary to bring the accounting policies used into line with those used by
the Group
All intra-group balances and transactions, and any unrealised gains arising
from intra-group transactions, are eliminated in preparing the consolidated
financial information. Unrealised losses are eliminated in the same way as
unrealised gains except that they are only eliminated to the extent that there
is no evidence of impairment.
(b) Foreign currencies
Transactions in currencies other than the functional currency are recorded at
the rates of exchange prevailing on the dates of the transactions. At each
balance sheet date, monetary assets and liabilities that are denominated in
foreign currencies are retranslated at the rates prevailing on the balance
sheet date.
Non-monetary assets and liabilities denominated in foreign currencies that are
carried at historic cost are translated to the functional currency at the rate
prevailing on the date of the transaction. Non-monetary assets and liabilities
denominated in foreign currencies that are carried at fair value are
translated to the functional currency at the rates prevailing at the date when
the fair value was determined.
(c) Financial instruments
Non-derivative financial instruments comprise investments in equity and debt
securities, loan and interest receivables, cash and cash equivalents, other
receivables and trade and other payables.
A financial instrument is recognised if the Group becomes a party to the
contractual provisions of the instrument. Financial assets are derecognised if
the Group's rights to the cash flows from the financial assets expire or if
the Group transfers the financial asset to another party without retaining
control or substantially all risks and rewards of the asset. Regular way
purchases and sales of financial assets are accounted for at trade date, i.e.,
the date that the Group commits itself to purchase or sell the asset.
Financial liabilities are derecognised if the Group's obligations specified in
the contract expire or are discharged or cancelled.
Non-derivative financial instruments are recognised initially at fair value
less any directly attributable transaction costs, except as described below.
Subsequent to initial recognition, non-derivative financial instruments are
measured as described below.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits.
Financial assets designated at fair value through profit or loss
(a) Classification
Financial assets and financial liabilities designated at fair value through
profit or loss at inception are those that are managed and their performance
evaluated on a fair value basis in accordance with the Group's documented
investment strategy. The Group policy is for the investment manager and the
board of directors to evaluate the information about these financial assets on
a fair value basis together with other related financial information.
(b) Measurement
Financial assets at fair value through profit or loss are initially recognised
at fair value. Transaction costs are expensed in the income statement.
Subsequent to initial recognition, all financial assets at fair value through
profit or loss are measured at fair value, which will be estimated by the
directors following the International Private Equity and Venture Capital
Valuation Guidelines developed by the European Venture Capital Association
("EVCA") and others, unless the directors believe that such guidelines are not
appropriate for a particular investment.
The fair value of financial instruments at fair value through profit and loss
is estimated using pricing model and discounted cash flow techniques. The
estimated future cash flows are based on management's best estimates, which
are discounted to arrive at the present value of cash flows at the balance
sheet date. The discount rate is calculated using the Weighted Average Cost of
Capital method. Where the pricing model is used, inputs are based on market
related measures which may vary according to the specific industry that the
company operates in, at the balance sheet date.
Changes in the fair value of investments held at fair value through the profit
or loss are recognised in the Income Statement. On disposal realised gains and
losses are also recognised in the Income Statement. Dividend income from
financial assets at fair value through profit or loss is recognised in the
income statement within dividend income when the Group's right to receive
payments is established.
Loans receivable
Loans receivables are recognised initially at fair value. Subsequent to
initial recognition, loans receivable are stated at amortised cost with any
difference between cost and redemption value recognised in the income
statement over the period of the loan on an effective interest basis.
(d) Impairment
Financial assets that are stated at cost or amortised cost are reviewed at
each balance sheet date to determine whether there is objective evidence of
impairment. If any such indication exists, an impairment loss is recognised
in the income statement as the difference between the asset's carrying amount
and the present value of estimated future cash flows discounted at the
financial asset's original effective interest rate.
If in a subsequent period the amount of an impairment loss recognised on a
financial asset carried at amortised cost decreases and the decrease can be
linked objectively to an event occurring after the write-down, the write-down
is reversed through the income statement.
(e) Share capital
Participating Preference share capital is classified as equity if it is
non-redeemable, or redeemable only at the Company's option, and any dividends
are discretionary. Dividends on participating preference shares are recognised
as distributions within equity upon approval by the Group's shareholders.
(f) Segment reporting
The Directors consider that the Group is investing into one business segment,
investing into companies looking to come to a listing on a recognised stock
exchange, and into a single geographic segment, Russia and the Commonwealth of
Independent States. The Group is organised and operated as one segment both in
terms of business and geographical location. Consequently, no segment
reporting is provided in the Group's financial information.
(g) Expenditure
All expenses are accounted for on an accruals basis and are charged through
the Income Statement.
4. TAXATION
The Company is exempt from taxation under the terms of The Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 and is liable to an annual fee of �600.
Income tax within the subsidiary is provided for in accordance with Cypriot
income tax regulations. The Company is liable for income tax in Cyprus on its
taxable income at a flat rate of 10%. Taxable income does not include capital
gains on trading of securities either of a revenue or capital nature. All
expenses wholly and exclusively incurred in the production of taxable income
are deductible for Cypriot tax purposes. Expenses relating to the trading of
securities will not be allowed for tax purposes.
5. EARNINGS PER PREFERENCE SHARE
The consolidated loss per preference share of US$ 0.0001 per share are based
on the net deficit of US$ 7,106 and on 92,767,201 preference shares, being the
weighted average number of shares in issue during the period. 6. FINANCIAL
ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
Consolidated Company
USD USD
30 June 2008 30 June 2008
Lubel Coal Company Ltd. 6,900,000 shares 14,692,136 -
EPAM Systems, Inc. 249,788 shares 18,551,595 -
Nutrinvest bonds 1. 23,700 979,979 979,979
Vostok Servis Finance (10.99%). 203,126 8,443,692 8,443,692
RTS Stock Exchange ADR 31,054 17,561,755 17,561,755
Cost 60,229,157 26,985,426
Fair value adjustment 2,400,477 188,223
Fair value 62,629,634 27,173,649
Investment fair value is comprised as follows -
Lubel Coal Company Ltd. 6,900,000 shares 16,580,507 -
EPAM Systems, Inc. 249,788 shares 18,875,479 -
Nutrinvest bonds 1. 23,700 at RUB 99,900 each 1,009,341 1,009,341
Vostok Servis Finance (10.99%). 203,126 at RUB 994.11 each 8,602,552 8,602,553
RTS Stock Exchange ADR 31,054 at USD 565.523 each 17,561,755 17,561,755
62,629,634 27,173,649
7. TRADE AND OTHER RECEIVABLES
Consolidated Company
USD USD
Due from investors 2,250,000 2,250,000
Accrued income 551,401 289,645
Prepayments 303,011 303,011
3,104,412 2,842,656
8. LOANS RECEIVABLE
Consolidated Company
USD USD
30 June 2008 30 June 2008
Interest bearing unsecured loans
- CIPO Investments Limited - 59,662,983
- ZAO Imperia Detstva 2,078,689 -
- ZAO Pleasure Machine 3,545,902 -
5,624,591 59,662,983
CIPO Investments Limited
A Loan Facility Agreement was entered into by the Company as Lender and CIPO
as Borrower with the effective date of 1 January 2008. The Lender agreed to
make available to the Borrower a credit facility (the "Facility") in
accordance with the following terms and conditions:
The Lender granted the Borrower the Facility, in the aggregate principal
amount of US$85,000,000.00 (eighty five million US Dollars) (the "Facility
Amount"), under which the lender shall, when requested by the Borrower, make
advances in US$ (the "Advances") to the Borrower, subject to the agreement.
Until such time as the Advances are repaid in full by the Borrower to the
Lender, the Lender shall receive interest on the total sum of all outstanding
Advances. The outstanding Advances will carry a floating interest rate per
annum equal to the 3-month USD London Inter-bank Offered Rate ( the "Libor
Rate") plus 2% (two percent), calculated daily, commencing on the date of
receipt of the Advances by the Borrower until the date of full repayment.
Interest is to be compounded annually and will be payable in a lump sum on
final settlement of the loan.
The final maturity date is set at 1 January 2012 and the entire facility shall
be repayable at the final maturity date.
ZAO Imperia Detstva
On 3 March 2008 CIPO extended a loan facility of $5,000,000 to ZAO Imperia
Detstva for a period of three months at an interest rate of 15% per annum.
This facility has subsequently been further extended to 19 September 2008.
This loan is to be provided in two tranches. The first being no more than US$
2,000,000; the second tranche being no more than US$ 3,000,000. Both parties
confirm that the pledge of eleven ordinary voting shares of nominal value
Rubles 1000 each will collateralize the first tranche of the loan and a pledge
of eighteen shares shall collateralize the second tranche of the loan.
ZAO Pleasure Machine
On 5 June 2008 CIPO extended a loan facility of $3,500,000 to ZAO Pleasure
Machine for a period of three months at an interest rate of 20% per annum.
Under the loan agreement, the borrower is required to pledge 276,250
registered shares of common stock issued by ZAO Pleasure Machine; this
represents 25% of the issued and outstanding shares of the Company.
9. INVESTMENT IN SUBSIDIARY
Company
2008
USD
1,000 ordinary shares of CYP 1 each, unquoted 2,490
The Company acquired a 100% interest in CIPO Investments Limited ("CIPO") from
Sandford Industries Limited, a company incorporated in the British Virgin
Islands, on 20 December 2007. CIPO is a holding company incorporated in
Cyprus. At the time of acquisition cash amounting to USD 307,865 was held in
CIPO, along with the investment and liability disclosed in note 7. At the time
of the transaction Sandford Industries Limited was a related party due to its
association with one of the shareholders of the Company.
10. TRADE AND OTHER PAYABLES
Consolidated Company
USD USD
Administration fees 45,253 45,253
Management fees 196,403 196,403
Directors fees 35,960 35,960
Audit fees 96,990 38,461
Legal fees 20,028 20,028
Professional fees 571,012 571,012
Sundry - 2,490
965,646 909,607
11. SHARE CAPITAL
Consolidated
and Company
31 January 2008
Authorised
100 Founder Shares of $1 each 100
1,000,000,000 Unclassified Shares of $0.01 each 10,000,000
31 January 2008
USD
Issued and fully paid
2 Founder Shares of $1 each 2
Issued 18 January 20008
89,007,692 Participating Preference Shares of $0.01 each 890,077
Issued 29 May 2008
19,150,000 Participating Preference Shares of $0.01 each 191,500
1,081,577
The Founder Shares have been created so that Participating Preference Shares
("Shares") may be issued. To qualify as participating preference shares, the
Shares are required under Guernsey law to have a preference over another class
of share capital. Accordingly, on a winding up, the holders of the Founder
Shares have a right to repayment only of paid-up capital after capital on the
Shares. The Founder Shares are not redeemable and do not carry a right to
dividends. Each holder of Founder Shares is entitled, on a poll, to one vote
for each undivided Founder Share held. The two Founder Shares are beneficially
owned by the Investment Manager.
The Shares carry a right to attend but do not carry any right to vote at a
general meeting except on a modification of class rights issue and in the
limited circumstances provided elsewhere in the Articles. On a winding-up
holders of Shares have a preferential right in respect of a return of capital.
They are entitled to receive the nominal amount paid up on the Shares in
priority to holders of Founder Shares. Any surplus of assets then remaining
after payment by the Company of the nominal amounts paid up on the Founder
Shares will be distributed among the holders of the Shares pro-rata to their
respective holdings.
12. SHARE PREMIUM
On 22nd February 2008 the Royal Court of Guernsey approved the reduction of
capital by way of a cancellation of the Company's share premium account. The
amount cancelled, being USD 87,087,507, being credited as a distributable
reserve established in the Company's books of account. This shall be available
as distributable profits to be used for all purposes permitted under Guernsey
Company Law including the buy back of shares and the payment of dividends.
13. RISK PROFILE OF FINANCIAL ASSETS AND LIABILITIES
The Company will maintain positions in a variety of non-derivative financial
instruments as dictated by its investment management strategy. The Company
intends to approach selected companies which, in its opinion, would benefit
from additional equity financing or where the current owners may have an
interest in selling part of their equity.
The Company intends to pursue the following strategies:
- invest into companies either through the private placement of shares or an
alternative arrangement ahead of a future liquidity event.
- invest into companies which the Company believes are preparing for a future
liquidity event without a private placement.
- mezzanine finance for companies which trade on the region's secondary
markets.
The Company's investment portfolio comprises non-quoted equity and
equity-related investments that it intends to hold in the medium term to
achieve capital growth.
Subject to the Directors' general oversight, the Investment Manager has been
given the right to exercise approval regarding the acquisition, financing and
disposition of all of the investments of the Company.
The nature and extent of the financial instruments outstanding at the balance
sheet date and the risk management policies employed by the Company are
discussed below.
The CIS region has been experiencing political and economic change which has
affected, and may continue to affect, the activities of enterprises operating
in this environment. Consequently, operations in the CIS involve risks which
do not typically exist in other markets. The consolidated financial
information reflects management's assessment of the impact of the CIS business
environment on the operations and the financial position of the Group. The
future business environment may differ from management's assessment.
Market risk
Market risk embodies the potential for both loss and gains and includes
currency risk, interest rate risk and price risk.
The Group's strategy on the management of investment risk is driven by the
Group's investment objective. The objective being to achieve medium-term
capital growth through investments primarily in unlisted equity and equity
related securities and other instruments of companies that are located in
Russia and other countries of the Commonwealth of Independent States or that
derive a substantial portion of their revenue from or have assets within the
Region.
The Group may participate in a limited number of investments and, as a
consequence, the aggregate return of the Group may be substantially adversely
affected by the unfavourable performance of a single investment. In addition,
the Group will generally hold non-controlling interests in companies and,
therefore, will have a limited ability to protect its position. No rating
criteria have been established for the debt securities in which the Group may
invest. The Group may invest in low rated (considered to be those that are
below "investment grade") and unrated debt securities. Low rated and unrated
debt securities are the equivalent of high yield, high risk bonds, commonly
known as "junk bonds" and are generally considered to be speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of its obligations under such securities. These
practices may adversely affect the Group's investments.
Details of the nature of the Group's investment portfolio at the balance sheet
date are disclosed in note 7 above.
Currency risk
The Group may invest in financial instruments and enter into transactions
denominated in currencies other than US Dollars. Consequently, the Group is
exposed to risks if exchange rates change in a manner that has an adverse
effect on the value of that portion of the Group's assets or liabilities
denominated in currencies other than the U.S. Dollar.
Shares are issued in U.S. Dollars. The Group's assets will generally be
invested in securities and other investments that are denominated in
currencies other than U.S. Dollars. Accordingly, the value of an investment
may be affected favourably or unfavourably by fluctuations in exchange rates,
notwithstanding any efforts made to hedge such fluctuations. In addition,
prospective investors whose assets and liabilities are primarily denominated
in currencies other than the U.S. Dollar should take into account the
potential risk of loss arising from fluctuations in the rate of exchange
between the U.S. Dollar and such other currency. The Group may utilise
derivatives such as forwards, futures, options and other derivatives to hedge
against currency fluctuations, but there can be no assurance that such hedging
transactions will be effective or beneficial in preventing a loss by a
Shareholder on its investment. No hedging instrument is being utilised by the
Company at the balance sheet date.
At the reporting date the Group had the following foreign currency exposure:
30 June 2008
Currency Value USD % of net assets
Russian Rouble 9,611,893 9.00%
At 30 June 2008, had the US Dollar strengthened by 5% in relation to the
Rouble, with all other variables held constant, net assets attributable to
holders of participating shares per the income statement would have decreased
by USD 480,595. A 5% weakening of the US Dollar against the Rouble would have
resulted in an equal but opposite effect on the above financial amounts to the
amounts shown above, on the basis that all other variables remain constant.
The parent company is not exposed to currency risk as all major transactions
and loans are denominated in U.S. Dollars.
Interest rate risk
The majority of the Group's financial assets are non-interest bearing.
Interest-bearing financial assets and interest-bearing financial liabilities
mature or re-price in the short-term. As a result, the Group is subject to
limited exposure to fair value interest rate risk due to fluctuations in the
prevailing levels of market interest rates. Any excess cash and cash
equivalents of the Group will be invested in high quality short-term
commercial paper with the term to maturity of up to three or six months. The
maturity dates of the fixed income instruments correspond to their re-pricing
dates.
Other price risk
Other price risk is the risk that value of an instrument will fluctuate as a
result of changes in market prices (other than those arising from currency
risk or interest rate risk), whether caused by factors specific to an
individual investment, its issuer or all factors affecting all instruments
traded in the market.
As the majority of the Group's financial instruments are carried at fair value
with fair value changes recognised in the income statement, all changes in
market conditions will directly affect net investment income.
Under normal circumstances the Group will invest primarily in unlisted equity
and equity-related securities and other instruments of companies that are
located in Russia and the other countries of the Commonwealth of Independent
States or that derive a substantial portion of their revenue from or have
substantial assets within the Region.
The following table details the breakdown of the investment assets held by the
Group and the Company:
Consolidated Company
30 June 30 June
2008 2008
% of Net % of Net
Investment Assets Assets Assets
Equity investments:
Unlisted equities 49.27 16.61
Debt investments:
Corporate Debt 8.93 9.09
Total investment assets 58.21 25.70
Investment liabilities - -
Liquidity risk
The Group's financial instruments include unlisted equity investments, which
are not traded in an organised public market and which generally may be
illiquid. As a result, the Group may not be able to liquidate quickly some of
its investments in these instruments at an amount close to their fair value in
order to meet its liquidity requirements.
At the reporting date group held significant amount of cash and cash
equivalents to manage its liquidity position.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with
the Group.
The Group may be subject to risk of loss of assets placed on deposit with a
broker in the event of the broker's bankruptcy, the bankruptcy of any clearing
broker through which the broker executes and clears transactions, or the
bankruptcy of an exchange clearing house.
Many of the markets in which the Group may effect its transactions are
"over-the- counter" or "inter-dealer" markets. Participants in these markets
are typically not subject to credit evaluation and regulatory oversight as are
members of "exchange-based" markets. To the extent that the Group invests in
swaps, derivatives or synthetic instruments, or other over-the-counter
transactions in these markets, it may take a credit risk with regard to
parties with which it trades and may also bear the risk of settlement default.
These risks may differ materially from those involved in exchange-traded
transactions, which generally are characterised by clearing organisation
guarantees, daily marking-to-market and settlement, and segregation and
minimum capital requirements applicable to intermediaries. Transactions
entered into directly between two counterparties generally do not benefit from
these protections, which in turn may subject the Group to the risk that a
counterparty will not settle a transaction in accordance with agreed terms and
conditions because of a dispute over the terms of the contract or because of a
credit or liquidity problem. Such "counterparty risk" is increased for
contracts with longer maturities when events may intervene to prevent
settlement.
The ability of the Group to transact business with any one or any number of
counterparties, the lack of any independent evaluation of the counterparties
or their financial capabilities, and the absence of a regulated market to
facilitate settlement, may increase the potential for losses to the Group. The
risks associated with counterparties may adversely affect the Group's
investments, business, financial condition and prospects and the market price
of the Shares, and may lead to a total loss of a Shareholder's investment.
Apart from cash and cash equivalents held with reputable financial
institutions, the carrying amount of the Group's financial assets exposed to
credit risk and their industry wide concentration is as below:
Consolidated
30 June
2008
% of NAV USD
Agriculture 0.94% 1,009,341
Entertainment 3.30% 3,545,902
Stock Exchange/Finance 16.32% 17,561,755
Mining 15.41% 16,580,507
Retail 1.93% 2,078,689
Security Services 8.00% 8,602,552
Software Development 17.54% 18,875,479
Total 63.44% 68,254,224
Other than outlined above, there were no significant concentrations of credit
risk to counterparties at 30 June 2008.
14. RELATED PARTIES AND TRANSACTIONS
Ultimate controlling party
The company is a collective investment scheme and the Directors are not aware
of any ultimate controlling party.
Investment Manager
Under the Investment Management Agreement dated 10 December 2007 the
Investment Manager, Da Vinci Capital Management Limited, will be entitled to
receive a management fee (the "Management Fee") at an annual rate equal to
2% of the value of the assets of the Group less its liabilities (prior to the
deduction of the relevant portion of the Management Fee or any accrued
Performance Fee) as at the date on which the Management Fee is being
calculated. Management Fees are calculated and accrued as of the end of each
week and paid monthly in arrears or at such other time as the Directors, with
the consent of the Investment Manager, may determine. The Management Fee will
be paid in cash within 30 days of the end of each monthly payment date.
During the period, fees of $840,147 were payable to the Investment Manager
with $196,403 outstanding at the period end.
The Investment manager is also entitled to a performance fee (the "Performance
Fee") equal to 20% of net profits earned over each Performance Period, subject
to a High Water Mark, which incorporates a Hurdle Rate. If the final Net Asset
Value per Share achieved at the close of a Performance Period (as adjusted for
any distributions made during the period) is less than the High Water Mark, no
Performance Fee will be payable for such Performance Period. The "High Water
Mark" at the end of a Performance Period is the greater of (a) the highest Net
Asset Value per Share achieved at the end of any previous Performance Period;
and (b) the initial offer price of U.S.$1 per Share plus 8% per annum,
compounded annually, as of such date (the "Hurdle Rate").
The use of a High Water Mark ensures that investors will not be charged a
further Performance Fee until (a) any losses are recovered and (b) the Company
has achieved more than an 8% compounded annual growth rate up to that point in
time.
Unless otherwise determined by the Directors, each "Performance Period" will
be a period of 12 calendar months, save that the first Performance Period will
begin on the Commencement Date and end on 31 December 2008 (note: the first
Performance Period will be shorter than 12 calendar months) and the last
Performance Period will begin on 1 January prior to the termination of the
Investment Management Agreement. In respect of any extended period, the Hurdle
rate will be annualised.
The Performance Fee for each Performance Period will be paid as follows: the
Investment Manager will be entitled to receive 50% of the Performance Fee in
cash (the "Interim Payment") subject to conditions as laid out in the Private
Placement Memorandum and the remaining 50% (the "Deferred Payment") will be
held as a cash reserve. The Interim Payment will be made within 30 days
following the end of the Performance Period. Any outstanding Deferred Payment
will be paid to the Investment Manager in cash as soon as is practicable
following the date of termination of the Company.
Directors
Directors are entitled to receive a collective annual fee of GBP 90,000 and to
be reimbursed for all travel and other costs incurred as a direct result of
carrying out their duties as Directors. The outstanding balance due to the
Directors at the period end was USD 35,960 (GBP 11,813 to Mr Fisher and GBP
6,250 to Mr Smith). Mr Clark has elected to waive his Director Fee.
15. SUBSEQUENT EVENTS
Via a secondary placement, the Company issued 9.5 million new shares effective
as of Monday 21st July 2008 at a price of USD 1.00 per share.
Enquiries:
Fortis Fund Services (Guernsey) Limited
Company Secretary
Martello Court
Admiral Park
St Peter Port
Guernsey GY1 3HB
Tel: 01481 751000
Fax: 01481 751001
END
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