In order to strengthen its global network, VenFin made investments
in a few equity funds.
In addition to providing VenFin shareholders
with access to high-growth opportunities in markets they otherwise
would not have access to, these investments provide VenFin and its
investee companies with access to potential direct investment opportunities
as well as to networks and expertise in markets outside South Africa. |
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USD12.6 million |
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| General Enterprise Management Services Limited (GEMS)
is a private equity fund management group that manages the GEMS Funds,
namely GEMS I – 1998 vintage; GEMS II – 2001 vintage and
GEMS III – 2005 vintage. These funds make direct investments
in the Asia Pacific Region. Assets under management in the first
two funds total over US$500 million, representing capital commitments
from corporate clients and selected individual investors from around
the world. The GEMS III fund is targeting to raise USD300 million. |
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| VenFin has invested USD12.6 million in GEMS II. During
the period under review VenFin committed USD12.5 million to GEMS
III, which has the same management team as the first two funds. |
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| GEMS I achieved a positive net internal rate of return
for its limited partners, compared to the benchmark average of -4%
for the eight 1998 vintage Asian private equity funds. It is still
too early to calculate a similar return for GEMS II, but current
valuations indicate that GEMS II will comfortably outperform GEMS
I. |
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| Under the chairmanship of Simon Murray, GEMS has assembled
a team of individuals with a wealth of experience in the Asia Pacific
region. With no senior departures since founding, this personalised
business offers a high degree of stability. |
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| GEMS is able to capitalise on opportunities by avoiding
the cumbersome bureaucracies and lengthy decision-making procedures
of multi-purpose financial institutions. GEMS operates in Asia, where
its headquarters are based, and is controlled by management in Asia. |
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| GEMS Management Company has committed US$30 million
of its own capital to the funds it manages, which ensures a close
alignment between the interests of the management team and those
of investors. |
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INVESTMENT STRATEGY |
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| GEMS’s principal objective is to achieve medium
to long-term capital appreciation through a diversified portfolio
of equity investments in the Asia Pacific region. To date, GEMS I
and II have made a combined 25 investments in nine countries. GEMS
III intends to focus on China, Japan, India and South Korea. These
countries are all improving as target markets: China represents Asia’s
growing consumer market; Japan remains the broadest and deepest economy
in Asia; South Korea’s recovery from the Asian financial crisis
provides restructuring opportunities; India’s high economic
growth rate represents opportunities for expansion capital. |
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| GEMS only invests in companies that have a committed,
quality management team. Whilst the funds typically take minority
positions, GEMS III will also acquire controlling stakes that are
management backed. GEMS will generally not make investments in start-up
operations, unless they are extensions of existing businesses. |
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INVESTMENT CRITERIA |
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| The diversity and experience of the members of the
GEMS Funds’ board and advisory council and of their investment
team provide the funds with a wealth of expertise in some of the
region’s most promising sectors. GEMS does not invest in businesses
or industries of which its team does not have first-hand knowledge
or experience. To date, investments have been made in industry sectors
such as telecommunications, finance, steel, forestry, oil, electronics
and retail. |
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| 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 it cannot clearly
identify a minimum internal rate of return of 25% in US dollar
terms.
- GEMS seeks board representation that is commensurate with
its shareholding. The funds also add value through acting as
the investee company’s conduit to the entire GEMS network.
- 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 and initial public offerings
(IPOs).
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USD2.4 million |
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| The Milestone China Opportunities Fund I L.P. (Milestone
China), a limited partnership, was initiated by Milestone Capital
Management Limited (MCM), a China-focused private equity investment
firm with offices in Shanghai and Beijing. MCM is the general partner
in this USD47 million fund of 2003 vintage. To date, VenFin has invested
USD2.5 million in Milestone China, with a further USD2.5 million
committed. VenFin has already received USD0.2 million back by means
of capital repayment. |
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| 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. All the executive team members of MCM are mainland
Chinese citizens, with extensive investment and operational experience,
in both China and the US. |
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| The fund has made six investments to date, representing
USD19.8 million invested or committed. Investments were made in a
mobile phone handset design company, a catering business, a medical
equipment manufacturer, an advertising company, a chemical manufacturer
and an electronics company. The deal pipeline remains strong, but
it is too early to give an indication of investment returns to the
limited partners. |
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THE CHINA OPPORTUNITY |
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| The Chinese economy went through a fast-growing year
in 2004 with an estimated GDP growth rate of 9.2%. The economy is
expected to cool down in 2005 with a growth rate of around 8% due
to the government’s endeavours for a soft landing. |
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| As China’s regulatory and legal environment improves
further, MCM believes venture capital and direct investments in China
may achieve significant short-term and long-term capital appreciation. |
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| The Chinese consumer market offers attractive investment
opportunities in robust companies with proven operating track records.
Through negotiation, investments can still be made at reasonable
valuations with definable and realisable exits. The following statistics
give some indication of the size of the Chinese consumer market: |
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| Population |
1.29 billion (40.5% urban) |
| Population growth |
0.6% |
| Literacy |
86% |
| Fixed-line telephones |
263 million |
| Mobile phones |
269 million |
| Television sets |
448 million |
| Cable TV subscribers |
105 million |
| Internet users |
79 million (73% year-on-year growth) |
| Private cars |
4.9 million (43% year-on-year growth) |
| Source: National Bureau of Statistics, China |
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INVESTMENT STRATEGY |
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| Based in China, MCM takes a hands-on approach in the
investment process and typically sits on the boards of its portfolio
companies. The fund does not have any specific industry preference
when evaluating potential investment opportunities. Instead, MCM
seeks companies that already have leading positions in their respective
market segments with sound financial and operating track records.
MCM also focuses on long-term sustainability of the business and
the strength of the management team, while striving to align the
interests of all shareholders and management. |
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USD0.75 million |
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| Veritas Fund II L.P. (VVP Fund II) is a venture capital
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 USD1.5 million, representing
an interest of 4%. Veritas has drawn USD750 000 of this commitment. |
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| The investment broadens VenFin’s access to international
deal flow and networks, offering VenFin exposure to Israel and, to
a lesser extent, the southeast USA region, where the fund is primarily
invested in seed-stage technology companies. VVP Fund II focuses
on enterprise software, network communications and medical devices. |
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OVERVIEW OF THE YEAR TO 30 JUNE 2005 |
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| VVP Fund II has made nine investments by June 2004,
and an additional two investments during the year under review, namely
Sirica and WebLayers, briefly outlined below. Follow-on investments
were made in five portfolio companies, including ClickFox, CytoDome,
Escape Rescue Systems, Guardium and UltraSpect. |
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| Sirica is an Israeli-based developer of non-cooled “detector-on-a-chip” technology
for infrared sensing and imaging applications. Sirica’s technology
is expected to revolutionise the cost structure of existing infrared
applications and has the potential to finally make infrared functionality
available to mass markets. Potential applications include personal
night vision, automotive night vision and digital infrared cameras. |
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| WebLayers’ mission is to become a leading provider
of IT governance solutions. Its WebLayers Center™ is an enterprise
software platform that enables governance, conformance and design
optimisation of XML, web services and service-oriented architecture.
Located in Boston, the company achieved initial success with the
US Department of Defense and with a major player in the financial
services sector. |
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THE FUTURE |
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| In the US, venture capital funds raised a total of
USD17.9 billion in 2004, double the amount raised in 2003 and the
first annual increase since 2000. However, on the exit front, there
were only eight venture-backed IPOs in the first quarter of 2005 – the
lowest level of venture-backed IPO activity in several quarters.
The volume of merger and acquisition activity was also less than
in the same period last year. |
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| In the Israeli venture capital sector, seed-stage investments
rose sharply in recent quarters. They reached a total of USD110 million
in the three most recent quarters since July 2004, compared with
USD40 million in the three preceding quarters. Among other factors
this can be attributed to the increased fund-raising by Israeli venture
capital funds. A reported USD700 million was closed in the first
five months 2005, some of which are being allocated to seed-stage
investments. |
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| These developments in Israel and the US are indicative
of the anticipated increase in venture capital activity, which is
likely to be accompanied by increased entry valuations. |
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Equity
Funds 
