KUBC.L Regulatory News (KUBC)

9 Aug 2007 07:00

Kubera Cross-Border Fund Limited09 August 2007 Kubera Cross-Border Fund Limited Interim Results for the period ended 30 June 2007 Kubera Cross-Border Fund Limited (LSE/AIM: KUBC), an investment company tradedon the AIM market of the London Stock Exchange has issued its maiden interimresults for the period ended 30 June 2007. Highlights - The Company was admitted to trading on AIM on 27 December 2006, raising US$ 206 million by issue of 206,000,000 shares of US$ 0.01 at a price US$ 1.00 each. - During the period from 27 December 2006 to 30 June 2007, the Company completed two investments, investing a total of US$ 36.5 million. - Net asset value per share stood at US$ 0.977 as on 30 June 2007. Electronic and printed copies of the interim report will be sent to shareholdersshortly. Copies of the report will be available, free of charge, from theoffices of Grant Thornton Corporate Finance, Grant Thornton House, MeltonStreet, Euston Square, London NW1 2EP For more information contact: Kubera Partners, LLC (as the investment manager of Kubera Cross-Border Fund Limited) Ramanan Raghavendran, Managing PartnerTel: +1 212 (295) 2400 Grant Thornton Corporate Finance (Nominated Adviser)Philip Secrett, PartnerTel: +44 (0) 20 7383 5100 LCF Edmond de Rothschild Securities Limited (Broker)Hiroshi FunakiTel no: +44 (0) 20 7845 5968 Chairman's Statement Dear Shareholders: I am pleased to present the first interim report of the Kubera Cross-Border FundLimited (the "Company") for the period ended 30 June 2007. As outlined in the Admission Document for the Company when its shares wereadmitted to trading on the AIM market of the London Stock Exchange on 27December 2006, the Company, advised by Kubera Partners LLC, its investmentmanager (the "Manager"), invests in businesses that operate in a cross-borderenvironment. These businesses primarily operate between the US and India,although investments in other geographies may also form part of the Company'sportfolio if the Manager believes it can bring distinctive competence and valueto such investments. Investments The Manager has screened a large number of opportunities on behalf of theCompany over the course of the first half of 2007. During this period, theCompany completed two investments, in Kejriwal Stationery, the leading Indianmanufacturer of paper-based stationery products for the US market, and AdayanaInc., an industry-leading US-based provider of e-learning and training servicesthat has a large technology development unit in Hyderabad, India. Eachinvestment amounted to US$20 million (including the 8.8% co-investment byaffiliates of the Manager), or an aggregate of US$40 million, for substantialminority interests in both cases. Indian environment The favorable economic and regulatory changes of the last decade have created anew generation of export-oriented Indian companies. Of particular note here isthe desire of many of these businesses to grow through Western acquisitions, asevidenced by several substantial transactions announced in the last two years.These businesses, and their management teams, view "intelligent" capital as acritical component of their growth strategies, which plays to the Company'sstrengths and focus. The Indian environment for private equity investments, while undoubtedlycompetitive, has worked in the Company's favor. The Manager's skill set, networkand experience in cross-border environments makes it, on behalf of the Company,a partner of choice for export-oriented Indian companies. This has created astrong investment pipeline for India-domiciled investments for the Company. In India, we expect the Company to remain sector-agnostic provided there is anexport component to the investee company's plans. In addition, we expect to seethe Company's Indian portfolio consist largely of substantial minority holdings,as control positions are rarely available. US environment In the US, the Company has moderated its investment pace to match the build-outof the Manager's New York team. With a full team now in place, the Managerexpects both deal flow and transaction capability to rapidly reach that of theManager's Indian operation. The Company is differentiated in the US market because of its focus on businessservices and IT services (reflecting the experience of the Manager). However,the Company has elected to decline several of the more prominent IT services andoutsourcing investment opportunities, primarily due to valuation concerns -these concerns have largely been borne out by the stock market performance ofpublic companies in these sectors over the last six months, and we expectopportunities to become more attractive in the coming months as valuationscontinue to correct. Public market investments The Company has evaluated several potential investment opportunities in quotedcompanies, in the US, the UK and India. The majority of these are so-calledPIPEs, which the Manager treats as it would any private equity opportunity. TheCompany may, however, accumulate positions in public companies where a privateequity opportunity could take time to fructify or could benefit from apre-existing equity interest. Financial Performance The Company issued 206 million shares at US$1.00 each on 27 December 2006,raising net proceeds of US$199.8 million. In accordance with US GAAP, all costsrelating to the issue of the shares were written off to the income statement. At30 June 2007, the net asset value per share was US$0.977 and US$36.5 million hadbeen invested. Substantially all cash held pending investment in companies isplaced in low-risk money market instruments. It is to be noted that potential follow-on investments in portfolio companiesare not specifically quantified, unless there is a contractual commitment to doso. In the case of both Adayana and Kejriwal Stationery, we are activelyevaluating acquisitions that may give the Company the opportunity to investfurther capital. Our anticipation is that the Company may invest an additionalamount between 50% and 100% of the original investment if such acquisitions cometo fruition. The aggregate dollar amount invested to date should be evaluated inthis context. Prospects and Shareholder Information Given the experience and track record of the Manager's partners the Companyenjoys a competitive edge in the attractive cross-border niche in theIndia-centric private equity environment. The Board is confident, given thecurrent pipeline of attractive investment opportunities as well as the Manager'steam now being fully operational, that the proceeds of the initial publicoffering will be invested within 18 months from the date of Admission, subjectto standard holdbacks, in companies demonstrating attractive potential long-termreturns. Information on existing and new investments, quarterly net asset values andother material events relating to the Company are available through newsreleases made to the London Stock Exchange available onwww.londonstockexchange.co.uk under ticker KUBC or through the Company's websiteat www.kuberacrossborderfund.com. Our thanks for your continued support. Martin M. AdamsChairman Investment Manager's Report Team The Company and the Manager began effective operations at the time of theadmission of the Company to the AIM market of the London Stock Exchange on 27December 2006. Since then, the Manager has been fully occupied in making theCompany's initial investments, and in building out its investment and supportteams in Mumbai and New York - a process that is now largely complete - and iswell positioned to meet the objectives laid out in the Company's AdmissionDocument. The Manager has built an investment team combining strong private equity andoperational skill sets reflecting our strategy. Our professionals have severalyears of experience with leading consulting, IT and private equity firmsincluding McKinsey and Company, AT Kearney, Cambridge Technology Partners andRhone Capital. We have also built a strong support team in Mumbai to assist withour global operations, including finance, compliance, marketing and generaladministration. Details on the Manager and biographies of team members can beobtained at www.kuberapartners.com. Macro environment The two most important macro trends that affect the Company's investment thesis- the growth in Indian GDP and the continued trend towards the offshoring ofservices and manufacturing in Western economies - remain firmly in place. IndianGDP growth was 9.1% during the first quarter of 2007, and the continued pressureon cost and efficiency in Western economies has driven strong offshoring growth,as evidenced by the strong performance of the leading India-oriented IT andoutsourcing companies. While we expect periodic political pressure in the Westas well as greater efficiency imposed by a strengthening rupee, the underlyingglobalization thesis of the Company appears to be secure for the foreseeablefuture. China continues to dominate lower-end manufacturing but India is makingimpressive strides in products involving a significant design, engineering,services or customer support component. Investment environment and strategy In both India and the US, we operate in a competitive private equityenvironment. In India, for example, US$7.5 billion of private equity investmentswere consummated during the course of 2006. In our specific target area ofcross-border businesses, our primary competition arises from global privateequity firms that have operations in both Western economies and India. We havefound that both in the US and in India, management teams are becomingincreasingly aware of the importance of a stable value-added capital partner.Our exclusive focus on cross-border businesses, our integrated global approach,our network, and our track record generate proprietary deal flow, even whenthere is an intermediary involved or where there is competition. In both ourinvestments to date, Adayana (in the US) and Kejriwal Stationery (in India), wewere able to stop an intermediated process at an early stage and obtain superiorterms as a consequence of our focus and expertise. While there is no assurancethat this favorable environment will continue indefinitely, at this time we arewell-positioned to continue sourcing attractive investments. Investment criteria and structure In evaluating potential investments on behalf of the Company, we have created aformal deal "escalation" process, with numerous checkpoints and investmentcommittee deliberations, to ensure that our work at all times supports theinvestment thesis as well as the Company's mandate. We seek to invest at least US$20 million (between the Company and theco-investment by the Manager's affiliates) in any one investment round, but haveevaluated several exceptions to this criterion when we see unusual upsidepotential, or believe there is a high likelihood of increasing our capitalcommitment over time. We have also evaluated several investments where theequity commitment would be in excess of US$40 million, which is the upper limitof what is permissible for the Company - in such situations we engageco-investors as appropriate. In selected cases, we may take passive positions inlisted companies where we see a potential path to a larger negotiatedtransaction, and have also evaluated certain fund investments where we cancreate a pass-through structure such that the Company's shareholders do not bearany additional economic burden. When evaluating opportunities, we give precedence to the quality of themanagement team and the relationship we have formed with them. Given ourvalue-added approach, this element is critical as it drives their receptivity toour advice and assistance. We conduct detailed diligence of the global marketopportunity prior to making any investment, in addition to standard legal,accounting, operational and business diligence. Of course a detailed economicmodel, allowing us to assess whether the investment generates base case returnsin our target range, is the foundation for a decision to proceed with aninvestment. Our investment structures for unlisted private companies are designed tomitigate downside risk and provide strong governance. These also occasionallyhave tangible economic value that equates to a lower effective valuation. We donot typically disclose the details of our specific structures for numerousreasons including protecting the underlying portfolio company in its day-to-daybusiness operations in competitive environments, but as a matter of policy wegenerally seek a liquidity preference so as to greatly mitigate downside risk;often have redemption rights at a defined point (usually five years), again tomitigate downside risk; have several veto rights and governance provisions; havestandard minority economic rights where appropriate, including pre-emptive,co-sale and tag-along rights; and typically take one or more seats on thecompany's board of directors. It goes without saying that all these elements cannot guarantee superiorreturns, but we believe the probability of a favorable outcome is significantlyincreased as a consequence. Investments During the period covered by this report, the Company completed two investments,in Kejriwal Stationery, the leading Indian manufacturer of paper-basedstationery products for the US market, and Adayana Inc., an industry-leadingUS-based provider of e-learning and training services that has a largetechnology development unit in Hyderabad, India. In both cases the Companyobtained substantial minority interests in the underlying companies (in excessof 25%), significant downside protection features, and strong governance rightsincluding board seats and several veto rights. We are engaged with bothcompanies in assisting with their growth strategies, primarily in the followingthree areas: recruiting in the US and in India at a senior level, evaluatingfollow-on acquisitions, and improving board reporting and governance. Given the unlisted and recent nature of these investments, it is too early tocontemplate valuation changes. However, both companies continue to generatestrong results. Kejriwal Stationery is now the leading Indian exporter ofpaper-based stationery products to the US, in less than three years; and Adayanahas shown strong growth in both the US and the Indian markets. We will keep youinformed as developments occur in our portfolio. Pipeline The strength of our investment pipeline, developed in a short period, has been asource of satisfaction for us. We have developed a structured approach tosourcing investments based on past experience. Components of our sourcingstrategy include: a systematic outreach program to intermediaries in both Indiaand the US; mining our individual networks; and a "top-down" sector researcheffort in selected sectors that we believe are well-positioned for ourinvolvement. As a consequence, we have screened a large number of potentialinvestments, and expect this flow of opportunities to only get better. We have been judicious in making investments and have brought stringentdiscipline to evaluation and diligence. In three cases over the last six months,we declined an investment opportunity well into the diligence stage as the factsdid not support the investment thesis. While it is disappointing to declineinvestment opportunities at a late stage given our limited time and resources,we do not intend to compromise in our approach. Conclusion We are pleased with the continued strength of our investment theses, ourexisting investments, the quality of our investment pipeline, and thecomposition of our team. We are confident that as our portfolio is built andthen matures, investors in the Company will obtain unique exposure to the exportside of the India story - India as a "factory to the world" for products andservices. Kubera Partners LLCInvestment Manager Investments --------------------------------------------------------------------------------------------------------------Adayana Inc. Kejriwal Stationery--------------------------------------------------------------------------------------------------------------Adayana is a learning services outsourcing company Kejriwal Stationery manufactures and distributes paperthat provides a range of technology-enabled learning related stationery products to customers predominantlyservices to a focused set of vertical markets that in the US markets, using manufacturing operations ininclude automotive services; defense; food, India. The Company also uses a cross-border model foragriculture and life sciences; and training customer service, logistics, technology and designoutsourcing. innovation. Adayana uses technology as an underlying enabler to The Company's adherence to global pricing norms, highsupport the training needs of its clients. The company quality, and superior customer service has led toeffectively uses a cross-border business model, with strong performance in recent years.sales, support, and other customer-facing functions inthe US and other markets supported by a strongdevelopment organization in India. An aggregate of US$20 million was invested, of which a co-investment of 8.8% was provided by affiliates of the Investment Manager.An aggregate of US$20 million was invested, of which aco-investment of 8.8% was provided by affiliates ofthe Investment Manager.-------------------------------------------------------------------------------------------------------------- Domicile US Domicile Singapore--------------------------------------------------------------------------------------------------------------Securities held Series A Participating Securities held Convertible Redeemable Preferred Stock, Series B Preference Shares Preferred Stock--------------------------------------------------------------------------------------------------------------Offices Minneapolis, US and Offices Mumbai, India and New Hyderabad, India York, US--------------------------------------------------------------------------------------------------------------Sector Learning services Sector Stationery products--------------------------------------------------------------------------------------------------------------Website www.adayana.com Website www.kejriwalgroup.net--------------------------------------------------------------------------------------------------------------Acquisition date 26 June 2007 Acquisition date 3 April 2007--------------------------------------------------------------------------------------------------------------Purchase cost US$ 18,230,871 Purchase cost US$ 18,230,871--------------------------------------------------------------------------------------------------------------Book value US$ 18,230,871 Book value US$ 18,230,871--------------------------------------------------------------------------------------------------------------Change on cost % - Change on cost % ---------------------------------------------------------------------------------------------------------------Ownership Private Ownership Private-------------------------------------------------------------------------------------------------------------- Balance Sheet (unaudited)As at 30 June 2007 Notes US$-------------------------------------------------------------------------------- Investments 3 36,474,762 Current Assets Cash and Cash Equivalents 160,835,550 Accrued interest 4,110,676 ----------- 164,946,226 Current Liabilities Accrued expenses 120,378 ----------- 120,378 Net Current Assets 164,825,848 Net Assets 201,300,610 ----------- Shareholders' Equity Issued Capital 4 2,060,000 Share Premium 203,940,000 Accumulated losses (4,699,390) 201,300,610 ----------- Number of shares in issue 206,000,000 Net asset value per share 5 0.977 Statement of Income (unaudited)For the period ended 30 June 2007 Notes US$--------------------------------------------------------------------------------IncomeInvestment Income 6 4,962,937 -----------Total Income 4,962,937 Expenses 7 Organization and listing expenses 7,344,759 Investment management fee 1,995,615 Broker fee 20,092 Directors' fees 65,238 Professional fees 25,555 Insurance 200,101 Other expenses 10,967 ----------Total Expenses 9,662,327 Loss before tax (4,699,390) Taxation 8 - ----------- Net Loss (4,699,390) ----------- Statement of Changes in Shareholders' Equity (unaudited)For the period ended 30 June 2007 Issued Share Accumulated Capital Premium Losses Total US$ US$ US$ US$----------------------------------------------------------------------------------------------------Balance as at 23 Nov 2006 (incorporation date) - - - - Issue of shares 2,060,000 203,940,000 - 206,000,000 Net loss for the period - - (4,699,390) (4,699,390) --------------------------------------------------------------Balance as at 30 June 2007 2,060,000 203,940,000 (4,699,390) 201,300,610 -------------------------------------------------------------- Statement of Cash Flows (unaudited)For the period ended 30 June 2007 US$-------------------------------------------------------------------------------Cash flows from operating activitiesNet loss for the period (4,699,390)Adjustments for: Increase in interest receivable (4,110,676) Increase in accrued expenses 120,378 ----------Net cash used in operating activities (8,689,688) Cash flows from investing activities Purchase of investments (36,474,762) -----------Net cash used in investing activities (36,474,762) Cash flows from financing activities Issue of ordinary shares 2,060,000 Proceeds from share premium 203,940,000 -----------Net cash provided by financing activities 206,000,000 Net increase in cash and cash equivalents 160,835,550 Cash and cash equivalents at the beginning of the period - -----------Cash and cash equivalents at the end of the period 160,835,550 ----------- Notes to the Financial Statements (unaudited)For the period ended 30 June 2007 1. The Company Kubera Cross-Border Fund Limited was incorporated on 23 November 2006 as aclosed-end, Cayman Islands company established to make investments in businessesthat leverage India-based resources for lower costs or greater access to talent.The Company has appointed Kubera Partners LLC, (the 'Investment Manager') as itsinvestment manager. The Company focuses its investments on businesses thatserve, or seek to serve, customers in North American and European markets forall or part of their activities. Investment targets for the Company includeIndian businesses that provide services to clients in developed country markets,and US-based companies whose business model may benefit substantially from theopportunity to utilize Indian outsourcing services The registered office of the Company is PO Box 309GT, Ugland House, South ChurchStreet, George Town, Grand Cayman, Cayman Islands. The Company's shares wereadmitted to trading on AIM, a market operated by the London Stock Exchange on 27December 2006. 2. Summary of significant accounting policies Basis of accounting The financial statements expressed in US dollars have been prepared under thehistorical cost convention and in conformity with US GAAP. Cash and cash equivalents Cash and cash equivalents of demand deposits and short-term, highly liquidinvestments readily convertible to known amounts of cash and which are subjectto insignificant risk of change in value. Interest income Interest income is calculated on an accrual or, if applicable, effective yieldbasis. Valuation policy The assets of the Company will be valued as follows: • securities listed on a stock exchange or traded on any other regulated market will be valued at the last closing price on such exchange or market or, if no such price is available, at the mean of the bid and asked price on such day. If there is no such price or such market price is not representative of the fair market value of any such security, then the security should be valued based on quotations readily available from principle-to-principle markets, financial publications, or recognized pricing services, or a good faith estimate of fair value should be made in accordance with US GAAP, in consultation with the Investment Manager; • if a security is listed on several stock exchanges or markets, the last closing price on the stock exchange or market which constitutes the main market for such security will be used; • where the securities are not listed on any stock exchange, fair value shall be estimated with reference to US GAAP; • if a revaluation of an unlisted security of the Company is proposed by the Investment Manager, it shall be accepted by the Company at its revised value only upon unanimous approval of the independent Directors of the Board; • cash or other liquid assets will be valued at their face value with interest accrued to the end of the day; • the value of accounts receivable, prepaid expenses and interest receivable and dividend income receivable will be the full amount thereof less any withholding tax unless the Board determines the value of the asset to be less than that amount; • values expressed in a currency other than US dollars will be translated into US dollars at the average of the last available buying and selling price for such currency; and • for avoidance of doubt, all derivatives, forwards or other option contracts on listed securities will be held at fair value. The Investment Manager may use such probable realization value estimated with care and in good faith by a competent professional appointed by the Investment Manager. Foreign currency translations The accounting records of the Company are maintained in US dollars. Foreigncurrency translations during the year are translated at the exchange rates thatapproximate those prevailing on transaction dates. Foreign currency monetaryassets and liabilities at the balance sheet date are translated into US dollarsat exchange rates that approximate those prevailing on that date. Exchange gainsand losses are calculated in income for the period. 3. Investments Investments at value as at 30 June 2007: Number of Shares Closing balance Gain / (loss) US$ US$Unlisted securitiesKubera Cross-Border Fund LP - 36,457,070 - (the primary asset of which is its directinvestment in Adayana Inc. and itsindirect investment in Kejriwal StationeryHoldings Limited through KuberaCross-Border Fund (Mauritius) Limited) Kubera Cross-Border Fund (GP) Limited 200 17,692 -(the primary asset of which is itspartnership interest in KuberaCross-Border Fund LP) ----------Total 36,474,762 - 4. Share capital Authorized: 1,000,000,000 ordinary shares of US$0.01 each US$10,000,000Issued & allotted: 206,000,000 ordinary shares of US$0.01 each US$2,060,000 5. Net asset value per share The net asset value per share is calculated based on the net assets attributableto the shares as at 30 June 2007 of US$ 201,300,610 or US$ 0.977 per share. 6. Investment income The amount of the investment income as of 30 June 2007 of US$ 4,962,937comprises of interest income from deposits in bank and short-term, highly liquidinvestments. Interest US$ 161,592Income on short-term investments - realized US$ 690,669Income on short-term investments - unrealized US$ 4,110,676 -------------Total US$ 4,962,937 7. Expenses Investment management fee Kubera Partners LLC, the Investment Manager, is entitled to receive an aggregateannual fee from the Company payable quarterly in advance at the rate of 2% ofthe net asset value of the Company. Directors' fees Each Director is paid a fee of £20,000 per annum and the Chairman is paid£25,000 per annum, plus reimbursement for out-of-pocket expenses incurred in theperformance of their duties. Each of Messrs. Mahadeva and Raghavendran haswaived his Director's fees for so long as he is interested in the InvestmentManager. 8. Taxation Under the laws of the Cayman Islands, the Company is not required to pay any taxon profits, income, gains or appreciations and, in addition, no tax is to belevied on profits, income, gains, or appreciations or which is in the nature ofestate duty or inheritance tax on the shares, debentures or other obligations ofthe Company or by way of withholding in whole or part of a payment of dividendor other distribution of income or capital by the Company to its members or apayment of principal or interest or other sums due under a debenture or otherobligation of the Company. 9. Events after balance sheet date There have been no material events since the balance sheet date. This information is provided by RNS The company news service from the London Stock Exchange