GEMS

USD7.6 million
www.gems.com.hk

GEMS Oriental and General Funds (GEMS O&G Funds I&II) are equity funds, managed by General Enterprise Management Services Limited (GEMS), a private equity fund management group. These funds have a focus on investment in the developing Asia Pacific region. Funds under management totals over US$500 million, representing capital commitments from institutional corporate clients and select individual investors from around the world. VenFin has invested US$7.6 million in GEMS O&G II during the period under review.

INVESTMENT STRATEGY

GEMS’s principal objective is to achieve medium to long-term capital appreciation for GEMS O&G Funds by investing in a diversified portfolio of equity investments in the Asia Pacific region. Direct investment in these markets, where liquidity and lending policies are tight, creates a unique opportunity for the GEMS O&G Funds to provide an alternative source of capital for well-managed and well-positioned companies in need of equity for strategic growth, acquisitions, market expansion or balance sheet restructuring.

INVESTMENT CRITERIA

The value GEMS places on “intelligence” is fundamental to its comprehensive investment evaluation process. GEMS therefore does not invest in businesses or industries where it does not have first-hand knowledge or experience. The diversity and experience of the members of the GEMS O&G Funds Board and Advisory Council and its management and investment team provide them with a wealth of expertise in some of the region’s most promising sectors. To date, these include telecommunications, technology, finance, retailing, energy, media, manufacturing, engineering, trading, transportation and others.

The following criteria are implemented:

• Each investment is likely to be between US$10 million and US$50 million. No single investment exceeds or will exceed 20% of the capital of each fund.
• Funds are invested with a three to five-year time horizon.
• GEMS will not consider any investment where they cannot clearly identify a minimum internal rate of return of 25% in US dollar terms.
• GEMS normally takes significant minority stakes in companies in which it invests, but through co-investment with strategic investors, GEMS may sometimes participate in larger combined stakes. GEMS seeks board representation that is commensurate with GEMS O&G Funds shareholding.
• Prior to making any investments, GEMS would explore multiple exit strategies expected to produce the highest returns. These strategies may include trade sales, put options, buyouts, strategic investors, new financial investors, IPOs and other M&A transactions.

Milestone Capital Management Limited (MCM), a China-focused private equity investment firm with offices in Shanghai and Beijing, initiated the Milestone China Opportunities Fund I L.P. (Milestone China), a limited partnership. MCM is the general partner. VenFin has invested US$500 000 in Milestone China to date. US$1 million was committed by VenFin to this fund at year-end. Subsequent to the year-end, a further US$4 million has been committed to the fund of which US$2 million was invested. s

The principal objective of MCM is to achieve superior medium-term capital appreciation in its funds through direct investments in well-established, high-growth companies seeking expansion or acquisition capital in China.

THE CHINA OPPORTUNITY

MCM strongly believes that the time is ideal for investors to capitalise on China’s remarkable economic growth and market reform.

• China offers attractive investment opportunities in robust companies with proven operating track records. Through negotiation, investments can be made at reasonable valuation with definable and realisable exits.
• Exits are enhanced by the ongoing development of domestic capital markets, foreign direct investment and the consolidation of various industries in China.
• The economy will continue to grow more rapidly than most other countries in the world. The 2008 Olympics in Beijing and 2010 World EXPO in Shanghai will offer further growth momentum.
• As China’s regulatory and legal environment improves further, MCM believes venture capital and direct investments in China may achieve significant capital appreciation over both short term and long term.

INVESTMENT HIGHLIGHTS

• Typical investment in the partnership ranges from US$1 million to US$5 million.
• To date, the Milestone China Fund investors committed a total of US$33 million in the fund. Overview of Milestone’s investments to date:

Veritas Fund II L.P. (V VP Fund II L.P.) is an equity fund, managed by Veritas Venture Partners (Cayman) L.P. (Veritas), Israel’s oldest venture capital firm. VenFin is a limited partner of the fund, with a maximum exposure of US$1.5 million, representing an interest of 4%. Veritas has drawn US$600 000 of this commitment.

The investment broadens VenFin’s international deal flow, providing VenFin with exposure to Israel and the southeast USA region, where the fund is primarily invested in seed-stage technology companies. V VP II focuses on enterprise software, network communications and medical devices.

OVERVIEW OF THE YEAR TO 30 JUNE 2004

V VP Fund II L.P. made four investments by June 2003, and an additional five during the year to 30 June 2004.

THE FUTURE

The gradual upward trend of venture capital investing in Israel and the US is expected to continue, with a number of funds commencing new fund-raising initiatives. Veritas continues to experience good deal flow at reasonable valuations. Its biggest challenge is to attract co-funding for early-stage investments in today’s markets.