INVESTCORP BANK B.S.C.
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
INVESTCORP BANK B.S.C. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
Description Page REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TO THE BOARD OF DIRECTORS OF INVESTCORP BANK B.S.C...... 2 INTERIM CONDENSED CONSOLIDATED BALANCE SHEET...... 3 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME………………………………………………………………………... 4 INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ...... 5 INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS ...... 6
Notes to the interim condensed Consolidated Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ...... 7 2. SEGMENT REPORTING...... 12 3. ASSETS UNDER MANAGEMENT...... 20
4. OPERATING EXPENSES ...... 21 5. LIQUIDITY...... 22 6. RECEIVABLES AND PREPAYMENTS...... 23 7. LOANS AND ADVANCES ...... 24 8. CO-INVESTMENTS IN HEDGE FUNDS ...... 25 9. CO-INVESTMENTS IN CORPORATE INVESTMENTS...... 26 10. CO-INVESTMENTS IN REAL ESTATE ...... 30 11. PROVISION FOR IMPAIRMENT ...... 31 12. DEPOSITS FROM CLIENTS...... 31 13. PAYABLES AND ACCRUED EXPENSES...... 32 14. MEDIUM-TERM DEBT ...... 33 15. LONG-TERM DEBT...... 33 16. SHARE CAPITAL...... 34 17. CAPITAL ADEQUACY...... 35 18. DERIVATIVE FINANCIAL INSTRUMENTS ...... 36 19. COMMITMENTS AND CONTINGENT LIABILITIES...... 39 20. FAIR VALUE OF FINANCIAL INSTRUMENTS ...... 40 21. CYCLICALITY OF ACTIVITIES...... 42
REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TO THE BOARD OF DIRECTORS OF INVESTCORP BANK B.S.C.
Manama, Kingdom of Bahrain
INVESTCORP BANK B.S.C.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2010 (UNAUDITED)
December 31, $000s June 30, 2010 2010 (Audited) Note Page
ASSETS Cash and short-term funds 67,662 21,342 5 22 Placements with financial institutions and other liquid assets 393,210 881,469 5 22 Positive fair value of derivatives 63,208 74,766 18 38 Receivables and prepayments 262,574 315,975 6 23 Loans and advances 250,365 247,593 7 24 Co-investments Hedge funds 601,379 537,274 8 25 Corporate investments 1,008,604 1,052,765 9 26 Real estate 200,333 216,777 10 30 Total co-investments 1,810,316 1,806,816 Premises, equipment and other assets 65,613 68,995 TOTAL ASSETS 2,912,948 3,416,956
LIABILITIES AND EQUITY
LIABILITIES Deposits from clients - short-term 234,845 247,426 12 31 Negative fair value of derivatives 27,884 27,199 18 38 Payables and accrued expenses 66,897 144,342 13 32 Deposits from clients - medium-term 103,011 90,693 12 31 Medium-term debt 917,181 1,321,348 14 33 Long-term debt 587,680 591,610 15 33 TOTAL LIABILITIES 1,937,498 2,422,618
EQUITY Preference share capital 511,501 508,678 16 34 Ordinary shares par value 200,000 200,000 16 34 Reserves 594,949 596,243 Treasury shares (186,389) (161,669)
Retained earnings other than unrealized fair value changes of 75,900 65,430 corporate and real estate co-investments Ordinary shareholders' equity other than unrealized fair value changes, proposed dividend and revaluation reserve 684,460 700,004 Proposed preference share dividend - 57,374 Unrealized fair value changes and revaluation reserve (220,511) (271,718) TOTAL EQUITY 975,450 994,338
TOTAL LIABILITIES AND EQUITY 2,912,948 3,416,956
______Abdul-Rahman Salim Al-Ateeqi Nemir A. Kirdar Chairman Executive Chairman & CEO
The attached notes 1 to 21 are an integral part of these interim condensed consolidated financial statements.
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INVESTCORP BANK B.S.C.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2010 (UNAUDITED)
INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME
6 months 6 months $000s Jul - Dec Jul - Dec 2010 2009 Note Page
FEE INCOME
Management fees 44,760 48,955 Activity fees 21,087 17,725 Performance fees 5,853 13,009 Fee income (a) 71,700 79,689 2 17 ASSET BASED INCOME
Investment income Corporate investments (2,873) 8,186 Hedge funds 40,607 96,388 Real estate 11,507 8,427 Treasury and other asset based income 8,459 181 Asset based income (b) 57,700 113,182 Gross operating income (a) + (b) 129,400 192,871 Provision for impairment (407) (5,989) Interest expense (28,782) (28,801) 2 17 Operating expenses (83,249) (100,683) 4 21 Net operating income before fair value changes of corporate and real 16,962 57,398 estate co-investments
Fair value changes of corporate and real estate co-investments (c) 39,273 2,795
NET INCOME 56,235 60,193
Basic and fully diluted earnings per ordinary share ($) 8 8 84
TOTAL REVENUE (a)+(b)+(c) 168,673 195,666
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 6 months 6 months $000s Jul - Dec Jul - Dec 2010 2009
NET INCOME (AS ABOVE) 56,235 60,193
Other comprehensive income Unrealized loss on available for sale investments (1,860) - Fair value movements - cashflow hedges Net realized loss recycled to statement of income 536 1,941 Net unrealized gains for the period 6,766 2,774 Other comprehensive income 5,442 4,715
TOTAL COMPREHENSIVE INCOME 61,677 64,908
The attached notes 1 to 21 are an integral part of these interim condensed consolidated financial statements.
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INVESTCORP BANK B.S.C.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2010 (UNAUDITED) Reserves Fair value changes Revaluation Total fair value Corporate reserve on changes and Preference Ordinary investment Available premises share share Share Statutory General Total Treasury Proposed and for sale Cash flow and revaluation Total Retained * capital capital premium reserve reserve reserves shares earnings dividend real estate investments equipment $000s hedges reserve equity
Balance at July 1, 2010 508,678 200,000 446,243 100,000 50,000 596,243 ( 161,669) 65,430 57,374 ( 299,919) 6 ,573 1 1,679 9,949 ( 271,718) 994,338
Total comprehensive income ------5 6,235 - - (1,860) 7 ,302 - 5 ,442 61,677 Transfer of realized losses to retained earnings ------(6,922) - 6 ,922 - - - 6 ,922 - Transfer of unrealized gains to fair value changes ------(39,273) - 39,273 - - - 39,273 - Depreciation transferred to retained earnings ------4 30 - - - - ( 430) ( 430) - Purchased during the period ------( 34,971) ------( 34,971) Sold during the period ------8,957 ------8 ,957 Loss on treasury shares - - (1,294) - - (1,294) 1,294 ------Dividends paid ------(57,374) - - - - - ( 57,374) Vesting during the period 2,823 ------2 ,823
Balance at December 31, 2010 511,501 200,000 444,949 100,000 50,000 594,949 ( 186,389) 75,900 - ( 253,724) 4 ,713 1 8,981 9,519 ( 220,511) 975,450
Balance at July 1, 2009 500,000 200,000 454,995 100,000 50,000 604,995 ( 150,507) 16,926 - ( 297,031) 6 ,573 3,025 10,765 ( 276,668) 894,746
Total comprehensive income ------6 0,193 - - - 4 ,715 - 4 ,715 64,908 Transfer of realized gain to retained earnings ------7 ,852 - ( 7,852) - - - ( 7,852) - Transfer of unrealized gain to fair value changes ------(2,795) - 2 ,795 - - - 2 ,795 - Depreciation transferred to retained earnings ------2 38 - - - - ( 238) ( 238) - Purchased during the period ------( 6,776) ------( 6,776) Sold during the period ------3,090 ------3 ,090 Loss on sale of treasury shares - - (908) - - (908) 9 08 ------Preference share issuance proceeds 15,146 ------15,146 Share issue expenses - - (725) - - (725) ------( 725) Non-vested preference shares issued to employees ( 12,148) ------( 12,148) Vesting during the period 1,735 ------1 ,735
Balance at December 31, 2009 504,733 200,000 453,362 100,000 50,000 603,362 ( 153,285) 82,414 - ( 302,088) 6 ,573 7,740 10,527 ( 277,248) 959,976
* Retained earnings other than unrealized fair value changes of corporate and real estate co-investments
The attached notes 1 to 21 are an integral part of these interim condensed consolidated financial statements.
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INVESTCORP BANK B.S.C.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2010 (UNAUDITED)
6 months $000s Jul - Dec 6 months Jul 2010 - Dec 2009
OPERATING ACTIVITIES Net income 56,235 60,193 Adjustments to reconcile net income to net cash: Fair value changes (39,273) (2,795) Depreciation 3,547 3,666 Provisions for impairment of receivables and loans and advances 407 5,989 Amortization of transaction costs of borrowings 3,514 2,185 Preference shares vesting -net of forfeitures 2,823 - Net income adjusted for non-cash items 27,253 69,238
Changes in: Operating capital Placements with financial institutions and other liquid assets (non-cash equivalents) (25,000) - Receivables and prepayments 49,721 70,503 Loans and advances 501 (23,826) Deposits from clients - short-term (12,581) 31,102 Payables and accrued expenses (77,445) 7,954 Co-investments Hedge funds (64,105) 36,907 Corporate Investments 79,547 (62,771) Real estate 18,471 8,225 Fair value of derivatives 64,184 29,441 Other assets 9 (114)
NET CASH FROM OPERATING ACTIVITIES 60,555 166,659
FINANCING ACTIVITIES
Deposits from financial institutions - (15,000) Deposits from clients - medium-term 12,318 (4,807) Medium-term revolvers repaid on maturity (150,000) - Medium-term revolvers repaid and available for drawdown (150,000) - Medium-term debt repaid - net (111,250) (492,000) Long-term debt repaid (45,000) (10,000) Treasury shares purchased - net (26,014) (3,686) Share issue expenses - (725) Preference share issuance proceeds - 4,733 Dividends paid (57,374) - NET CASH USED IN FINANCING ACTIVITIES (527,320) (521,485) INVESTING ACTIVITY
Investment in premises and equipment (174) (836) NET CASH USED IN INVESTING ACTIVITY (174) (836) Net decrease in cash and cash equivalents (466,939) (355,662) Cash and cash equivalents at beginning 839,811 1,129,305 Cash and cash equivalents at end 372,872 773,643
Cash and cash equivalents comprise: Cash balances with banks 21,950 29,123 Cash in transit 45,712 91,692 Placements with financial institutions and other liquid assets 305,210 652,828 372,872 773,643
Total accessible liquidity comprise: Cash and cash equivalents 372,872 773,643 Placements with financial institutions and other liquid assets (non-cash equivalents) 88,000 - Undrawn revolvers 196,250 - Total accessible liquidity* 657,122 773,643
* In addition to the above, the group has $589.9 million (December 31, 2009: $546.2 million) in hedge funds, which also forms a part of the Group's total liquidity.
Additional cash flow information 6 months 6 months $000s Jul - Dec Jul - Dec 2010 2009 Interest paid (32,268) (30,702) Interest received 10,773 1,212
The attached notes 1 to 21 are an integral part of these interim condensed consolidated financial statements.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES A. ORGANIZATION (i) Incorporation Investcorp Bank B.S.C. (the ‘Bank’) operates under a Wholesale Banking License issued by the Central Bank of Bahrain (‘CBB’). The Bank is a holding company owning various subsidiaries (together the ‘Group’ or ‘Investcorp’). The activities of the Bank are substantially transacted through its subsidiaries. The Bank is incorporated in the Kingdom of Bahrain as a Bahraini Shareholding Company with limited liability. The Bank has a primary listing on the Bahrain Bourse (formerly called Bahrain Stock Exchange). The ultimate parent of the Group is SIPCO Holdings Limited [see Note 1.A (iii)]. The registered office of the Bank is at Investcorp House, Building 499, Road 1706, Diplomatic Area 317, Manama, Kingdom of Bahrain. The Bank is registered under commercial registration number 12411 issued by the Ministry of Industry and Commerce, Kingdom of Bahrain. The interim condensed consolidated financial statements for the six month period ended December 31, 2010 were authorized for issue in accordance with a resolution of the Board of Directors dated January 31, 2011.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
A. ORGANIZATION (continued) (ii) Activities The Group’s principal activity is providing products in three broad alternative investment asset classes to its client base and co-investing in these together with its clients. The alternative investment asset classes in which the Group specializes are corporate investments, hedge funds and real estate. Within the corporate investment asset class the Group offers three products namely, (a) US and European buyouts, (b) technology small-cap investments and (c) Gulf growth capital. In carrying out its activities, the Group performs two principal roles (a) to act as an intermediary by bringing global alternative investment opportunities to its clients, and (b) to act as a principal investor by co-investing with its clients in each of its investment products.
INVESTCORP GROUP
Corporate Investment (North America, Europe & the Hedge Funds Real Estate Placement and Arabian Gulf) (Global) (North America) Relationship Management Corporate Support Acquisition Fund of Hedge Funds Acquisition Places Group's products with Administration & Finance Post Acquisition Single Manager Platform Post Acquisition clients Realization Realization
US and European Technology Small Cap Gulf Growth Capital Buyouts (North America & Europe) (Arabian Gulf) (North America & Europe) Investment in technology Buy, build and bridge Investment in mid-size small cap companies through investments through Fund companies through Deal-by- Fund structure structure Deal and Fund structure
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
A. ORGANIZATION (continued)
(iii) Ownership
SIPCO Holdings Limited
Strategic shareholders SIPCO Limited Public shareholders (approximately 60) (approximately 120 eligible employees) 22.1% beneficial ownership** 33.4% beneficial ownership 36.6% beneficial ownership*
Ownership Holdings Limited
C.P. Holdings Limited
Investcorp Funding Limited Investcorp Bank B.S.C. (Treasury Shares) 7.9% beneficial ownership
Investcorp Holdings Limited
100% Holdings with voting and economic rights ------Holdings with voting rights but no economic rights Investcorp S.A.
* Includes 13.9% in shares that are held for future sale to management under the SIP Plan. The Group has approval from the Central Bank of Bahrain ("CBB") to hold up to 40% of shares for the SIP Plan. On the balance sheet these shares are accounted for as the equivalent of treasury shares. ** Includes 0.7% beneficial ownership held in the form of unlisted GDRs.
The Bank is controlled by Ownership Holdings Limited (‘OHL’), through its shareholding directly, and through C.P. Holdings Limited (‘CPHL’), of the issued ordinary shares of the Bank. OHL is, in turn, ultimately controlled by SIPCO Holdings Limited (‘SHL’). SIPCO Limited (‘SIPCO’), an SHL subsidiary, is the entity through which employees participate in ownership of the Bank’s ordinary shares. The Bank is, therefore, controlled by its employees through their beneficial ownership as a group via SHL, SIPCO, OHL and CPHL.
SHL, SIPCO, OHL and CPHL are companies incorporated in the Cayman Islands.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) A. ORGANIZATION (continued) (iv) Subsidiary companies The interim condensed consolidated financial statements incorporate the financial statements of the Bank and its subsidiaries. A subsidiary is an entity that the Group has the power to control so as to obtain economic benefits and therefore excludes those held in a fiduciary capacity. The Bank has a 100% economic interest in Investcorp Holdings Limited ("IHL", incorporated in the Cayman Islands) through Series A and Series B preference shares issued by IHL. These preference shares have the right to 100% of all dividends declared by IHL and 100% of IHL’s net assets in the event of liquidation subject to the payment of a nominal amount in respect of IHL’s ordinary shares. CPHL, OHL, SPICO Limited and Investcorp Funding Limited (“IFL”) own ordinary shares of IHL in the same proportion to their shareholding of the Bank’s ordinary shares. The ordinary shares and Series A preference shares of IHL carry voting rights. IHL in turn has a 100% economic and voting interest in Investcorp S.A. ("ISA"), a financial holding company originally incorporated in Luxembourg and transferred to the Cayman Islands during the previous fiscal year. ISA is the principal asset- holding operating entity within the Group and, consistent with covenants contained in the Group's medium and long-term debt, the Group holds at least 95% of its assets through ISA or subsidiaries that are owned directly or indirectly by ISA.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
A. ORGANIZATION (continued) (iv) Subsidiary companies (continued) The Group structure along with its significant subsidiaries is illustrated below:
Parent Wholly owned significant subsidiaries Description of principal activities
Investcorp Bank B.S.C. Bahrain-based parent company of the Group (Bahrain)
Investcorp Holdings Limited Holding company that provides force majeure investment protection to shareholders and lenders (Cayman Islands)
Investcorp S.A. Financial holding company that is the principal (Cayman Islands) operating and asset owning arm of the Group
Investcorp Capital Limited Company that issues the Group's long-term notes and other capital market financings (Cayman Islands)
Investcorp Investment Company through which the Group retains its equity Holdings Limited investments across its product classes (Cayman Islands)
Company that provides investment management Investcorp Management and advisory services to client investment holding Services Limited companies for corporate and real estate (Cayman Islands) investments
Investcorp Investment Company that provides investment management Adviser Limited and advisory services to the hedge funds program (Cayman Islands) (HFP) and is a SEC registered investment advisor
Investcorp Funding Company that provides short-term funding to Limited investee and client investment holding companies (Cayman Islands)
Company that executes the Group's money market, Investcorp Trading Limited foreign exchange and derivative financial contracts (Cayman Islands) and invests in single manager funds
Company that manages the Group's excess Investcorp Equities Limited liquidity. (Cayman Islands)
Investcorp AMP Limited Company through which the Group co-invests in the (Cayman Islands) hedge funds program (HFP)
CIP AMP Limited Company through which the Group co-invests in the (Cayman Islands) hedge funds program (HFP)
Investcorp Financial and Company that provides M & A advisory services for Investment Services S.A. deal execution in Western Europe (Switzerland)
The Group's principal operating subsidiary in the Investcorp International UK, a further subsidiary of which (Investcorp Limited Securities Limited) provides M&A advisory services (UK) in the UK
Investcorp International The Group's principal operating subsidiary in the Holdings Inc. United States of America (USA)
Company that provides M&A advisory services for Investcorp International Inc. deal execution in North America (USA)
Company that provides marketing services in the N A Investcorp LLC United States for the HFP and is a SEC registered (USA) broker dealer Investcorp Investment Company that provides investment management Adviser LLC services in the United States for the HFP and is a (USA) SEC registered investment advisor
Investcorp Saudi Arabia Company that acts as principal agent of the Bank in Financial Investments Co Saudi Arabia for placements of the products offered (Saudi Arabia) by the Group
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
B. SIGNIFICANT ACCOUNTING POLICIES The interim condensed consolidated financial statements of the Group are prepared in conformity with International Accounting Standard 34 applicable to interim financial reporting. The significant accounting policies adopted in the preparation of these interim condensed consolidated financial statements are those followed in the preparation of the audited consolidated financial statements for the year ended June 30, 2010. The interim condensed consolidated financial statements are prepared in United States dollars, this being the functional currency of the Group, and rounded to the nearest thousands ($000s) unless otherwise stated.
2. SEGMENT REPORTING
A) ACTIVITIES i) As an intermediary The Group acts as an intermediary by arranging and managing alternative investment assets for institutional and high net worth clients through operating centers in the Kingdom of Bahrain, London and New York. Fee income is earned throughout the life cycle of investments by providing these intermediary services to clients. The Group’s clients are primarily based in the Arabian Gulf states, however the Group has been expanding its franchise globally, targeting institutional investors in the United States and Europe. ii) As a principal The Group co-invests along with clients in all the alternative investment asset products it offers to its clients. Income from these proprietary co-investments in corporate investments, hedge funds and real estate investments is classified as asset-based income.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
2. SEGMENT REPORTING (contined)
B) ASSET CLASSES, LINES OF BUSINESS AND REPORTING SEGMENTS The Group classifies its reporting segments on the basis of its three product asset classes and the individual lines of business within these that are responsible for each distinct product category. The following table shows the relationship between the Group’s reporting segments, asset classes, lines of business and products. Lines of Business Reporting Segments Asset Classes (Product Categories) Products
1)Corporate 1) Corporate 1) US and European buyouts - Deal by deal offerings investments investments - Closed-end fund(s)
2) Technology small-cap - Closed-end fund(s) investments
3) Gulf growth capital - Closed-end fund(s)
2) Hedge funds 2) Hedge funds 4) Hedge funds - Fund of hedge funds - Single managers
3) Real estate 3) Real estate 5) Real estate - Equity investments - Mezzanine debt investments
4) Corporate support - Liquidity / working capital / funding
Each of the five lines of business comprises its team of investment professionals and is supported by a common placement and relationship management team. The lines of business, together with their related product offerings and the reporting segments are described in further detail below: i) US and European buyouts (‘buyouts’) The buyouts team, based in London and New York, arranges corporate investments in mid-size companies in North America and Western Europe with a strong track record and potential for growth. These investments are placed primarily on a deal- by-deal basis with the Group’s investor base in the Arabian Gulf states, and also offered through conventional fund structures to international institutional investors. The Group retains a small portion as a co-investment on its consolidated balance sheet. These investments are managed by the team on behalf of investors for value optimization until realization.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
2. SEGMENT REPORTING (continued)
B) ASSET CLASSES, LINES OF BUSINESS AND REPORTING SEGMENTS (continued) ii) Technology small-cap investments (‘TSI’) The TSI team, based in London and New York, arranges and manages investments in technology small cap companies in North America and Western Europe, with a high potential for growth. Given their relatively higher risk-return profile, these investments are offered to clients through fund structures that ensure diversification across several investments. The Group also has co-investments alongside its clients in the Technology Funds. iii) Gulf growth capital (‘GGC’) The GGC team, based in Bahrain, targets buy, build (‘greenfield’) and bridge investment opportunities primarily in the Arabian Gulf states. The team also considers, on a selective basis, similar investment opportunities in the Middle East and North Africa (MENA) region. Given their risk-return profile, and the need for multiple follow-on rounds of funding, these investments are being offered to clients through a fund structure that ensures diversification across several investments. The Group also co-invests alongside its clients in the GGC Fund(s). iv) Hedge funds (‘HF’) The HF team operating from New York and London manages Investcorp's Fund of Hedge Funds business (referred to as the Hedge Funds Program, ‘HFP’) and Single Managers business (referred to as the Single Manager Platform, ‘SMP’) including proprietary co-investment as well as client assets. The program aims to achieve attractive returns on a risk-adjusted basis over a medium-term period with low correlation to traditional and other alternative asset classes, through a diversified portfolio of investments in hedge funds. v) Real estate (‘RE’) The RE team, based in New York, arranges investments in US-based properties with strong cash flows and/or potential for attractive capital gains over a three to five year holding period. Several properties are assembled into diversified portfolios that are then placed individually with the Group’s investor base in the Gulf, with the Group retaining a small portion as a co-investment on its own consolidated balance sheet. Further the Group also provides its investor base with mezzanine investment opportunities through fund structures, with the Group retaining a small portion as a co-investment on its own consolidated balance sheet. The property investments are managed by the RE team on behalf of investors for value optimization up until realization. vi) Corporate support Corporate support comprises the Group’s administration, finance and management functions, which are collectively responsible for supporting the five lines of business through services including risk management and treasury, accounting, legal and compliance, corporate communications, back office and internal controls, technology and general administration.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
2. SEGMENT REPORTING (continued)
C) REVENUE GENERATION i) Fee income There are several components of fees that are earned from providing intermediary services to clients and investee companies. Activity fees comprise acquisition fees earned by the Group from investee companies on new corporate investments or real estate acquisitions (usually as a percentage of the total purchase consideration), placement fees earned by the Group from Gulf clients at the time of placing new corporate investments or real estate transactions with them (usually as a percentage of the total subscription from a client), and ancillary fees that are earned from investee companies for providing advisory services for ancillary transactional activity, including refinancings, recapitalizations, restructuring and disposal. Management fees are earned from client holding companies and investee companies based on investments under management and from funds based on clients’ commitments or investments. Performance fees are calculated as a portion of the gain earned by clients on investments that exceed a specified hurdle rate. ii) Asset based income and unrealized fair value changes This includes realized as well as unrealized gains and losses over previously reported values of FVTPL corporate investment and real estate co-investments, value appreciation on the Group’s co-investment in hedge funds, cash or pay-in-kind interest from various debt investments in corporate investment or real estate deals and rental income distributions from real estate investments. All other income that is common to the Group (such as income arising from the deployment of the Group's excess liquidity) is treated as treasury and other asset based income and recorded under Corporate Support.
D) ALLOCATION OF OPERATING EXPENSES Operating expenses for each reporting segment comprise the respective lines of businesses’ employee compensation and benefits and costs of its technology and communications infrastructure and resources, including professional fees for external advisors, travel and business development costs and premises. These are allocated between intermediary and principal co-investing activities. The operating expenses associated with principal co-investing activities are determined to be: a) a fee calculated at 1.2% of average proprietary co-invested assets of each reporting segment from the Group’s balance sheet, placements with banks and other financial institutions; plus b) a 20% carry on excess asset based income, which is calculated as gross asset based income after provisions less interest expense less the 1.2% fee in (a) above. The remaining operating expenses after allocation to principal co-investing activities represent the costs relating to intermediary activities.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
2. SEGMENT REPORTING (continued)
E) SEGREGATION OF ASSETS Assets directly attributable to the corporate investments and real estate reporting segments are primarily in the form of proprietary co-investments by the Group in investments arranged by the respective lines of businesses, classified as FVTPL investments in the consolidated balance sheet. Assets directly attributable to the hedge funds reporting segment are primarily in the form of the Group’s proprietary co-investment in hedge funds. All other assets that are common to the Group are recorded under Corporate Support.
F) ALLOCATION OF EQUITY, LIABILITIES AND INTEREST EXPENSE The Group uses a variety of risk based methodologies including Value-at-Risk (VaR) to determine the required amount of economic risk capital that is needed to support growth objectives under normal and extreme stress conditions for each business line. Equity is allocated to each business line based on both the current amount of capital and an ex-ante assessment, before the beginning of each fiscal year, which takes into account the current size of the business, expected growth over the medium-term and the associated equity required to support the risks within each reporting segment. Having determined the assets directly attributable to each reporting segment, and the equity requirements, the Group allocates liabilities (debt funding) to each segment based on the relative maturity profile of the segment’s assets. Longer-dated liabilities are generally allocated to the corporate investments and real estate reporting segments, considering their medium-long term investment horizon. The allocation of liabilities determined above, in turn, drives the allocation of interest expense for each reporting segment.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
2. SEGMENT REPORTING (continued)
G) BALANCE SHEET AND STATEMENT OF INCOME BY REPORTING SEGMENTS The interim condensed consolidated statements of income for the six months ended December 31, 2010 and 2009 by reporting segments are as follows:
July 2010 - December 2010 (6 months) Corporate Hedge Real Corporate $000s Investments Funds Estate Support Total
Fee income Management fees 27,638 11,913 5,209 - 44,760 Activity fees 19,069 - 2,018 - 21,087 Performance fees 1,290 4,525 38 - 5,853
Gross fee income (a) 47,997 16,438 7,265 - 71,700 Expenses attributable to fee income (33,248) (19,750) (4,953) - (57,951) Net fee income (loss) 14,749 (3,312) 2,312 - 13,749
Asset based income Interest income 1,835 - 1,061 7,280 10,176 Treasury and other asset based income (loss) (4,708) 40,607 10,446 1,179 47,524 Fair value changes 37,246 - 2,027 - 39,273
Gross asset based income (b) 34,373 40,607 13,534 8,459 96,973 Provision for impairment - - - (407) (407) Interest expense (4,082) (4,763) (1,134) (18,803) (28,782) Expenses attributable to asset based income (11,803) (6,416) (3,619) (3,460) (25,298) Net asset based income (loss) 18,488 29,428 8,781 (14,211) 42,486
Net income (loss) 33,237 26,116 11,093 (14,211) 56,235
82,370 57,045 20,799 8,459 168,673 Total revenue (a) + (b)
July 2009 - December 2009 (6 months) Corporate Hedge Real Corporate $000s Investments Funds Estate Support Total
Fee income Management fees 30,670 12,463 5,822 - 48,955 Activity fees 16,898 - 827 - 17,725 Performance fees - 12,675 334 - 13,009
Gross fee income (a) 47,568 25,138 6,983 - 79,689 Expenses attributable to fee income (43,383) (20,303) (8,787) - (72,473) Net fee income (loss) 4,185 4,835 (1,804) - 7,216
Asset based income Interest income 43 - 528 2,816 3,387 Treasury and other asset based income (loss) 8,143 96,388 7,899 (2,635) 109,795 Fair value changes 44,593 - (41,798) - 2,795
Gross asset based income (loss) (b) 52,779 96,388 (33,371) 181 115,977 Provision for impairment - - - (5,989) (5,989) Interest expense (4,483) (5,697) (1,956) (16,665) (28,801) Expenses attributable to asset based income (12,621) (10,078) (1,769) (3,742) (28,210) Net asset based income (loss) 35,675 80,613 (37,096) (26,215) 52,977
Net income (loss) 39,860 85,448 (38,900) (26,215) 60,193 Total revenue (a) + (b) 100,347 121,526 (26,388) 181 195,666
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED) 2. SEGMENT REPORTING (continued)
G) BALANCE SHEET AND STATEMENT OF INCOME BY REPORTING SEGMENTS (continued) The interim condensed consolidated balance sheet as at December 31, 2010 and June 30, 2010 by reporting segments is as follows:
December 31, 2010 Corporate Hedge Corporate $000s Investments Funds Real Estate Support Total Assets Cash and short-term funds - - - 67,662 67,662 Placements with financial institutions and other liquid assets - - - 393,210 393,210 Positive fair value of derivatives - - - 63,208 63,208 Receivables and prepayments - - - 262,574 262,574 Loans and advances - - - 250,365 250,365 Co-investments 1,008,604 601,379 200,333 - 1 ,810,316 Premises, equipment and other assets - - - 65,613 65,613 Total assets 1,008,604 601,379 200,333 1,102,632 2 ,912,948
Liabilities and Equity Liabilities Deposits from clients - short-term - 46,821 - 188,024 234,845 Negative fair value of derivatives - - - 27,884 27,884 Payables and accrued expenses 10,340 3,827 1 ,081 51,649 66,897 Deposits from clients - medium term 27,448 131 1 4,583 60,849 103,011 Medium-term debt 55,258 284,548 5 9,174 518,201 917,181 Long-term debt 354,297 48,057 3 6,482 148,844 587,680 Total liabilities 447,343 383,384 111,320 995,451 1 ,937,498 Total equity 561,261 217,995 8 9,013 107,181 975,450
Total liabilities and equity 1,008,604 601,379 200,333 1,102,632 2 ,912,948
June 30, 2010 Corporate Hedge Corporate $000s Investments Funds Real Estate Support Total Assets Cash and short-term funds - - - 21,342 21,342 Placements with financial institutions and other liquid assets - - - 881,469 881,469 Positive fair value of derivatives - - - 74,766 74,766 Receivables and prepayments - - - 315,975 315,975 Loans and advances - - - 247,593 247,593 Co-investments 1,052,765 537,274 216,777 - 1 ,806,816 Premises, equipment and other assets - - - 68,995 68,995 Total assets 1,052,765 537,274 216,777 1,610,140 3 ,416,956
Liabilities and Equity Liabilities Deposits from clients - short-term - 49,054 - 198,372 247,426 Negative fair value of derivatives - - - 27,199 27,199 Payables and accrued expenses 11,736 3,062 3 ,497 126,047 144,342 Deposits from clients - medium term - 4,539 - 86,154 90,693 Medium-term debt 88,951 269,385 4 2,146 920,866 1 ,321,348 Long-term debt 340,713 35,036 6 1,514 154,347 591,610 Total liabilities 441,400 361,076 107,157 1,512,985 2 ,422,618 Total equity 611,365 176,198 109,620 97,155 994,338 Total liabilities and equity 1,052,765 537,274 216,777 1,610,140 3 ,416,956
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
2. SEGMENT REPORTING (continued)
G) BALANCE SHEET AND STATEMENT OF INCOME BY REPORTING SEGMENTS (continued)
Total revenue of $82.4 million (2009: $100.4 million) from corporate investment asset class includes $ 20.7 million and $8.6 million (2009: $28.5 million and $10.5 million) relating to technology small-cap investments and Gulf growth capital respectively. The balance relates to US and European buyouts.
Revenue reported above represents revenue generated from external customers. There were no inter-segment revenues in the period (2009: nil).
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
3. ASSETS UNDER MANAGEMENT The Group's clients participate in products offered under its three alternative investment asset classes. Total assets under management (‘AUM’) in each of the reporting segments at the balance sheet date are as follows:
December 31, 2010 June 30, 2010 (Audited) Affiliates Affiliates Clients Investcorp and co- Total Clients Investcorp and co- Total $millions investors investors
Corporate Investments Closed-end Committed Funds - US and European buyouts 4 76 1 99 71 7 46 4 76 1 99 71 7 46 - Technology small cap investments 4 24 6 1 15 5 00 4 19 6 7 14 5 00 - Gulf Growth Capital 8 53 7 0 6 9 29 8 53 7 0 6 9 29 - MENA mezzanine investments - - - - 1 05 5 0 - 1 55 Sub total 1 ,753 3 30 92 2 ,175 1 ,853 3 86 91 2 ,330 Closed-end Invested Funds - Technology small cap investments 2 12 2 7 10 2 49 2 09 2 3 10 2 42 Deal-by-deal investments - US and European buyouts 2 ,307 8 00 340 3 ,447 2 ,598 8 52 368 3 ,818 Strategic and other investments - 6 8 - 6 8 - 7 3 - 7 3 Total corporate investments 4 ,272 1 ,225 442 5 ,939 4 ,660 1 ,334 469 6 ,463
Hedge Funds Fund of hedge funds 2 ,497 1 44 3 2 ,644 2 ,125 7 7 3 2 ,205 Single managers 1 ,020 2 43 4 1 ,267 1 ,289 2 65 6 1 ,560 Structured and levered products 3 97 5 87 5 9 89 3 51 5 38 2 8 91 Total hedge funds 3 ,914 9 74 12 4 ,900 3 ,765 8 80 11 4 ,656
Real Estate Closed-end Committed Funds 1 50 2 7 - 1 77 2 53 2 8 4 2 85 Closed-end Invested Funds 1 03 1 4 1 08 - - - - Deal-by-deal investments 7 19 1 71 29 9 19 8 59 1 81 32 1 ,072 Strategic and other investments - 8 - 8 - 8 - 8 Total real estate 9 72 2 07 33 1 ,212 1 ,112 2 17 36 1 ,365
Corporate Support Client call accounts held in trust 1 75 - - 1 75 1 70 - - 1 70
Total 9 ,333 2 ,406 487 1 2,226 9 ,707 2 ,431 516 1 2,654
Summary by category: Closed-end Committed Funds 1 ,903 3 57 92 2 ,352 2 ,106 4 14 95 2 ,615 Closed-end Invested Funds 3 15 2 8 14 3 57 2 09 2 3 10 2 42 Hedge Funds 3 ,914 9 74 12 4 ,900 3 ,765 8 80 11 4 ,656 Deal-by-deal investments 3 ,201 1 ,047 369 4 ,617 3 ,627 1 ,114 400 5 ,141 Total 9 ,333 2 ,406 487 1 2,226 9 ,707 2 ,431 516 1 2,654
Summary by segments: Corporate Investments - US and European buyouts 2 ,783 9 99 411 4 ,193 3 ,074 1 ,051 439 4 ,564 - Technology small cap investments 6 36 8 8 25 7 49 6 28 9 0 24 7 42 - Gulf Growth Capital 8 53 7 0 6 9 29 8 53 7 0 6 9 29 - MENA mezzanine investments - - - - 1 05 5 0 - 1 55 - Strategic and other investments - 6 8 - 6 8 - 7 3 - 7 3 Hedge Funds 3 ,914 9 74 12 4 ,900 3 ,765 8 80 11 4 ,656 Real Estate 9 72 2 07 33 1 ,212 1 ,112 2 17 36 1 ,365 Corporate Support 1 75 - - 1 75 1 70 - - 1 70 Total 9 ,333 2 ,406 487 1 2,226 9 ,707 2 ,431 516 1 2,654
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
3. ASSETS UNDER MANAGEMENT (continued)
In the above table all hedge funds and Investcorp balance sheet co-investment amounts for corporate investment and real estate are stated at fair values while the other categories are stated at their carrying cost. Certain of the Group’s clients entered into a trust arrangement whereby their call account balances maintained with the Bank were transferred into individual trust fund accounts managed by a common trustee. These trust funds are invested in highly liquid assets which have a credit rating no lower than that of Investcorp and are specifically ring-fenced to meet the amounts placed in trust. Client monies held in trust earn the return generated from the assets of the trust, with a guaranteed minimum return equivalent to inter-bank based market rates. All of these clients’ assets (including affiliates and co-investors) are managed in a fiduciary capacity and the Group has no entitlement to these assets. Clients bear all of the risks and earn a majority of the rewards on their investments, subject to normal management and performance fee arrangements. Accordingly, these assets are not included in the Group’s consolidated balance sheet.
4. OPERATING EXPENSES
Jul - Dec Jul - Dec 2010 2009 $000s (6 months) (6 months)
Staff compensation 4 2,041 6 2,304 Other personnel costs 7,969 7 ,283 Professional fees 1 2,489 9 ,431 Travel and business development 3,913 4 ,618 Administration and research 5,947 5 ,736 Technology and communication 1,310 1 ,505 Premises 5,284 5 ,544 Depreciation 3,547 3 ,666 Other 749 5 96 Total 8 3,249 1 00,683
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
5. LIQUIDITY
(Audited) $000s December 31, June 30, 2010 2010
Cash balances with banks 21,950 21,342 Cash in transit 45,712 - Cash and short term funds 67,662 21,342 Placements with financial institutions and other liquid assets 305,210 818,469 Cash and cash equivalents 372,872 839,811 Placements with financial institutions and other liquid assets ( non cash equivalent) 88,000 63,000 Add: undrawn medium-term revolvers [see Note 14] 196,250 - Less: medium and long-term debt maturing within three months - (261,250) Total accessible liquidity 657,122 641,561 Co-investments in hedge funds (excluding gated funds) 589,939 518,286 Total liquidity 1,247,061 1,159,847
The Group maintains access to sufficient on and off-balance sheet liquidity in order to meet the maturing debt and to ensure sufficient cash is available to fund corporate investment and real estate acquisitions, prior to syndication to clients.
Accessible liquidity therefore includes both invested amounts that can be realized for cash at very short notice, and undrawn committed medium-term revolvers that can be drawn at short notice and that are not repayable for at least three months from the draw down date.
If required, managed redemptions from the Group’s co-investment in hedge funds provide a large source of additional back up liquidity, except for $11.44 million (June 30, 2010: $19.0 million) which is not immediately available due to gating clauses imposed by the underlying fund managers. Cash balances with banks comprise the Group’s cash, balances in nostro accounts and short-term dated government securities. Cash in transit relates to redemptions from hedge funds for which notices have been issued, the proceeds of which have been received subsequent to the balance sheet date.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
6. RECEIVABLES AND PREPAYMENTS
$000s December 31, (Audited) 2010 June 30, 2010 Subscriptions receivable 125,105 143,830 Receivables from investee companies 84,025 90,912 Investment disposal proceeds receivable 18,590 11,536 Hedge funds related receivables 13,121 52,159 Accrued interest receivable 5,799 6,396 Prepaid expenses 33,309 32,520 Other receivables 21,114 16,917 301,063 354,270 Provision for impairment (see Note 11) (38,489) (38,295) Total 262,574 315,975
Receivables arise largely from subscriptions by clients to the Group’s investment products, fees earned in respect of the Group’s investment management and other transactional services, interest accruals on loans and advances and proceeds due from investment disposals. Subscriptions receivable represents amounts due from clients for participation in the Group’s US and European buyouts and real estate investment products. These arise in the normal course of the Group’s placement activities and are recorded when a client signs a binding agreement confirming his or her participation in an investment offering. These are typically collected over the short-term, and, in the interim period prior to receipt of cash, are collateralized by the underlying investment assets. Investment disposal proceeds receivable includes proceeds due from contracted disposals of corporate investments and real estate investments. Hedge funds related receivables represent amounts due from HFP funds for management and administrative services and performance fees. They also include redemption proceeds receivable from underlying hedge fund managers relating to the Group’s co-investment in HFP through internal parallel vehicles. Accrued interest receivable represents interest receivable on placements with banks and other financial institutions, from investee companies on investment debt and from investment holding companies on working capital advances.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
7. LOANS AND ADVANCES
December 31, (Audited) $000s 2010 June 30, 2010 Advances to HFP Funds, Real Estate Funds and Technology Funds 9,891 11,224 Advances to investment holding companies 142,985 141,413 Advances to Employee Investment Programs 138,267 141,188 Other advances 8,556 6,375 299,699 300,200 Provision for impairment (see Note 11) (49,334) (52,607) Total 250,365 247,593 Loans and advances arise largely as a result of the Group extending working capital advances to investment holding companies and include advances to employees to facilitate co-investment in the Group’s products. Advances to HFP funds represent the amounts advanced to these funds to facilitate re-balancing of redemptions and subscriptions between various underlying fund managers. Advances to the Real Estate Funds represent amounts invested on behalf of the Group's clients in the acquisitions made by the Funds in the interim period prior to receipt of the associated capital call. These advances carry interest at market rates. In both cases, the advances are secured by the underlying investments in the associated fund(s), and hence represent a low risk to the Group. Advances to investment holding companies arise largely as a result of the Group extending working capital advances to companies established for client participation in the Group’s investment products. These advances carry interest at market rates. Advances to Employee Investment Programs represent the amounts advanced by the Group on behalf of employees in connection with their co-investment in the Group’s investment products. These advances carry interest at LIBOR plus margin, and are collateralized by the underlying investments, resulting in a low risk to the Group.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
8. CO-INVESTMENTS IN HEDGE FUNDS Co-investments in hedge funds, classified as FVTPL, comprise a portion of the Group’s liquidity deployed alongside clients in the various fund of hedge funds and single manager hedge funds products offered by the Group, and similar internal vehicles. The Group currently manages several funds of hedge funds and structured fund products. The underlying hedge fund managers invest in a variety of liquid financial instruments, including equities, bonds, and derivatives. In addition, the Group seeds investments to several emerging hedge fund managers on its single manager platform. An emerging manager is typically one who is just starting his or her firm, but may also include an established manager at low levels of AUM. The Group’s investments in hedge funds comprise the following:
$000s December 31, (Audited) 2010 June 30, 2010
Diversified Strategies Fund ("DSF") A cash management substitute targeting 300-500bp spread 86,593 76,918 and parallel vehicles over LIBOR
Flagship offering targeting a balanced exposure to the Balanced Fund ("IBF") hedge funds asset class and returns of 500-700bp over 36,167 - LIBOR Investments with single managers that have been seeded Single Manager Platform 243,014 264,777 on Investcorp's platform Investments in DSF, IBF or single managers through Structured products structured notes that may include a component of 214,304 195,515 embedded leverage
Other Hedge Funds investments Mix of small investments across several theme funds 21,301 64
Total balance sheet co-investments 601,379 5 37,274
The net asset value of the Group’s investments in hedge funds is determined based on the fair value of the underlying investments of each fund as advised by the fund manager. Significant controls are built around the determination of the net asset values of the various hedge funds including the appointment of third party independent fund administrators, use of separate accounts provided by fund managers for increased transparency and an independent verification of the prices of underlying securities through a dedicated operational risk group unit.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
9. CO-INVESTMENTS IN CORPORATE INVESTMENTS
$000s December 31, (Audited) 2010 June 30, 2010
US and European buyouts [See Note 9 (a)] 854,656 889,953 Technology small cap investments [See Note 9 (b)] 63,799 72,111 Gulf growth capital [See Note 9 (c)] 22,153 18,112 Strategic and other investments [See Note 9 (d)] 67,996 72,589 Total co-investments in corporate investments 1,008,604 1,052,765
9 (a) US AND EUROPEAN BUYOUTS The Group’s US and European buyout investments are classified as FVTPL investments. The fair value of unquoted US and European buyout investments is determined wherever possible using valuations implied by material financing events for the specific investment in question that involves third party capital providers operating at arms’ length. An example of a material event would be where a sale is imminent and credible bids have been received from third parties wherein the fair value would be established with reference to the range of bids received and based on management's assessment of the most likely realization value within the range. Another example of a material event would be where an arm's length financing transaction has occurred recently that is (a) material in nature, (b) involves third parties, and (c) attaches an implicit value to the company. In the event that such third-party evidenced recent measure of specific fair value for an individual investment is not available, the fair value is determined by following valuation techniques using a multiples-based approach applied to the most recent and relevant operating performance metric of the underlying company, typically EBITDA and sometimes sales. The multiple to be used is taken from a universe of comparable publicly listed companies, recent M&A transactions involving comparable companies, and multiples implied by Discounted Cash Flow (‘DCF’) analysis. Management exercises its judgment in choosing the most appropriate multiple, on a consistent basis, from within the universe established above.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
9 (a) US AND EUROPEAN BUY-OUTS (continued) The carrying values of the Group's co-investments in US and European buyout deals are: $000s December 31, (Audited) VINTAGE * 2010 June 30, 2010
Vintage 1997 (1997 - 2000) 187,521 180,205 Vintage 2001 (2001 - 2004) 39,029 137,996 Vintage 2005 (2005 - 2008) 436,486 402,353 Vintage 2009 (2009 - 2012) 191,620 169,399
Total 854,656 889,953
* Each vintage covers a period of four calendar years starting that year, for example, vintage 1997 covers deals acquired between 1997 and 2000. Summary by sector and location:
December 31, 2010 (Audited) June 30, 2010 North North $000s America Europe Total America Europe Total Consumer Products - - - 8 7,447 - 87,447 Industrial Products - 321,161 321,161 1 5,043 300,540 315,583 Technology and Telecom 2 10,350 - 210,350 1 78,082 - 178,082 Industrial Services 1 53,181 57,382 210,563 1 67,529 54,565 222,094 Distribution 9 5,071 17,511 112,582 7 3,478 13,269 86,747 Total 458,602 396,054 854,656 521,579 368,374 889,953
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
9 (b) TECHNOLOGY SMALL CAP INVESTMENTS Similar to US and European buyouts, the Group’s technology small-cap investments are classified as FVTPL investments. The fair value of unquoted technology small cap investments is determined primarily through valuations implied by material financing events for the specific investment in question that involves third party capital providers. In cases where these are not applicable, the Group uses a DCF valuation methodology similar to that used for US and European buyout investments as described in Note 9 (a). The carrying values of Group's co-investments in technology small-cap deals are:
Communication InfrasWtruicretuleress Data Digital ContenEtnterprise SoftwOathreer Tech & Telecom (Audited) December 31, June 30, $000s Communication Wireless Digital Enterprise 2010 2010 Infrastructure Data Content Software Other Total Total
Technology Fund I North America 1 ,177 1,104 54 1,444 392 4,171 3,604 Sub-Total 1 ,177 1,104 54 1,444 392 4,171 3,604
Technology Fund II North America 3 ,680 356 3,949 1,299 - 9,284 10,825 Europe - - 12,477 - - 12,477 8,860 Sub-Total 3 ,680 356 16,426 1,299 - 21,761 19,685
Technology Fund III North America - 13,282 - 3,313 - 16,595 13,083 Europe - - - 9,379 - 9,379 7,983 Sub-Total - 13,282 - 12,692 - 25,974 21,066
Direct Co-Investment Europe - - 11,893 - - 11,893 27,756 Sub-Total - - 11,893 - - 11,893 27,756 Total 4 ,857 14,742 28,373 15,435 392 63,799 72,111
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
9 (c) GULF GROWTH CAPITAL
This represents the Group’s co-investments through Gulf Opportunity Fund I (‘Fund’). Similar to US and European buyouts, the Group’s Gulf growth capital investments are classified as FVTPL investments. The fair value of unquoted Gulf Growth Capital investments is determined primarily through valuations implied by material financing events for the specific investment in question that involves third party capital providers. In cases where these are not applicable, the Group uses EBITDA multiples based valuation methodology.
9 (d) STRATEGIC AND OTHER INVESTMENTS
Strategic and other investments represent the following types of investments of the Group: 1. Investments made for strategic reasons; 2. Investments made for relationship reasons e.g. an opportunity introduced by an employee or a counterparty relationship; and 3. Instruments obtained on disposal of exited corporate investment and real estate deals or portfolios. These are primarily held as AFS investments, except for investments amounting to $32.6 million (June 30, 2010: $36.1 million) that are classified as FVTPL.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
10. CO-INVESTMENTS IN REAL ESTATE The Group’s real estate investments are mainly classified as FVTPL investments. Those investments that are developed and leased out are fair valued based on the estimated future cash flows from the underlying real estate assets and using prevailing capitalization rates for similar properties in the same geographical area, or DCF analysis. Opportunistic investments that involve an element of development are generally valued based on third party led financing events, or DCF analysis. The debt investments in real estate properties are classfied as held-to-maturity (“HTM”) investments amouting to $27.5 million (June 30, 2010 $34.2 million). The carrying values of the Group's co-investments in real estate portfolios in the United States are:
(Audited) $000s Number of Region December 31, June 30, PORTFOLIO TYPE properties East Midwest Southeast Southwest West 2010 2010
Office 9 39,158 - - - 6,047 45,205 33,393 Hotels 1 4 17,291 6,158 1,603 5,486 - 30,538 32,911 Retail 3 4 - 1,196 1,324 5,286 213 8,019 8,657 Industrial 4 5,072 - - - - 5,072 4,756 Core Plus Total 6 1 61,521 7,354 2,927 10,772 6,260 88,834 79,717 Mezzanine debt 21,455 221 48 107 530 22,361 29,264 Opportunistic 8 26,488 - 22,609 - 31,699 80,796 99,454 Strategic and other 8,342 - - - - 8,342 8,342 Total 6 9 117,806 7,575 25,584 10,879 38,489 200,333 216,777
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
11. PROVISION FOR IMPAIRMENT
Specific provisions for receivables, and loans and advances are as follows:
$000s 6 months to December 31, 2010 Charge/(write At beginning Write offs At end Categories back) Receivables 38,295 3,680 (3,486) 38,489
Loans and advances 52,607 (3,273) - 49,334 Total 90,902 407 (3,486) 87,823
6 months to December 31, 2009 (Audited) 79,233 5,989 - 85,222
12. DEPOSITS FROM CLIENTS
(Audited) $000s December 31, June 30, 2010 2010
SHORT-TERM:
Call accounts 233,858 1 05,726 Short-term deposits 9 87 385 Transitory balances - 1 41,315
Total deposits from clients - short-term 234,845 2 47,426
MEDIUM-TERM:
Medium-term deposits 24,422 22,860 Investment holding companies' deposits 58,030 50,949 Discretionary and other deposits 20,559 16,884
Total deposits from clients - medium-term 103,011 90,693
Total 337,856 3 38,119
Contractual deposits from clients that mature within one year from the balance sheet date are classified under short-term deposits, while those with maturity greater than one year are grouped under medium-term deposits. Call accounts comprise amounts left on deposit by clients that are not subject to the trust arrangement described in Note 3 for future participation in the Group’s investment products. Transitory balances comprise subscription amounts paid in by clients towards participation in specific investment products currently being placed by the Group. These also include investment realization proceeds held on behalf of investment holding companies by the Group in the interim period prior to distribution to or withdrawal by clients. Investment holding companies’ deposits represent excess cash deposited by the investment holding companies in the interim period prior to utilization or onward distribution. Discretionary and other deposits represent deposits held on behalf of various affiliates, including strategic shareholders and employees. All deposits bear interest at market rates.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
13. PAYABLES AND ACCRUED EXPENSES
(Audited) $000s December 31, June 30, 2010 2010
Accrued expenses - employee compensation 1 6,607 69,200 Vendor and other trade payables 2 9,964 35,459 Investment related payables 3,656 18,654 Deferred income 4,697 5,570 Accrued interest payable 1 1,973 15,459 Total 6 6,897 1 44,342
Accrued expenses for employee compensation include the incentive and retention component of the Group’s overall employee related costs. Investment related payables represent amounts contractually due in respect of acquisitions and exit proceeds that are held as escrows and reserves pending onward distribution. Deferred income represents amounts received by the Group from its investment activities, the recognition of which is deferred to future periods concurrent with the services to be rendered.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
14. MEDIUM-TERM DEBT Amounts outstanding represent the drawn portion of the following medium-term revolvers and funded facilities:
December 31, 2010 (Audited) June 30, 2010 Average Current Average Current $000s Maturity Tranche Type Size UndrawnSize utilization outstanding utilization outstanding
5-year Eurodollar facility December 2009 Funded 1 42,000 - - 1 42,000 5 2,636 -
5-year Eurodollar facility December 2009 Funded 3 50,000 - - 3 50,000 1 60,137 -
5-year Eurodollar facility July 2010 Revolver 1 50,000 22,826 - 1 50,000 1 50,000 150,000
5-year Eurodollar facility July 2010 Funded 1 50,000 22,826 - 1 50,000 1 50,000 150,000
5-year Eurodollar facility September 2010 Funded 5 0,000 21,196 - 5 0,000 5 0,000 50,000
5-year Eurodollar facility December 2011 Revolver 5 00,000 444,837 3 50,000 5 00,000 5 00,000 500,000
5.5-year Eurodollar facility December 2011 Revolver 4 0,000 40,000 40,000 4 0,000 4 0,000 40,000
5-year Floating rate medium-term note June 2012 Funded 1 9,000 19,000 19,000 1 9,000 1 9,000 19,000
3-year Multi-currency facility March 2013 Revolver 4 6,250 - - - - -
3-year Multi-currency facility March 2013 Funded 2 81,703 258,684 2 81,703 1 92,953 4 9,126 192,953
5.5-year Eurodollar facility March 2013 Forward Start 2 46,500 - - 3 81,500 - -
5-year Eurodollar facility April 2013 Revolver 1 07,500 107,500 1 07,500 1 07,500 1 07,500 107,500
5-year Eurodollar facility April 2013 Funded 1 35,500 135,500 1 35,500 1 35,500 1 35,500 135,500
Total 1,072,369 9 33,703 1 ,413,899 1,344,953
Foreign exchange translation adjustments (348) ( 4,011)
Transaction costs of borrowings (16,174) ( 19,594) 9 17,181 1,321,348 All medium-term facilities carry LIBOR-based floating rates of interest when drawn. Revolvers carry a fixed rate of commitment fees when undrawn.
15. LONG-TERM DEBT
December 31, 2010 (Audited) June 30, 2010 Average Current Average Current $000s Final Maturity outstanding outstanding outstanding o u tstanding
PRIVATE NOTES GBP 25 Million Private Placement January 2010 - - 1,438 - $40 Million Private Placement December 2010 2 7,380 - 30,000 30,000 $20 Million Private Placement November 2011 2 0,000 20,000 20,000 20,000 $20 Million Private Placement April 2012 2 0,000 20,000 20,000 20,000 $71.5 Million Private Placement May 2012 3 5,750 35,750 46,684 35,750 $75 Million Bi-lateral Placement March 2013 3 1,111 20,000 41,877 35,000 $35 Million Private Placement December 2013 2 6,250 26,250 26,250 26,250 JPY 37 Billion Private Placement March 2030 3 32,328 332,328 332,328 332,328 $50 Million Private Placement July 2032 5 0,000 50,000 50,000 50,000
5 42,819 504,328 568,577 549,328
Foreign exchange translation adjustments 122,833 85,657 Fair value adjustments (36,104) ( 39,904) Transaction costs of borrowings (3,377) ( 3,471) Total 587,680 591,610
Long-term debt issuances by the Group predominantly carry fixed rates of interest and are governed by covenants contained in the relevant agreements. Such covenants include maintaining certain minimum levels of net worth and liquidity coverage, and operating below a maximum leverage ratio. Page 33
INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
16. SHARE CAPITAL The Bank’s share capital at the balance sheet date is as follows:
December 31, 2010 (Audited) June 30, 2010 No. of Par value No. of Par value $000 $000 shares $ shares $ Authorized share capital - Ordinary shares 4 ,000,000 250 1,000,000 4,000,000 250 1,000,000 - Preference and other shares 1 ,000,000 1,000 1,000,000 1,000,000 1,000 1,000,000
2,000,000 2,000,000
Issued share capital - Ordinary shares 8 00,000 250 200,000 800,000 250 200,000 - Preference shares 5 15,132 1,000 515,132 515,132 1,000 515,132 - Non-vested preference shares (3,631) (6,454)
511,501 508,678
Total issued share capital 711,501 708,678
Ordinary share capital The Bank de-listed its Global Depository Receipts (“GDRs”) from the London Stock Exchange with effect from October 4, 2010. During the period, the Group, through a tender offer, purchased a total of 6,289,653 of the outstanding Regulation S GDRs, representing 7.9% of Investcorp's authorised outstanding share capital.
Preference share capital The preference shares are callable at the Bank’s option any time on or after their first call dates at par plus dividend due up to the call date. The earliest call date for these preference shares is June 30, 2014. These preference shares are non-cumulative, non-convertible, non-voting, non- participating and perpetual in nature and carry a dividend of 12% per annum upto their respective first call dates and 12-months USD LIBOR + 9.75% per annum thereafter, if not called. The payment of dividends on preference shares is subject to recommendation by the Board of Directors, and approval by the CBB and ordinary shareholders. The preference shares take priority over the Bank’s ordinary shares for payment of dividends and distribution of assets in the event of a liquidation or dissolution.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
17. CAPITAL ADEQUACY
The Group applies the Basel II framework regulations, as adopted by the CBB, on a consolidated basis to Investcorp Bank B.S.C. which is the entity licensed and regulated by CBB. For the measurement of risk weighted exposures, the Group has chosen: • standardized approach for credit risk of all exposures • the VaR model for market risk • basic indicator approach for operational risk. The table below summarizes the regulatory capital and the risk asset ratio calculation in line with the rules detailed above.
December 31, (Audited) $000s 2010 June 30, 2010
Gross Tier 1 capital 975,450 994,338 Less: regulatory deductions (44,921) (39,382) Tier 1 capital - net 930,529 954,956 Tier 2 capital -net - - Regulatory capital base under Basel II (a) 930,529 954,956
December 31, 2010 (Audited) June 30, 2010
Risk weighted exposure Principal / Principal / $000s Notional Risk weighted Notional Risk weighted amounts equivalents amounts equivalents
Credit risk
Claims on sovereigns 67 - 67 -
Claims on non-central government public sector entities 8,375 - 15,675 -
Claims on banks 277,834 63,967 610,147 122,929
Claims on corporates 643,840 496,020 800,874 564,885
Co-investments (including hedge funds) 1,810,316 2,676,760 1,806,816 2,653,057
Other assets 73,541 73,541 73,715 73,715 Off-balance sheet items Commitments and contingent liabilities 315,315 217,355 421,229 255,674 Derivative financial instruments 2,331,269 25,729 2,143,999 29,734 Credit risk weighted exposure 3,553,372 3,699,994
Market risk Market risk weighted exposure 7,433 7,148 Operational risk Operational risk weighted exposure 454,169 454,169
Total risk weighted exposure (b) 4,014,974 4,161,311
Risk asset ratio (a)/(b) 23.2% #DIV/0! 22.9%
Minimum required as per CBB regulatory guidelines under Basel II 12.0% 12.0%
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
18. DERIVATIVE FINANCIAL INSTRUMENTS
The Group utilizes derivative financial instruments primarily as risk management tools for hedging various balance sheet and cash flow risks. Such derivative instruments include forwards, swaps and options in the foreign exchange and capital markets. The Group’s criteria for a derivative financial instrument to be accounted for as a hedge include: - the hedging instrument, the underlying hedged item, the nature of the risk being hedged and the risk management objective and strategy must be formally documented at the inception of the hedge;
- it must be clearly demonstrated that the hedge, through changes in value of the hedging instrument, is expected to be highly effective in offsetting the changes in fair values or cash flows attributable to the hedged risk in the hedged item;
- the effectiveness of the hedge must be capable of being reliably measured; and
- the hedge must be assessed on an ongoing basis and determined to have actually been highly effective throughout the financial reporting period. The Group’s management classifies hedges into two categories: (a) fair value hedges that hedge exposure to changes in fair value of a recognized asset or liability; and (b) cash flow hedges that hedge exposure to variability in cash flows that is attributable to a particular risk associated with either a recognized asset or liability or a forecasted transaction highly probable to occur.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
18. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The following table illustrates the accounting treatment of fair value changes relating to various types of effective hedges:
Changes in fair value of Changes in fair value of Type of hedge underlying hedged item hedging instrument relating to the hedged risk Fair value hedges Recorded in the consolidated Recorded in the statement of income, and as a consolidated statement of corresponding adjustment to income, with a the carrying value of the corresponding effect on the hedged item on the consolidated balance sheet consolidated balance sheet. under positive or negative fair value of derivatives. Cash flow hedges Not applicable Recorded in equity with a corresponding effect on the consolidated balance sheet under positive or negative fair value of derivatives. Any unrealized gains or losses previously recognized in equity are transferred to the consolidated statement of income at the time when the forecasted transaction impacts the consolidated statement of income.
Other derivatives
The Group does not actively engage in proprietary trading activities in derivatives. However, on occasions, the Group may need to undertake certain derivative transactions to mitigate economic risks under its asset-liability management and risk management guidelines that may not qualify for hedge accounting under IAS 39. Consequently, gains or losses resulting from the re-measurement to fair value of these derivatives are taken to the consolidated statement of income.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
18. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The table below summarizes the Group's derivative financial instruments outstanding at December 31, 2010 and June 30, 2010:
Hedged item December 31, 2010 June 30, 2010 (Audited) Description Notional Positive Negative Notional Positive Negative $000s value fair value fair value value fair value fair value
A) HEDGING DERIVATIVES
Currency risk being hedged using forward foreign exchange contracts i) Fair value hedges On balance sheet exposures 466,712 15,029 ( 87) 431,158 16,926 ( 261) ii) Cashflow hedges Coupon on long-term debt 88,489 3,044 - 81,481 3,199 -
Total forward foreign exchange contracts 555,201 18,073 ( 87) 512,639 20,125 ( 261)
Interest rate risk being hedged using Interest rate swaps i) Fair value hedges - fixed rate debt 574,799 13,309 - 563,855 4,563 - ii) Cashflow hedges - floating rate debt 100,000 - ( 1,347) - - - Total interest rate hedging contracts 674,799 13,309 ( 1,347) 563,855 4,563 -
Total – Hedging Derivatives 1,230,000 31,382 ( 1,434) 1,076,494 24,688 ( 261)
B) DERIVATIVES ON BEHALF OF CLIENTS Forward foreign exchange contracts 10,349 21 ( 114) 15,483 27 ( 165) Total - Derivatives on behalf of clients 10,349 21 ( 114) 15,483 27 ( 165)
C) OTHER DERIVATIVES Interest rate swaps 350,000 13,133 (14,489) 350,000 16,738 (18,752) Forward foreign exchange contracts 373,319 14,714 ( 5,289) 264,971 17,532 (7,322) Currency option 2,251 38 ( 38) 2,251 71 ( 71) Cross currency swaps 340,350 3,920 ( 4,933) 334,800 15,710 - Interest rate options 25,000 - ( 1,587) 100,000 - ( 628)
Total – Other Derivatives 1,090,920 31,805 (26,336) 1,052,022 50,051 (26,773)
TOTAL – DERIVATIVE FINANCIAL INSTRUMENTS 2,331,269 63,208 (27,884) 2,143,999 74,766 (27,199)
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
19. COMMITMENTS AND CONTINGENT LIABILITIES
$000s December 31, June 30, 2010 2010 (Audited)
Investment commitments to closed-end committed funds 187,283 200,672 Other investment commitments 4,203 4,203 Total investment commitments 191,486 204,875
Non-cancelable operating leases 60,812 63,712
Guarantees and letters of credit issued to third parties 63,017 63,017 Capital guarantees - 5,876
Investment related commitments include future funding of acquisitions that were contracted but not funded at balance sheet date, and the Group’s unfunded co- investment commitments to various corporate investment and real estate funds. Non-cancelable operating leases relate to the Group’s commitments in respect of its New York and London office premises. Guarantees and letters of credit issued to third parties primarily relate to real estate investments. They include financial guarantees provided to facilitate investee companies’ on-going operations and leasing of equipment and facilities. In addition, the group has also issued indemnification letters and back stop guarantees in support of performance obligations of operating partners and investee companies. These mainly relate to real estate investments and amount to $83.7 million (June 30, 2010: $83.7 million).
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Underlying the definition of fair value is the presumption that the Group is a going concern without any intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. Fair value adjustments arise from re-measurement to fair value of investments, liabilities and derivatives. Fair value of the Group’s financial assets and liabilities on the consolidated balance sheet are not materially different to their carrying value except for fixed rate liabilities effectively carried at amortized cost. The fair value of such liabilities amount to $1,423.1 million (June 30, 2010: $1,878.5 million) as compared to carrying value of $1,504.9 million (June 30, 2010: $1,912.9 million). The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy as at 31 December, 2010:
December 31, 2010 $000s Level 1 Level 2 Level 3 Total
Financial assets Placements with financial institutions and other liquid assets - 153,000 - 153,000 Positive fair value of derivatives - 63,208 - 63,208 Co-investments Hedge funds - 601,379 - 601,379 Corporate investments 1,104 - 972,797 973,901 Real estate - - 172,861 172,861 Total financial assets 1,104 817,587 1,145,658 1,964,349
Financial liabilities Negative fair value of derivatives - 27,884 - 27,884 Total financial liabilities - 27,884 - 27,884
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) June 30, 2010 $000s Level 1 Level 2 Level 3 Total
Financial assets Placements with financial institutions and other liquid assets - 253,000 - 253,000 Positive fair value of derivatives - 74,766 - 74,766 Co-investments Hedge funds - 537,274 - 537,274 Private equity 914 - 1,003,597 1,004,511 Real estate - - 182,586 182,586 Total financial assets 914 865,040 1,186,183 2,052,137
Financial liabilities Negative fair value of derivatives - 27,199 - 27,199 Total financial liabilities - 27,199 - 27,199
During the period, there have been no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.
A reconciliation of the opening and closing amounts of financial assets (including those measured using Level 1 input and assets at amortized cost) is given below:
Movements July 1 to December 31, 2010 relating to $000s At Net new Fair value realizations/ Other beginning acquisitions movements* placements movements** At end
US and European Buyouts Level 3 8 87,114 3 4,577 3 2,119 (126,533) 2 4,540 8 51,817 Others 2,839 - - - - 2,839 Sub-total 8 89,953 3 4,577 3 2,119 (126,533) 2 4,540 8 54,656 Technology Small Cap Investments - Level 3 45,288 - 6 ,058 - (361) 5 0,985 Others 26,823 - 1 90 - (14,199) 1 2,814 Sub-total 72,111 - 6 ,248 - (14,560) 6 3,799 Gulf Growth Capital Level 3 18,112 4 ,041 - - - 2 2,153 Sub-total 18,112 4 ,041 - - - 2 2,153 Strategic investments and other Level 3 53,083 - (2,981) ( 2,221) (39) 4 7,842 Others 19,506 - - - 6 48 2 0,154 Sub-total 72,589 - (2,981) ( 2,221) 6 09 6 7,996 Real Estate Level 3 1 82,586 2 4,575 2 ,027 (42,262) 5 ,935 1 72,861 Others 34,191 - - ( 6,719) - 2 7,472 Sub-total 2 16,777 2 4,575 2 ,027 (48,981) 5 ,935 2 00,333 Total 1 ,269,542 6 3,193 3 7,413 (177,735) 1 6,524 1 ,208,937 *Include $1.9 million fair value movement in available for sale investments. **Other movements include add-on fundings and foreign currency translation adjustments.
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INVESTCORP BANK B.S.C. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Movements July 1, 2009 to June 30, 2010 relating to $000s At Net new Fair value realizations/ Other beginning acquisitions movements placements* movements* At end US and European Buyouts Level 3 7 69,392 1 53,417 9 7,690 (112,144) (21,241) 8 87,114 Others - 2 ,839 - - - 2,839 Sub-total 7 69,392 1 56,256 9 7,690 (112,144) (21,241) 8 89,953 Technology Small Cap Investments Level 3 45,483 2 9,003 1 ,286 (29,641) (843) 4 5,288 Others 711 2 5,909 2 03 - - 2 6,823 Sub-total 46,194 5 4,912 1 ,489 (29,641) (843) 7 2,111 Gulf Growth Capital Level 3 13,696 4 ,416 - - - 1 8,112 Sub-total 13,696 4 ,416 - - - 1 8,112 Strategic investments and other Level 3 54,603 6 23 (2,143) - - 5 3,083 Others 19,506 - - - - 1 9,506 Sub-total 74,109 6 23 (2,143) - - 7 2,589 Real Estate Level 3 2 39,077 4 8,986 (101,387) ( 4,666) 5 76 1 82,586 Others 44,130 1 6,969 - (26,908) - 3 4,191 Sub-total 2 83,207 6 5,955 (101,387) (31,574) 5 76 2 16,777 Total 1 ,186,598 2 82,162 (4,351) (173,359) (21,508) 1 ,269,542 *Other movements include add-on fundings and foreign currency translation adjustments.
21. CYCLICALITY OF ACTIVITIES
The Group’s income is comprised predominantly of revenues generated from direct investment and advisory services relating to investment activities. The main components of this revenue arise during the acquisition, placement and exit processes of corporate and real estate investments which may not be earned evenly during the fiscal period. Furthermore, the value development cycle for a given investment usually occurs over a longer time period and the revenues generated from that process are not spread evenly over the period. Consequently, the short- term operating result may not necessarily be indicative of the long-term operating result.
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