This Annual Report contains certain “forward-looking” statements, and such information is based on the beliefs of Arcapita, as well as on assumptions made by, and information currently available to, Arcapita. When used in this Annual Report, the words “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend”, and words or phrases of similar import, are intended to identify forward-looking statements. Such forward-looking statements may include, without limitation, statements relating to the following: Arcapita’s plans, strategy, objectives or goals; Arcapita’s future economic performance or prospects; specific country, region and worldwide business environment; potential effect on future performance of certain contingencies; and assumptions underlying any such statements. These statements are inherently subject to significant business, economic, competitive, regulatory and operational uncertainties, contingencies and risks, both specific and general in nature, many of which are beyond the control of Arcapita. Any forward-looking statements are speculative in nature, and it can be expected that one or more of the assumptions underlying such statements will prove not to be accurate, and unanticipated events and circumstances may occur. Actual results and events will likely vary from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements, and such variations may be material. Consequently, this Annual Report should not be regarded as a representation by Arcapita that the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements will be achieved and should not be relied on. Arcapita does not intend to update these forward-looking statements. TABLE OF CONTENTS
Overview Geographic Presence 5 Arcapita Values 6 Directors’ Report 7 CEO’S Message 9
Our Business Business Model 11 Clients 11 Lines of Business 11 Investment Process 14 Current and Exited Portfolio 15 Corporate Governance Overview 17 Board Committees 18 Management 18 Organizational Structure 20 Financial Highlights 22
Arcapita Group Independent Auditors’ Report to the Shareholders 25 Holdings Limited Consolidated Statement of Financial Position 26 Consolidated Statement of Income 27 Consolidated Statement Comprehensive Income 28 Consolidated Statement of Cash Flows 29 Consolidated Statement of Changes in Equity 30 Notes to the Consolidated Financial Statements 31 Shari’ah Supervisory Board’s Report to the Shareholders - AGHL 52
Arcapita Investment Independent Auditors’ Report to the Shareholders 54 Management B.S.C. (c) Report of the Board of Directors 55 Statement of Financial Position 56 Statement of Income and Other Comprehensive Income 57 Statement of Cash Flows 58 Statement of Changes in Equity 59 Notes to the Financial Statements 60 Shari’ah Supervisory Board’s Report to the Shareholders - AIM 69
Our People Board of Directors 70 Shari’ah Supervisory Board 72 Senior Management 73 Management Team 75 Contact Information 77
ARCAPITA ANNUAL REPORT 2016 3 OVERVIEW
Arcapita offers investors and shareholders diversified Shari'ah-compliant investments. At the center of one of the fastest growing wealth markets in the world, Arcapita's core management team has been serving an exclusive group of investors in the GCC region for 20 years. The global management team has extensive experience gained in a variety of market conditions and is a group of professionals with deep expertise in their respective fields. Arcapita maintains offices in Bahrain, Atlanta, London and Singapore.
4 ARCAPITA ANNUAL REPORT 2016 GEOGRAPHIC PRESENCE
Arcapita currently operates out of the following offices:
• Manama, Bahrain: Covering the MENA / GCC region and South Asia;
• Atlanta, US: Covering the United States;
• London, UK: Covering the United Kingdom and broader Europe; and
• Singapore: Covering Southeast Asia, China, Japan and Australia.
London
Atlanta
Bahrain
Singapore
Selected countries where Management has overseen investments Arcapita offices
ARCAPITA ANNUAL REPORT 2016 5 ARCAPITA VALUES
We are committed to operating our firm based on the following principles:
Originality Arcapita aims to provide innovative and distinctive alternative investment opportunities
Integrity Arcapita attracts and retains people with the courage to do the right thing at all times and in all circumstances
Transparency Arcapita is committed to full, accurate and timely disclosure of information to its stakeholders
Professionalism Arcapita is committed to recruiting and retaining the best people with a diverse range of expertise and experience
Prudent Risk Management Arcapita strives to achieve sustainable growth by maintaining a solid capital base and to effectively manage the risk inherent in the business
Alignment of Interests Arcapita aims to align the interest of investors and shareholders by encouraging employees to take a direct stake in the firm’s investments
Ethical Investment Policy Arcapita aims to invest in morally and ethically sound companies and products, and does not invest in non-Shari’ah compliant activities
6 ARCAPITA ANNUAL REPORT 2016 DIRECTORS’ REPORT FISCAL YEAR 2016
ABDULAZIZ HAMAD ALJOMAIH CHAIRMAN
We are pleased to report that Fiscal Year (“FY”) 2016 was another successful year for Arcapita. Revenues and net income for the period were USD 36.2 million and USD 12.2 million respectively, making this the third consecutive profitable year for the firm. Arcapita’s balance sheet remains robust with total equity of USD 130.2 million as of June 30, 2016, including USD 103.1 million in funded capital, USD 19.8 million in retained earnings, and USD 7.3 million in proposed dividends. In addition, Arcapita currently does not have any short or long term financing liabilities on its balance sheet1.
Arcapita’s new business activity accelerated considerably over the past twelve months. Despite a challenging market environment and the added volatility presented by lower oil prices, we completed investments worth a total transaction value of USD 360 million across the US and the GCC. These included the acquisition of a USD 85 million portfolio of senior living communities in Colorado, USA, a USD 100 million investment in a strategically-located logistics park in Dubai, UAE and the acquisition of a premium residential complex in Saadiyat Island, Abu Dhabi, for a transaction value of USD 180 million. Our investments were carefully selected to provide investors with secure and recurring income in markets and sub-sectors with sound economic fundamentals and compelling demographics. As we continue to canvass the market for other such opportunities and our investment portfolio expands, we are also looking forward to resuming private equity activity in the near term. Our global presence, lean investment teams, and deep industry relationships position us well to take advantage of the changing global economic landscape, and we are confident in our ability to continue to provide investors with distinctive investment opportunities.
During FY 2016, Arcapita completed further realizations from the investment portfolio it manages, including the sale of Viridian, the largest asset in the portfolio, for a total enterprise value of approximately £875 million. In addition, Arcapita successfully exited ARC Real Estate Income Fund, a USD 316 million real estate fund focused on the GCC’s warehousing and logistics sector, which delivered attractive returns to investors and is positioning us well to grow our global logistics investment platform. With these and past realizations, Arcapita has now returned over USD 3.4 billion to investors across 18 exits over the past three years, and we will be relying primarily on new business to support our future growth.
1) As of June 2016
ARCAPITA ANNUAL REPORT 2016 7 Arcapita’s management team has two decades of experience in managing innovative alternative investments across the globe, and we are excited about accelerating our new investment activity in the geographies and sectors we know best. To support our growth, we have recruited talented investment professionals for our deal teams in the US and the GCC and added additional depth to our investor relationship management team which maintains deep relationships with investors across the Gulf. We have also continued to strengthen each of our business groups, including risk management, information technology, and financial control, and will ensure that these key functions grow in line with the needs of the overall business.
FY 2016 was a successful year for Arcapita and we have a robust deal pipeline for FY 2017. As always, our goal is to provide innovative alternative investment opportunities for our investors and deliver superior returns to all our stakeholders. We continue to rely on the support of our shareholders, the Government of the Kingdom of Bahrain and the Central Bank of Bahrain, and we look forward to sharing another successful year ahead.
Abdulaziz Aljomaih
8 ARCAPITA ANNUAL REPORT 2016 CEO’S MESSAGE
ATIF A. ABDULMALIK CHIEF EXECUTIVE OFFICER
Arcapita has made considerable progress towards developing a robust and innovative global investment platform. This year, we expanded our investment teams, broadened the depth and coverage of our placement efforts, and invested in our global office infrastructure, all in anticipation of a substantial increase in our new investment activity.
As we look towards the year ahead, we are focused on a number of thematically-driven sectors that we believe will underpin global economic growth in the near to medium term. A rapidly aging population in the US and Europe is sustaining our interest in the senior living sector, where we have a strong and established track record. In addition, growth in global trade and the increased penetration of e-commerce is driving significant incremental demand for logistics and industrial warehousing services, creating compelling investment opportunities in both the real estate and private equity sectors. In addition, we are optimistic about the prospects of a global consumer-led recovery and believe that the retail and consumer services sectors will benefit from a growing middle class and higher consumer spending in both developed and developing markets.
Since its inception, Arcapita has aspired to be a leader in Shari’ah-compliant finance. In keeping with this philosophy, we have payed close attention to the evolving needs of our clients to ensure that our product offering addresses their unique and often varied requirements. We continue to expand and diversify our investor base and are deepening our relationships with institutional and sovereign investors in the region. We are likewise expanding our coverage outside our traditional focus areas in the GCC and have been successful in cultivating new relationships in strategic markets beyond the Gulf. Our focus over the next year will be on enhancing these efforts and developing a more diversified investor base.
Arcapita is at a unique and momentous juncture in its history and I am proud of our accomplishments thus far. This would not have been possible without the relentless support of our shareholders, our Board of Directors, and not least, the hard work and dedication of our employees. I would like to take this opportunity to thank each of our stakeholders for their continued guidance and support, and I look forward to our shared success.
ARCAPITA ANNUAL REPORT 2016 9 OUR BUSINESS
Arcapita provides investors with alternative investments and financial services that are Shari’ah-compliant. Arcapita capitalizes on the GCC region’s status as a net exporter of capital to provide clients with investments that target long-term returns exceeding those offered by conventional public equity markets. Arcapita comprises Arcapita Group Holdings Limited (“AGHL”), an exempted company organized under the laws of the Cayman Islands, and AIM Investment Management B.S.C(c) (“Arcapita Bahrain”), a company organized under the laws of the Kingdom of Bahrain, and their respective subsidiaries. Arcapita maintains offices in Bahrain, Atlanta, London and Singapore.
10 ARCAPITA ANNUAL REPORT 2016 BUSINESS Arcapita was formed to: MODEL • Provide investors with opportunities in alternative investment products in a Shari’ah- compliant manner and investment management services in connection with such products; • Co-invest with its investors in Arcapita-sponsored investment products to generate a return on such investments ; and • Provide investment management and administration services.
The broad network of over 1,300 valuable investors, the firm serves on a broad network of CLIENTS over 1,300 valuable investors from across the GCC and South East Asia.
Arcapita’s investor base is composed primarily of investors from the following four segments:
• HNWI: High net worth individuals with investable assets in excess of USD 1 million; • Family Offices: Professional entities set up to manage the investments, business affairs and philanthropic interests of high net worth families; • Institutions: Large, sophisticated investment groups that include pension funds, university endowments, asset managers and insurance companies; and • Sovereign Wealth Funds: State-owned investments funds.
LINES OF REAL ESTATE BUSINESS Overview Arcapita’s real estate team acts as a principal, arranger and manager of real estate investments. Its experienced real estate professionals analyze opportunities across a broad spectrum of transaction structures, geographies and return profiles in an effort to provide a diverse mix of attractive real estate investment opportunities to investors. To date, Arcapita’s core management has completed real estate investments in the industrial and logistics warehousing, self-storage, senior living, residential, mixed-use, business parks and retail sectors. The team has completed investments across the world; from North America, through Europe, the Middle East and Asia.
In support of Arcapita’s overall business strategy, and to provide more diverse investment opportunities for investors, the real estate team at Arcapita extended its focus to develop initiatives that include the establishment and management of real estate investment funds. In addition to real estate funds, the team is also focused on providing more real estate financial services and solutions by leveraging its experience in specific real estate sectors. To date, Arcapita’s core management has overseen over 40 investments with a total transaction value of approximately USD 15 billion.
Arcapita’s investment model has been developed and refined over an extended period of time as a result of underwriting a large number of investments and structures. The process begins with Arcapita sourcing projects, from direct approaches made to partners and sellers, and by working with specialist intermediaries within the real estate industry. Arcapita then performs project analysis and due diligence on the sourced projects. A full investment process typically
ARCAPITA ANNUAL REPORT 2016 11 lasts between two to six months. The real estate team also carefully assesses potential risks associated with the project, from broad macroeconomic trends to more narrowly defined issues specific to the project at hand. Arcapita consults closely with its co-investment partners, and conducts extensive analysis of the post-acquisition execution and exit strategies required to realize value over the investment term.
Portfolio Management Arcapita’s portfolio management approach is structured to allow its investments to realize their full potential and maximize returns. After closing the transaction, the asset managers, corporate management teams or joint venture partners are directly responsible for the execution of the business plan. Arcapita works closely with these partners to monitor and evaluate the progress of each real estate investment.
Early in the ownership period, the deal team works with its partners to identify the primary operating statistics to be monitored through regular meetings and reports. In this fashion, the deal team seeks to maintain continuous oversight over each investment. On a bi-monthly or quarterly basis, the deal team receives an asset performance report which includes a comprehensive set of marketing and financial updates for the investment and, on an annual basis, the deal team also receives and reviews audited financial statements for every investment.
The deal team conducts on-site operations reviews on a monthly or quarterly basis. At these sessions, the team conducts a deeper assessment of the investment’s performance, working with the operating partner to understand the underlying factors influencing current/future performance. This approach allows the deal team to recognize of any performance concerns in the early stages of the process, and to determine appropriate course corrections, if necessary. More extensive involvement is undertaken as needed.
Exit The real estate team sets a target date for the exit which typically ranges from three to seven years after the investment date, depending on the type of investment and the market. A partial or full exit may occur through a recapitalization, private sale or public sale.
PRIVATE EQUITY
Overview Arcapita acts as a principal and arranger in the acquisition of established middle-market companies, with an emphasis on the United States, Europe, the Middle East and Asia. The firm targets growth-oriented corporate acquisitions with a total transaction size between USD 50 million and USD 300 million per transaction. Arcapita focuses on sectors where its management team has established industry knowledge and a successful track record. Arcapita’s currently focused on investments in the food & beverage, transportation & logistics and industrial sectors.
Target companies will have innovative products or services; growing market positions and strong management teams, either in place or identified; exhibit the capability of building shareholder value; a clear business strategy with multiple avenues for growth and market share gains; industry growth drivers that are fundamental and compelling; and exit potential through a financial or strategic sale or an IPO.
Furthermore, Arcapita targets companies where it has a unique angle to secure the acquisition or to create value thereafter. In practice, this has arisen from transactions being offered to Arcapita on a proprietary basis, the opportunity to install a new expert management team,
12 ARCAPITA ANNUAL REPORT 2016 a special situation or industry knowledge that leads to identification of an opportunity, or in situations where Arcapita is able to leverage its extensive network of business relationships to the advantage of the target company, especially within the Middle East.
Once an acquisition is completed, and the target company becomes part of the private equity portfolio, Arcapita’s executives work closely with each portfolio company management team in establishing a clearly defined business plan for creating equity value, while designing a tailored capital structure and management equity incentives to promote growth and profitability. Arcapita aims to nurture and grow the investments through the holding period with strategic and financial support when necessary. To date, Arcapita’s core management has overseen over 30 investments with total transaction value of approximately USD 15 billion.
Portfolio Management Arcapita’s portfolio management approach is designed to ensure the highest possible performance of each of its portfolio companies - bringing critical insights, strategic capabilities and best practices in delivering superior investor returns.
Arcapita’s portfolio management approach is applied throughout asset ownership - including pre-acquisition and due diligence, during ownership and the process leading to exit. Prior to the acquisition of a company, the firm conducts market and operational due diligence, along with an assessment of the management team.
During the critical early ownership period Arcapita introduces process disciplines in the areas of strategy, operations, and people management, as well as board governance and audit protocols. Early on, the company works with senior management to identify the key industry and company-specific operating and financial measures that best reflect the true performance of the business. The firm structures incentive plans to encourage and motivate the targets management teams to meet agreed-upon metrics. Through a disciplined program of monthly performance reviews and quarterly board meetings, Arcapita’s team works with the company’s management team to evaluate the company’s performance, ensure early recognition of any deviations from expected performance and determine appropriate course corrections. More extensive involvement is undertaken as needed.
During the ownership period, Arcapita executives serve as members of each company’s Board of Directors, seeking to increase the value of the investment in three primary ways: (1) assisting management in defining and continuously updating the optimal three to five year action-based strategy, (2) identifying and driving initiatives in the company’s annual operating plans that improve the near-term operating performance of the business and support achievement of financial objectives, and (3) improving the company’s human resource management and succession planning. The firm also regularly identifies opportunities where its functional capabilities (both in-house and with selected third-party advisors) can be leveraged in support of marketing, sales, and growth-related initiatives, as well as cost reduction, working capital reduction, process improvement, and supply chain initiatives. Finally, Arcapita also play a critical role in evaluating, selecting, and developing CEO candidates, and will offer assistance to the CEO in the recruitment and selection of senior management team members.
Exit In most instances, Arcapita will aim to exit an investment within three to seven years. The relevant investment team will formulate its strategy to maximize equity value in the period prior to exit. Given the flexibility of the holding period, Arcapita may extend the holding period to avoid exiting at an inopportune time, and, equally it may opt for an earlier exit if an attractive exit opportunity presents itself. Exit may be way of trade sale, initial public offering or sale to financial buyer, depending on which route offers the most attractive return.
ARCAPITA ANNUAL REPORT 2016 13 INVESTMENT Deal Sourcing Exit (ONGOING) PROCESS
Due Diligence Post-Acquisition (2-6 MONTHS} (3-5 YEARS)
Fundraising Closing Acquisition / (3-6 MONTHS) Underwriting
Deal sourcing Due diligence Closing Investment Post-acquisition Exit acquisition/ placement underwriting
• Referrals from specialist • Market sounding • Close documentation PRE-MARKETING • Portfolio management is • Partial or full realization intermediaries handled by the Portfolio • Extensive analysis • Form investment • First contact with • Deal team’s Management Group • Direct approach • Consult external experts structure investors responsibility to partners/sellers • Asset management & advisors • Equity and financing • Book building starts • Approvals for real estate & • Dialogue with • Identify risks funded • Investors’ meetings • Distributions to investment banks infrastructure & mitigants • Finalize pricing & investors & Arcapita & other relationships transactions is handled • Arrange senior financing investment for investors in-house or outsourced • Allocation of • Follow-on transactions MARKETING • Set placement price to partners performance fees within the portfolio • Documentation • Release Private • Investment approvals • Prepare closing memo Placement Memorandum • Ongoing oversight by Risk Management Group • Risk management • Prepare post-acquisition • Process client orders strategy • Value optimization • Investors’ queries to maximize returns response • Commitments through Share Purchase Agreements • Funding & reduction of Arcapita’s position
14 ARCAPITA ANNUAL REPORT 2016 To date, Arcapita Management have completed over 70 investments with a total transaction CURRENT value of approximately USD 30 billion. AND EXITED PORTFOLIO Current Private Equity Investment Under Management Arcapita GCC Utilities Development I Arcapita India Growth Capital I Arcapita Ventures I Limited Meridian Surgical Partners, LLC
Current Real Estate Investments Under Management ARC UAE Logistics Park Arcapita CEE Residential Development I Arcapita India Business Park Development I Arcapita International Luxury Residential Development I Arcapita US Residential Development I Arcapita US Senior Living V Bahrain Bay Development B.S.C.(c) Bahrain Bay Development II B.S.C.(c) Saadiyat Beach Apartments, Limited
Exited Private Equity Investments American Pad & Paper LLC B.R. Lee Industries, Inc. Bijoux Terner, LLC Caribou Coffee Company, Inc. Church Street Health Management Church’s Chicken Cirrus Design Corporation Compagnie Européenne de Prestations Logistiques (CEPL) Computer Generation Incorporated Cypress Communications DVT Corporation Falcon Gas Storage Company, Inc. Freightliner Group Limited Honiton Energy Caymans Ltd Jill Acquisition, LLC Loehmann’s Holdings, Inc. Medifax-EDI, Inc. PODS Profine GmbH Roxar AS Smart Document Solutions, LLC South Staffordshire Plc Southland Log Homes, Inc. The Tensar Corporation, LLC TLC Health Care Services, Inc.
ARCAPITA ANNUAL REPORT 2016 15 Transportation Safety Technologies, Inc. Varel International Energy Services, Inc. Viridian Group Watermark, Inc. Working Rx Yakima Products , Inc. Zephyr Investments Limited
Exited Real Estate Investments ARC Real Estate Income Fund Arcapita Asian Industrial Yielding I Arcapita European Industrial Development I Arcapita European Industrial Yielding I Arcapita European Self-Storage Development I Arcapita European Self-Storage Development II Arcapita India Business Park Development II Arcapita Japan Residential Yielding I Arcapita Qatar Real Estate Investment Arcapita UK Senior Living Yielding I Arcapita US Residential Development II Arcapita US Residential Development III Arcapita US Retail Yielding I Arcapita US Senior Living Yielding I Arcapita US Senior Living Yielding II Arcapita US Senior Living Yielding III Arcapita US Senior Living Yielding IV Multifamily I Multifamily II Prologis I Prologis II Prologis III Riffa Views B.S.C.(c) Victory Heights Golf Residential and Development Company LLC
16 ARCAPITA ANNUAL REPORT 2016 The system of procedures and principles governing Arcapita’s management and operations are CORPORATE fundamental to the firm’s success. Arcapita’s Board of Directors and senior management are GOVERNANCE committed to an efficient, entrepreneurial decision-making structure that is fair, transparent and accountable while maintaining the agility required for a transaction. The illustration below OVERVIEW describes Arcapita’s current governance framework:
Board and Management Corporate Governance Framework
Board of Board of Directors Director's Level
Executive Executive Executive Audit & Administrative Investment Risk Management Board and Corporate Committee Committee Committee's Level Governance Committee
Management Risk Committee's Level Executive Committee Management Committee
Market Sounding Group
Investment Investment Executive Committee Team's Level
Arcapita has assembled a distinguished Board of Directors comprising eminent business personalities from across the GCC region. Drawing on deep experience in management, industry and investments, the Board of Directors is well positioned to represent the best interests of investors while assisting management with expert advice and counsel.
Arcapita’s Board of Directors takes responsibility for the strategy of Arcapita and for the supervision and oversight of its senior management, who have been entrusted with implementing day-to-day management policies. Arcapita’s Board of Directors consists of eight members, including seven non-executive members and Mr. Atif A. Abdulmalik, the firm’s CEO, representing management. The Board of Directors meet as often as business requires, and a minimum of four times a year. The roles of Chairman and CEO are held by two different individuals, to ensure an appropriate balance and seperation of authority. Arcapita’s management works closely with the Board of Directors, both directly and through its various committees. Management regularly provides investment and financial updates and strategic forecasts to the Board of Directors, and discusses all investment decisions under consideration, as well as any other major decisions or issues facing Arcapita.
ARCAPITA ANNUAL REPORT 2016 17 Arcapita’s Board of Directors is assisted in its monitoring and oversight responsibilities by the BOARD Executive Investment Committee, the Executive Administration and Corporate Governance COMMITTEES Committee and the Audit and Risk Committee.
Executive Investment Committee The Executive Investment Committee’s primary duties and responsibilities are to:
• Establish operating guidelines for investment activities • Approve new investments • Approve divestitures of current investments • Monitor investment performance across the portfolio • Approve firm-level financing and issuing of securities
Executive Administrative Committee The Executive Administrative Committee’s primary duties and responsibilities are to:
• Recommend and approve corporate and administrative policies • Review and recommend approval of the annual budget • Recommend and revise corporate governance policies and procedures • Oversee and monitor the governance framework
Audit & Risk Committee The Audit & Risk Committee’s primary duties and responsibilities are to:
• Approve and recommend for further approval by the Board of Directors: • Annual financial statements and budgets • Auditors and consultants • Monitor financial reporting, risk , compliance and internal control • Review and appraise activities of external and internal auditors
Arcapita has assembled a management team with deep experience in building and managing MANAGEMENT investment platforms globally. Drawing upon management’s collective experience and track record, Arcapita enjoys a seasoned management team that has lived through multiple investment cycles. Arcapita will utilize cross-functional management committees to operate its business:
Executive Committee The Executive Committee oversees the strategic planning for Arcapita and the decision making for all new investments. For example, prior to making a commitment to sign definitive agreements relating to investments (equity and financing), each new investment will need to be reviewed by the Executive Committee. Roles include the following:
• Set global strategy for Arcapita Group; • Review and recommend new investments; • Review and approve of business plans, budgets and control systems; and • Manage human capital, including determining compensation, and benefits plans and overseeing human resource development.
18 ARCAPITA ANNUAL REPORT 2016 Risk Management Committee The Risk Management Committee’s duty is to establish and maintain a risk management framework throughout the firm to best manage Arcapita’s shareholder and client interests. Its mandate is to identify, assess and measure risks arising from the firm›s activities, and to define the appropriate course of action to mitigate or manage them. Roles include:
• Establish and maintain a risk management framework throughout the firm by working with the Board Audit and Risk Committee; and • Oversee risk functions.
Market Sounding Group The Market Sounding Group is intended to evaluate the marketability of investment products identified by the deal teams. The Group comprises of the Investors Relationship Management team, members of the Financial Management Group and Shari’ah. The Market Sounding Group is responsible for the initial assessment of investor and market reaction to the following:
• Additional funding for an existing legacy transaction; and • Potential new transactions.
Investment Committee The Investment Executive Committee oversees the management of the existing investment portfolio, screens future new deal activity before Marketing Sounding Group, Executive Committee and other approvals are sought and provides inputs for Arcapita’s annual business planning. Roles include the following:
• Oversight of all deal teams and investment assets • Vetting of all deal team requests that will ultimately require Executive Committee approval • Serve as first point of contact for individual deal teams • Board-level engagement with individual deals • Serve as go-to liaison for new deal activities for specific sectors and geographies • Manage the firm’s operating rhythm related to investments (e.g., quarterly reviews, valuation updates, dividend distributions, investor reporting, etc.) • Provide periodic portfolio summary input for Arcapita’s overall financial reports • Provide portfolio exit projections and future investment plans as input for Arcapita’s 3-5 year plan
ARCAPITA ANNUAL REPORT 2016 19 Organizational Structure and Business Divisions ORGANIZATIONAL Board of Directors STRUCTURE AND
BUSINESS DIVISIONS Chief Executive Officer
Chief Operating Chief Investment Financial Financial Control Officer Officer Management Group
Investors Relationship Financial Reporting & Real Estate Management Management Group Internal Control
Corporate Accounts, Legal Private Equity Shari'ah Payables & Imprest Accounts
Investment Accounting & Corporate Management Risk Management Administration
Corporate System Development & Human Resources Communications Integration
Investors Relationship Management Investors Relationship Management is responsible for developing and maintaining relationships within Arcapita’s network of investors and potential investors. The team members are the primary liaisons with clients, delivering portfolio updates and presenting new investment opportunities. This group is also the first point of contact for investment opportunities which may be sourced from potential clients. The team operates out of Bahrain. Arcapita operates a sophisticated marketing system to plan, execute and monitor investment syndication, providing investors with a personalized and efficient service. The Investor Services Group within the Investors Relationship Management department is responsible for providing the team with the support necessary to respond to queries and requests in a timely and efficient manner.
Legal and Compliance Arcapita’s legal department (in coordination with related compliance personnel) has responsibility for Arcapita’s compliance with all applicable laws and regulations in its business activities and advises with respect to all legal matters. Its activities include advising investment teams on investments and divestments, and advising senior management and the Board of Directors on corporate governance, financing, arrangements and strategic planning. Arcapita’s legal department also assists with the administration of Cayman Islands, European, Middle Eastern and Asian offshore corporate structures in various investments. The legal department operates out of Bahrain and London.
Corporate Management Corporate Management provides support to all of Arcapita’s departments. The Corporate Management department comprises multiple disciplines, including: Administration, Information Technology and Treasury Operations. Corporate Management operates out of Bahrain.
20 ARCAPITA ANNUAL REPORT 2016 Human Resources Arcapita’s HR Department is responsible for the administration and management of the firm’s most valued assets – its employees, the administration and management of the global compensation & benefits programs, and the design and administration of the firm’s long- term incentive plans. The primary goal of our Human Resources Department is to help the organization meet its strategic goals by attracting and retaining employees and also managing them effectively through several processes. Most of these processes are performed by the HR Department in Bahrain. Some of the HR processes for Arcapita offices outside Bahrain are outsourced to third-party service providers whose service levels are monitored and managed from Bahrain. When all of these processes are effectively integrated, they provide significant economic benefits to the firm.
Investments: Real Estate and Private Equity Arcapita employs investment teams and independent consultants that are active globally, and their activities are coordinated under a Chief Investment Officer. Through the investment teams, Arcapita originates, manages and exits investments.
Financial Management Group The Financial Management Group is responsible for client reporting, the coordination of information across the firm, corporate level strategic/financial planning, preparation of Board of Directors packages, risk assessment of prospective investments, Shari’ah and corporate communications. The Financial Management Group operates out of Bahrain.
Financial Control Financial Control is responsible for preparing and maintaining accounts records, including; subsidiary accounting, internal and external financial reporting, regulatory reporting of financial figures and the related internal controls of the foregoing, and internal and external reporting of Arcapita’s financial information to the respective stakeholders.
ARCAPITA ANNUAL REPORT 2016 21 FINANCIAL HIGHLIGHTS
Income Statement (USD millions)
Revenues of Fiscal 2016 is mainly as a result of the investment portfolio and brokerage fees from new deal activities. As a result, new deal activity generated approximately USD 12.5 million in revenues, accounting for 35% of total revenue. Arcapita has completed three new investments worth a total transaction value of USD 360 million across the US and the GCC. These deals include ARC US Senior Living V, ARC UAE Logistics Park and ARC Saadiyat Beach Apartments. The revenue stream generated from RA is expected to reduce significantly in the coming year.
Arcapita group pro-forma statement of income
For the year ended 30 June 2016 AGHL Arcapita Consolidation Arcapita Group Bahrain adjustments Group USD ‘000 USD ‘000 USD ‘000 USD ‘000 INCOME Fee income and other 36,141 12,381 (12,357) 36,165 Total operating income 36,141 12,381 (12,357) 36,165
EXPENSES Staff compensation and benefits (12,933) (8,757) 8,757 (12,933) General and administration expenses (5,853) (2,763) 2,479 (6,137) Professional and consultancy fees (2,809) (1,232) 1,232 (2,809) Arcapita equity incentive plan expences (1,602) 111 (111) (1,602) Total operating expenses (23,197) (12,641) 12,357 (23,481) Foreign exchange (loss) / gain (714) 260 - (454) NET INCOME 12,230 - - 12,230
22 ARCAPITA ANNUAL REPORT 2016 Balance Sheet (USD Millions)
Total Equity as at June 30, 2016 amounted to USD 130.2 million, including USD103.1 million of share capital, USD 19.9 million of retained earnings and USD 7.3 million of proposed dividends. Arcapita ended Fiscal 2016 with a cash balance of approximately USD 68.8 million and total assets of USD 144.5 million.
As at 30 June 2016 AGHL Arcapita Consolidation Arcapita Group Bahrain adjustments Group USD ‘000 USD ‘000 USD ‘000 USD ‘000 ASSETS Cash and cash equivalents 61,394 7,398 - 68,792 Investments 43,858 - - 43,858 Receivables 29,722 1,084 (108) 30,698 Other asssets 1,149 - - 1,149 TOTAL ASSETS 136,123 8,482 (108) 144,497
LIABILITIES Accurated expenses and other liabilities 13,340 982 - 14,322 Payable to AGHL Group 108 - (108) - TOTAL LIABILITIES 13,448 982 (108) 14,322
EQUITY Share capital and premium 95,583 7,500 - 103,083 Reserves 19,828 - - 19,828 Proposed dividents 7,264 - - 7,264 TOTAL EQUITY 122,675 7,500 - 130,175 TOTAL EQUITY AND LIABILITIES 136,123 8,482 (108) 144,497
ARCAPITA ANNUAL REPORT 2016 23 ARCAPITA GROUP HOLDINGS LIMITED
INDEPENDENT AUDITORS’ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS SHARI’AH SUPERVISORY BOARD’S REPORT
FOR THE YEAR ENDED 30 JUNE 2016 INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF ARCAPITA GROUP HOLDINGS LIMITED
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Arcapita Group Holdings Limited (the ‘Company’) and its subsidiaries (together ‘the Group’) which comprise the consolidated statement of financial position as at 30 June 2016, the consolidated statement of income, consolidated statement of other comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory information.
Board of Directors’ responsibility for the consolidated financial statements
The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as the Board of Directors determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 30 June 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.
Partner’s registration no. 121 14 July 2016 Manama, Kingdom of Bahrain
ARCAPITA ANNUAL REPORT 2016 25 ARCAPITA GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016
ARCAPITA GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016
2016 2015 Note USD ‘000 USD ‘000 ASSETS Cash and cash equivalents 7 61,394 78,324 Investments 8 43,858 50,438 Receivables 9 29,722 7,926 Other assets 10 1,149 1,257 TOTAL ASSETS 136,123 137,945
EQUITY AND LIABILITIES
LIABILITIES Accrued expenses and other liabilities 11 13,340 11,394 Due to a related party 12 108 - Investment related payable 13 - 45,438 TOTAL LIABILITIES 13,448 56,832
EQUITY Share capital and premium 14 95,583 61,667 Reserves 19,828 14,779 Proposed dividends 15 7,264 4,667 TOTAL EQUITY 122,675 81,113 TOTAL EQUITY AND LIABILITIES 136,123 137,945
Abdulaziz Aljomaih Atif A. Abdulmalik Chairman of the Board of Directors Chief Executive Officer and Director
The attached explanatory notes 1 to 24 form part of these consolidated financial statements.
26 ARCAPITA ANNUAL REPORT 2016 ARCAPITA GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED 30 JUNE 2016
Year ended Year ended 30 June 2016 30 June 2015 Note USD ‘000 USD ‘000 OPERATING INCOME Fee and other income 16 36,141 35,463 Total operating income 36,141 35,463
OPERATING EXPENSES Staff compensation and benefits (12,933) (12,893) General and administration expenses (5,853) (4,779) Professional and consultancy fees (2,809) (5,383) Arcapita equity incentive plan expense 17 (1,602) (1,481) Total operating expenses (23,197) (24,536)
Foreign exchange (loss) / gain (714) 520 NET INCOME 12,230 11,447
Abdulaziz Aljomaih Atif A. Abdulmalik Chairman of the Board of Directors Chief Executive Officer and Director
The attached explanatory notes 1 to 24 form part of these consolidated financial statements.
ARCAPITA ANNUAL REPORT 2016 27 ARCAPITA GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016
Year ended Year ended 30 June 2016 30 June 2015 USD ‘000 USD ‘000 NET INCOME 12,230 11,447 Other comprehensive income to be reclassified to income statement in subsequent periods: - - Exchange differences on translation of foreign operations 83 (38) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 12,313 11,409
The attached explanatory notes 1 to 24 form part of these consolidated financial statements.
28 ARCAPITA ANNUAL REPORT 2016 ARCAPITA GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2016
Year ended Year ended 30 June 30 June 2016 2015 Note USD ‘000 USD ‘000 OPERATING ACTIVITIES Net income 12,230 11,447 Adjustment for non cash items: Arcapita equity incentive plan expense 1,602 1,481 Operating income before changes in operating assets and liabilities 13,832 12,928
Changes in operating assets and liabilities: Investments 6,580 (50,438) Receivables (21,796) (8,282) Other assets 108 - Accrued expenses and other liabilities 3,510 1,949 Investment related payables (45,438) 45,438 Due to a related party 108 (2,281) Net cash flows used in operating activities (43,096) (686)
FINANCING ACTIVITIES Proceeds from the issuance of share capital 14 30,833 22,390 Dividends paid (4,667) - Net cash flows from financing activities 26,166 22,390
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,930) 21,704 Cash and cash equivalents at the beginning of year 78,324 56,620 CASH AND CASH EQUIVALENTS AT THE END OF YEAR 7 61,394 78,324
The attached explanatory notes 1 to 24 form part of these consolidated financial statements.
ARCAPITA ANNUAL REPORT 2016 29 ARCAPITA GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2016
Share capital and premium Reserves Total Share Foreign Shares Capital Currency Share Share Pending Un-allocated and Retained Translation Total Proposed Total Capital Premium Allotment AEIP Shares Premium Earnings Reserve Reserves Dividend Equity USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 As at 1 July 2015 6 61,661 - - 61,667 14,906 (127) 14,779 4,667 81,113 Net income - - - - - 12,230 - 12,230 - 12,230 Exchange differences arising from translation of foreign operations ------83 83 - 83 Total comprehensive income - - - - - 12,230 83 12,313 - 12,313 Issue of share capital 4 41,107 - (10,278) 30,833 - - - - 30,833 Shares granted to employees under AEIP - - - 3,083 3,083 - - - - 3,083 Dividends paid ------(4,667) (4,667) Dividends proposed - - - - - (7,264) - (7,264) 7,264 - Balance as at 30 June 2016 10 102,768 - (7,195) 95,583 19,872 (44) 19,828 7,264 122,675
Total Share Foreign Shares Capital Currency Share Share Pending Un-allocated and Retained Translation Total Proposed Total Capital Premium Allotment AEIP Shares Premium Earnings Reserve Reserves Dividend Equity USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 USD ‘000 As at 1 July 2014 2 17,379 21,896 - 17,381 8,126 (89) 8,037 - 47,314 Net income - - - - - 11,447 - 11,447 - 11,447 Exchange differences arising from translation of foreign operations ------(38) (38) - (38) Total comprehensive income - - - - - 11,447 (38) 11,409 - 11,409 Issue of share capital 4 44,282 (21,896) - 44,286 - - - - 22,390 Dividends proposed - - - - - (4,667) - (4,667) 4,667 - Balance as at 30 June 2015 6 61,661 - - 61,667 14,906 (127) 14,779 4,667 81,113 The attached explanatory notes 1 to 24 form part of these consolidated financial statements.
30 ARCAPITA ANNUAL REPORT 2016 ARCAPITA GROUP HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016
1 ORGANISATION AND ACTIVITIES
Arcapita Group Holdings Limited (“the Company”) was incorporated in the Cayman Islands on 30 December 2013 as an exempt company. The registered office of the Company is at P.O. Box 1111, George Town, Grand Cayman, British West Indies. The Company and its subsidiaries (together the ‘Group’) provide alternative Islamic financial products.
These consolidated financial statements were authorized for issue by the Board of Directors on 5 July 2016.
2 BASIS OF PREPARATION
The consolidated financial statements have been prepared under the historical cost basis, except for investments that have been measured at fair value. The consolidated financial statements have been presented in US Dollars (USD) being the functional currency of the Group and all values are rounded to the nearest USD thousand, except when otherwise indicated.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
3 BASIS OF CONSOLIDATION
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 30 June 2016. Control is achieved if and only if the Group has:
- Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee, - Exposure, or rights, to variable returns from its involvement with the investee, and - The ability to use its power over the investee to affect its returns.
When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
- The contractual arrangement with the other vote holders of the investee, - Rights arising from other contractual arrangements, and - The Group’s voting rights and potential voting rights.
Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:
ARCAPITA ANNUAL REPORT 2016 31 - Derecognizes the assets (including goodwill) and liabilities of the subsidiary, - Derecognizes the carrying amount of any non-controlling interests, - Derecognizes the cumulative translation differences recorded in equity, - Recognizes the fair value of the consideration received, - Recognizes the fair value of any investment retained, - Recognizes any surplus or deficit in the statement of income, and - Reclassifies the parent’s share of components previously recognized in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities.
Subsidiary Companies
The following are the principal subsidiaries of the Company and are consolidated in these financial statements.
Year of Country of Subsidiary Ownership Incorporation Incorporation AIM Group Limited 100% 2013 Cayman Islands The primary activity of AIM Group Limited is to provide asset management and administrative services. Arcapita Investment Limited 100% 2015 Cayman Islands The primary activity of Arcapita Investment Limited is to hold the investments of the Group. Arcapita Management Limited 100% 2015 Cayman Islands The primary activity of Arcapita Management Limited is to administer or manage the Group’s investment structure companies. Arcapita Investment Partners Limited 100% 2015 Cayman Islands The primary activities of Arcapita Investment Partners Limited is to structure Islamically compliant investment products and act as placement agent. AIM Cayman SPE Limited 100% 2014 Cayman Islands The primary activity of Arcapita Cayman SPE Limited is to act as a deposit agent to the investors of the Group. Arcapita Investment Advisors UK Limited 100% 2013 United Kingdom The primary activities of Arcapita Investment Advisors UK Limited are to source investment opportunities in Europe and provide investment advisory services. Arcapita Investment Management US Inc. 100% 2013 United States of The primary activity of Arcapita Investment Management US America Inc. is to provide advisory services with respect to investment opportunities in the United States of America. Arcapita Investment Management Singapore Pte Limited 100% 2013 Singapore The primary activity of Arcapita Investment Management Singapore Pte Limited is to source investment opportunities in Asia and to provide financial advisory services to its related companies.
The Group’s ownership in the aforementioned subsidiaries has not changed from the prior year ended 30 June 2015.
32 ARCAPITA ANNUAL REPORT 2016 Investment entity
Entities that meet the definition of an investment entity within IFRS 10 are required to measure their subsidiaries held for sale under the ordinary course of business at fair value through statement of income rather than consolidate them. The criteria which define an investment entity are, as follows:
- An entity that obtains funds from one or more investors for the purpose of providing those investors with investment services; - An entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and - An entity that measures and evaluates the performance of substantially all of its investments on a fair value basis
The Group provides investment management services to investors which include investment in Islamic compliant equities, fixed income securities, private equity and property investments for the purpose of returns in the form of capital appreciation and investment income.
The Group reports to management via internal management reports and to its investors via investment reports on a fair value basis. All such investments are reported at fair value to the extent allowed under IFRS in the Group’s consolidated financial statements. The Group does not intend to hold such investments indefinitely and has a an exit strategy for all such investments.
The Group’s management has concluded that the Group meets the additional characteristics of an investment entity in that it has more than one investor; more than one investment; and the investments are predominantly in the form of equities and similar securities.
The Group concluded that it meets the definition of an investment entity.
Country of Unconsolidated subsidiaries Effective Ownership incorporation SBA Holdings Limited 100% Cayman Islands Senior Living Holdings Limited 100% Cayman Islands UAE Logistics Holdings Limited 100% Cayman Islands
4 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
The preparation of these consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts in the consolidated financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. Significant judgments applied in the preparation of the consolidated financial statements are given below:
Going concern
The Group’s Board of Directors has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Board of Directors is not aware of any material uncertainties that may cast significant doubt about the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements are prepared on a going concern basis.
ARCAPITA ANNUAL REPORT 2016 33 Impairment of financial assets
The management of the Group reviews its individually significant financial assets at each statement of financial position date to assess whether an impairment loss should be recorded in the statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss.
Assets that have been assessed individually and found not to be impaired and all individually insignificant assets are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether impairment should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident.
Fair value of financial instruments
Fair value is the price that would be received upon the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Group’s entire investment portfolio falls under level 3 of the fair value hierarchy. The Group uses various valuation techniques which are based on unobservable market inputs to determine the fair value of such investments.
The Group has engaged third party qualified valuation experts to perform the valuation of the Group’s entire investment portfolio as at the date of statement of financial position. The third party valuers have utilized methods such as sales comparison or the capitalization of future cash streams of the underlying asset using the prevailing capitalization rate for similar properties or similar geographies. The valuation experts applied their judgment in determining the appropriate valuation techniques and considerations of unobservable valuation inputs used in valuation models which include capitalisation rates and comparable assets.
5 NEW AND AMENDED STANDARDS AND INTERPRETATIONS
The accounting policies adopted are consistent with those of the previous financial year relating to the following new and amended IFRS and the IFRS Interpretations Committee (the “IFRIC”) interpretations which became effective for accounting periods beginning on or after 1 January 2015:
IFRS 2 ‘Share-based Payment’ and amendments to IFRS 2
This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions. The clarifications are consistent with how the Group has identified any performance and service conditions which are vesting conditions in previous periods.
IAS 24 ‘Related Party Disclosures’ and amendments to IAS 24
The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. The Group has complied with the aforementioned amendments in these consolidated financial statements.
6 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted in the preparation of the consolidated financial statements are set out below:
34 ARCAPITA ANNUAL REPORT 2016 a) Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
(i) Financial assets
Financial assets comprise of cash and cash equivalents, receivables and investments.
Initial recognition
The Group classifies its financial assets into two categories: at fair value through statement of income and receivables. The classification depends on the purpose for which the financial assets were acquired or transferred to the Group.
Financial assets are initially recognised at fair value plus, for an item not at fair value through statement of income, transaction costs that are directly attributable to its acquisition or issue.
Subsequent measurement
Financial assets at fair value through statement of income
Financial assets designated at fair value through statement of income upon inception are those that are not held for trading but are managed and their performance evaluated on a fair value basis in accordance with the Group’s objectives. The Group’s objectives require the Board of Directors to evaluate information about these assets on a fair value basis together with other related financial information. Subsequent to initial recognition, financial assets at fair value through statement of income are measured at fair value. Gains and losses arising from changes in the fair value are recognised in the statement of income.
Receivables
These are non-derivative financial assets that are not quoted in an active market and are stated at fair value plus transaction costs, if any. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment, if any. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial asset or liability to the carrying amount of the financial asset or liability.
An allowance for doubtful receivables is made when collection of the full amount is no longer probable. Receivables are written off when there is no possibility of recovery.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:
(i) the right to receive cash flows from the asset have expired; or (ii) the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
ARCAPITA ANNUAL REPORT 2016 35 Impairment of financial assets
The Group assesses, at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
(ii) Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as loans and borrowings and payables. All financial liabilities are recognised initially at fair value, net of directly attributable transaction costs.
The Group’s financial liabilities include accrued expenses and other liabilities.
Subsequent measurement
After initial recognition, financial liabilities are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the consolidated statement of income, when the liabilities are derecognised, as well as through the effective interest rate method (EIR) amortisation process.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated statement of income. b) Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if and only if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. c) Payables, accruals and provisions
Provisions are made when the Group has a present obligation as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. d) Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.
36 ARCAPITA ANNUAL REPORT 2016 Fee income
The fee income represents income the Group earns for investment placement, investment structuring and arranging, asset management and administrative services rendered in accordance to the contractual terms agreed between the parties. Fees are recognised as the services are preformed.
Placement and arrangement fee
The Company earns arrangement and placement fees for rendering services during the acquisition and placement of investments. These fees are recognised when earned based on the signed share purchase agreements by the Company.
Dividend income
Dividends from investments in equity securities are recognised when the right to receive the payment is established. e) Foreign currencies
Transactions in foreign currencies are initially recorded in the functional currency at the rate of exchange prevailing at the date of the transaction.
Monetary assets and liabilities in foreign currencies are translated into USD at exchange rates prevailing at the statement of financial position date. Any gains or losses are recognized in the statement of income.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial recognition. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Exchange gains and losses on non-monetary items classified as “fair value through statement of income” are taken to the consolidated statement of income and for items classified as “fair value through equity” such differences are taken to the consolidated statement of comprehensive income. f) Share based payments
Employees of the Group receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments. The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognised as employee benefits expense in the statement of income, together with a corresponding increase in equity. g) Operating lease commitments
The Group has entered into property leases which are classified as operating leases. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, such as the lease term not constituting a major part of the economic life of the property and the present value of the minimum lease payments not amounting to substantially all of the fair value of the property, that it therefore does not retain all the significant risks and rewards of ownership of these properties and accounts for the contracts as operating leases. h) Standards issued but not yet effective
Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt these standards when they become effective.
ARCAPITA ANNUAL REPORT 2016 37 IFRS 9 Financial Instruments: Classification and Measurement
IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. The Group is currently assessing the impact of IFRS 9 and plans to adopt the new standard on the required effective date.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018, when the IASB finalises their amendments to defer the effective date of IFRS 15 by one year. Early adoption is permitted. The Group is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date.
7 CASH AND CASH EQUIVALENTS
30 June 30 June 2016 2015 USD ‘000 USD ‘000 Cash and balances with banks 31,376 73,090 Murabaha with financial institution 30,018 5,234 61,394 78,324
8 INVESTMENTS
30 June 30 June 2016 2015 Note USD ‘000 USD ‘000 Investments classified through statement of income 8.1 43,858 50,438 43,858 50,438
8.1 Investments classified through statement of income
The Group has invested through its structured entities in real estate portfolios in United Arab Emirates and a property portfolio in the United States.
38 ARCAPITA ANNUAL REPORT 2016 9 RECEIVABLES
30 June 30 June 2016 2015 USD ‘000 USD ‘000 Deal subscription receivable 23,520 3,829 Advances to investment companies 1,931 - Management fee receivable 1,813 - Other receivables 1,538 4,097 Investment yield / dividend receivable 920 - 29,722 7,926
10 OTHER ASSETS
30 June 30 June 2016 2015 USD ‘000 USD ‘000 Prepayments and other assets 617 674 Equipment’s 532 583 1,149 1,257
11 ACCRUED EXPENSES AND OTHER LIABILITIES
30 June 30 June 2016 2015 Note USD ‘000 USD ‘000 Due to investment companies 6,744 3,206 Employee related payables 12.2 5,016 3,222 Payable to board members 800 816 Fee received in advance 316 613 Accrued expenses and supplier payables 242 2,895 Other Liabilities 222 642 13,340 11,394
12 RELATED PARTY TRANSACTIONS
Related parties represent associated companies, its major shareholders, directors and key management personnel of the Group, the Group’s Shari’ah Supervisory Board and entities controlled, jointly controlled or significantly influenced by such parties. Transactions with related parties arise from the ordinary course of business. Pricing policies and terms of these transactions are approved by the Group’s management.
ARCAPITA ANNUAL REPORT 2016 39 Income and Expenses paid to related parties are as follows:
Year ended Year ended 30 June 2016 30 June 2015 Note USD ‘000 USD ‘000 Income Yield and dividend income from investment companies 3,615 - Placement income 2,151 142 Management fee from investment companies 796 - Arrangement fee from investment companies 726 -
Expenses Reimbursement of expenses 12.1 12,357 12,649 Key management personnel costs 2,512 2,901 Share based compensation to key personnel 17 1,602 1,481 Fees to the Board of Directors 804 840
Balances with related parties
Assets Receivable from related parties 13,880 4,323
Liabilities Payable to key personnel 2,793 1,436 Payable to investment companies 2,500 3,206 Payable to board members 800 816 Payable to an affiliate 12.1 108 -
12.1 Reimbursement of expenses
The Group and Arcapita Investment Management B.S.C.(c) are under the common control of the same shareholders and governed by the same Board of Directors. As a result Arcapita Investment Management B.S.C.(c) is a related party to the Group. The Group reimburses the expenditures incurred by Arcapita Investment Management B.S.C.(c) in providing services to the Group. In the consolidated statement of income for the year ended 30 June 2016, the reimbursement is included within general and administration expenses, legal and professional expenses, staff compensation and benefit expenses and Arcapita equity incentive plan expenses.
12.2 Accrued expenses and other liabilities
Included in accrued expenses and other liabilities are amounts recovered by the Group from an affiliate, under a fiduciary capacity, on behalf of certain employees and consultants of the Group. The Group collects such amounts on behalf of such employees and consultants as per agreed terms. This amount will not revert to the Group at any point in time.
40 ARCAPITA ANNUAL REPORT 2016 13 INVESTMENT RELATED PAYABLE
Investment related payable consist of a payable arising from the recent acquisition of a regional residential real estate investment acquired during the year ended 30 June 2015 . The liability was subsequently settled in full during the year ended 30 June 2016.
14 SHARE CAPITAL & PREMIUM
Share capital
30 June 30 June 2016 2015 USD USD Authorized capital 50,000,000 ordinary shares with a par value of USD 0.001 per share 50,000 50,000 Issued and paid up capital As at 1 July (2015: 6,166,667 shares, 2014: 1,738,095.2 shares) 6,167 1,738 Issued during the year (2016: 4,111,111 shares, 2015:4,428,571.6 shares) 4,111 4,429 As at 30 June (2016: 10,277,778 shares, 2015: 6,166,667 shares) 10,278 6,167
Share premium
Amounts collected in excess of the par value of the issued share capital during any issue of shares are treated as share premium.
Unallocated Arcapita equity incentive plan shares
As detailed in Note 17, the Group has an employee share incentive program by the name of Arcapita equity incentive plan (“AEIP”). Under this program shares have been issued to the plan for allocation to plan participants. Any shares that have not been allocated to plan participants are presented as a deduction from equity.
15 PROPOSED DIVIDEND
Proposed dividends are disclosed as appropriations within equity until the time they are approved by the shareholders. On approval by shareholders, these are transferred to liabilities. As at 30 June 2016, the Group has proposed per share dividend of USD 0.76 ( 30 June 2015: USD 0.76) per share amounting to USD 7.264 million (30 June 2015 : USD 4.667 million). Unallocated shares held by AEIP are not entitled to receive dividends.
ARCAPITA ANNUAL REPORT 2016 41 16 FEE AND OTHER INCOME
30 June 30 June 2016 2015 USD ‘000 USD ‘000 Management and performance fees 24,257 31,593 Placement fees 7,368 2,472 Investment yield / dividend income 3,615 - Arrangement fees 726 1,357 Others 175 41 36,141 35,463
17 ARCAPITA EQUITY INCENTIVE PLAN
Arcapita equity incentive plan (“AEIP”) is an employee share incentive program through which employees may earn shares in the Company. Investment units comprising shares of the Company equal to 10 percent of the issued and outstanding equity, on a fully diluted basis, were allocated to the program upon its inception. Based on Group’s performance, up to 20 percent of the plan allocation becomes eligible to be granted to employees each year. Shares granted to employees are fully vested on the date of grant and expensed (i.e. Share based compensation costs) to the statement of income.
The fair value of the shares is estimated at the grant date based on the last capital raise valuation.
Movement during the year
30 June 30 June 2016 2015 Shares issued to AEIP 1,027,778 - Shares granted to employees during the year (308,334) - Number of un-allocated shares outstanding at 30 June 719,444 -
18 COMMITMENTS AND CONTINGENCIES
30 June 30 June 2016 2015 USD ‘000 USD ‘000 Operating lease commitments relating to rented premises within one year 1,424 832 within two to five years 1,446 1,542 more than five years 754 1,233 3,624 3,607
42 ARCAPITA ANNUAL REPORT 2016 19 INVESTOR FUNDS
From time to time the Group receives funds from or due to its investors. These funds are placed in a segregated client account with an established reputed international bank based in New York and are held pursuant to control agreements with investors and portfolio investment companies in which these investors have invested. The control agreements restrict the Group’s access to these funds and requires the consent and instructions of the investors or portfolio companies to transact. As a result the Group does not have legal authority to solely control the funds nor an obligation to the investor and as such these funds are not reflected in the Group’s financial statements.
20 RISK MANAGEMENT
20.1 Introduction
The Group intends to take an enterprise-wide approach to risk management, with proactive identification and mitigation of the risks embedded in the Group’s balance sheet and business activities. One of the primary objectives of risk management will be to optimize shareholder and investor returns while maintaining the Group’s risk exposure within self-imposed parameters to be defined within the Group’s risk strategy, appetite and policy documents.
The overall responsibility for the implementation of a sound risk management framework will lie with the Group’s senior management and the Board. The Group has established an independent Risk Management Department (RMD) that will assist in the development and implementation of the Group’s risk management framework. The RMD will work in co-ordination with the Risk Management Committee (RMC) which is a management level committee with the objective of providing a platform for senior management input, review and approval of key aspects relating to risk management. The RMD and RMC will work under the supervision of the Audit and Risk Committee (ARC) which is a board level committee delegated with certain responsibilities of risk oversight on behalf of the Board and will support the Board in the execution of its responsibilities pertaining to risk management.
One of the primary objectives for RMD (in conjunction with the RMC and ARC) will be to implement, maintain and enhance a risk management framework that is:
- Aligned to the overall risk profile of the Group; - Driven by Board approved risk strategy and risk appetite; - Conducive to risk management culture being embedded throughout the organization / processes; and - Ensuring that RMD is functioning in an independent but not isolated manner. While such a framework is being established, RMD in co-ordination with the RMC members has identified and is monitoring the risks identified below. Significant matters if any are brought to the attention of the ARC and the Board.
20.2 Credit risk
Credit risk is the risk that one party to a financial transaction will fail to discharge an obligation and cause the other party to incur a financial loss. The Group’s exposure to credit risk is limited due to minimal lending / placement activity and the fact that there are no investments in financial securities. The Group is exposed to credit risk on its bank balance and receivables. This risk is considered minimal as the bank balances are maintained in current accounts with reputable international banks having good credit standings. The receivable balances primarily represents prepayments to vendors and receivables from staff.
20.3 Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may also arise from an inability to realize a financial asset quickly at an amount close to its fair value. The Group’s exposure to funding liquidity risk is low given that the Group maintains minimal balance sheet leverage. The Group has enough cash and bank balances available as of 30 June 2016 in order to discharge its financial liabilities when they fall due. RMD closely monitors the liquidity position on an actual and forecasted basis and ensures that management is frequently updated on the Group’s liquidity position and actual / forecasted liquidity requirements.
ARCAPITA ANNUAL REPORT 2016 43 A maturity profile of assets and liabilities, based on expected maturities, is provided below.
As at 30 June 2016 Up to 3 > 3 months up Sub-Total up > 1 year up to Non-cash months to 1 year to 1 year 5 years items Total ASSETS Financial assets Cash and cash equivalents 61,394 - 61,394 - - 61,394 Investments - 27,807 27,807 16,051 - 43,858 Receivables 29,722 - 29,722 - - 29,722 Other assets - - - 400 - 400 Total financial assets 91,116 27,807 118,923 16,451 - 135,374
Non-financial assets Prepayments - - - - 217 217 Equipment’s - - - - 532 532 Total Assets 91,116 27,807 118,923 16,451 749 136,123
LIABILITIES Financial liabilities Accrued expenses and other liabilities 13,024 - 13,024 - - 13,024 Due to a related party 108 - 108 - - 108 Total financial liabilities 13,132 - 13,132 - - 13,132 Non-financial liabilities Fees received in advance - - - - 316 316 Total liabilities 13,132 - 13,132 - 316 13,448 Net gap 77,984 27,807 105,791 16,451 433 122,675
44 ARCAPITA ANNUAL REPORT 2016 As at 30 June 2015 Up to 3 > 3 months up Sub-Total up to > 1 year up to months to 1 year 1 year 5 years Non-cash items Total ASSETS Financial assets Cash and cash equivalents 78,324 - 78,324 - - 78,324 Investments - 35,914 35,914 14,524 - 50,438 Receivables 7,926 7,926 - - 7,926 Other assets - - - 418 - 418 Total financial assets 86,250 35,914 122,164 14,942 - 137,106
Non-financial assets Prepayments - - - - 256 256 Equipment’s - - - - 583 583 Total Assets 86,250 35,914 122,164 14,942 839 137,945
LIABILITIES Financial liabilities Accrued expenses and other liabilities 10,781 - 10,781 - - 10,781 Investment related payable 45,438 45,438 - - 45,438 Total financial liabilities 56,219 - 56,219 - - 56,219 Non-financial liabilities Fees received in advance - - - - 613 613 Total liabilities 56,219 - 56,219 - 613 56,832 Net gap 30,031 35,914 65,945 14,942 226 81,113
20.4 Investment risk
This category relates to the risks arising from the Group’s real estate investment portfolio and entails market / systematic risks (losses on investments due to changes in market fundamentals) and non-systematic / investment specific risks. The objective of investment risk management is to manage and control risk exposures within acceptable parameters, while optimizing returns.
As part of the risk management framework that is being implemented, RMD is to work closely with the business units to conduct investment risk analyses at the individual deal and portfolio level throughout the investment cycle. The investment risk analysis is to focus on the risk profile of each individual investment (including the incremental impact on the investment portfolio) and the overall investment portfolio in light of the Group’s risk strategy, appetite, policies and the risk limits and guidelines defined therein.
ARCAPITA ANNUAL REPORT 2016 45 20.5 Market Risk
The Group defines market risk as the risk of losses due to adverse movements in market fundamentals such as profit rates, foreign currency exchange rates, equity markets / prices and commodity prices on the Group’s investment securities (other than the real estate investment portfolio).
The Group does not maintain a significant portfolio of investment securities (such as investment in Sukuk, listed equity investments) other than the real estate investment portfolio and maintains a minimal component of liabilities on its balance sheet. The Group’s exposure, not including the real estate investment portfolio, to market risk as defined above is therefore not significant.
Systematic and non-systematic risks arising from the real estate investment portfolio are categorized under “Investment risk” that is outlined under note “20.4 Investment risk”.
Foreign currency net open positions (of non USD currencies that are not pegged to the USD) are also minimal. The largest foreign currency exposure is in GBP amounting to approximately USD 5.0 million (30 June 2015: USD 10.0 million). A 10 percent change in exchange rates, positive or negative would impact net income by USD 0.5 million (30 June 2015: USD 1.0 million).
20.6 Operational risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications or lead to financial loss. The Group minimizes the operational risk by maintaining a strong internal control environment and continuous oversight by the Board of Directors.
21 CAPITAL MANAGEMENT
The primary objective of the Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure and makes adjustments to it in line with the changes in operating conditions and the risk characteristics of its activities.
22 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received upon the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: a) In the principal market for the asset or liability, or b) In the absence of a principal market, in the most advantageous market for the asset or liability.
46 ARCAPITA ANNUAL REPORT 2016 The Group’s financial instruments have been classified in accordance with their measurement basis as follows:
At fair value through statement At cost/ of income amortised cost Total 30-Jun-16 USD ‘000 USD ‘000 USD ‘000 ASSETS Cash and cash equivalents - 61,394 61,394 Investments 43,858 - 43,858 Receivables - 29,722 29,722 Other assets - 400 400 43,858 91,516 135,374
LIABILITIES Accrued expenses and other liabilities - 13,024 13,024 Due to a related party - 108 108 - 13,132 13,132
At fair value through statement At cost/ of income amortised cost Total 30-Jun-15 USD ‘000 USD ‘000 USD ‘000 ASSETS Cash and cash equivalent - 78,324 78,324 Investments 50,438 - 50,438 Receivables - 7,926 7,926 Other assets - 418 418 50,438 86,668 137,106
LIABILITIES Accrued expenses and other liabilities - 10,781 10,781 Investment related payable - 45,438 45,438 - 56,219 56,219
Fair value hierarchy
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximizing the use of relevant observable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
ARCAPITA ANNUAL REPORT 2016 47 Determination of fair value and fair value hierarchy
The Group uses the following hierarchy for determining and disclosing fair value of financial assets and liabilities:
Level 1: Quoted (unadjusted) prices in active markets for identical assets or 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 significant effect on the recorded fair value that are not based on observable market data.
The investments carried at ‘fair value through statement of income’ has been classified as level 3 assets.
Movements in level 3 financial instruments measured at fair value
The following table shows a reconciliation of the opening and closing amount of level 3 financial assets which are recorded at fair value:
30 Jun 17 30 Jun 17 2016 2015 USD ‘000 USD ‘000 Opening balance 50,438 - Acquisition of investments 78,343 50,438 Placement of investments (84,923) - 43,858 50,438
Valuation process of the Group
Balances with banks represent cash and cash equivalents and are due on demand. The carrying value of these balances represents their fair value.
The recoverability of receivables were determined by the management as part of impairment testing. The carrying amounts approximate the fair value of these receivables.
For investment in real estate sector, fair value is determined by reference to valuations by an independent real estate valuation expert. The determination of the fair value of such assets is based on local market conditions.
Other liabilities and payable to a related party are current in nature and the carrying value of these financial instruments represents their fair value.
48 ARCAPITA ANNUAL REPORT 2016 The effect of unobservable inputs on fair valuation
The significant unobservable inputs used in the fair value measurements categorised within Level 3 of the fair value hierarchy, together with a quantitative sensitivity analysis as at 30 June 2016 are as shown below:
Impact on Income Favorable Unfavorable Unobservable inputs Input Change USD ‘000 USD ‘000 Capitalization rates 6.5% to 8.5% +/- 10% 7,238 (5,922) Price per square feet USD 857 +/- 10% 3,988 (3,988)
23 SEGMENTAL INFORMATION
The sole business of the Group is to provide and manage alternative Islamic investment products and as a result it does not have any other reportable segments for this financial period.
24 EARNINGS PROHIBITED BY SHARI’AH
The Group receives interest from incidental deposits. These earnings are prohibited by Shari’ah, hence set aside as a liability to be used exclusively for charitable purposes and amount to USD 9,126.12 (30 June 2015: USD 9,071.84)
SUPPLEMENTARY INFORMATION
Arcapita Group consists of Arcapita Group Holdings Limited (“AGHL”), AGHL’s direct and indirect subsidiaries and Arcapita Investment Management B.S.C.(c) (“Arcapita Bahrain”) (Formerly AIM Investment Management B.S.C.(c)).
AGHL and Arcapita Bahrain currently are owned by the same shareholders in the same shareholding ratios. This is as a result of contractual arrangements which requires the shareholders of each entity to be identical. The shareholders have to hold their interests in Arcapita Group in the same ratio of AGHL shares to Arcapita Bahrain shares and to appoint identical members to Board of Directors in both entities, now and in the future. However, under the requirements of IFRS, in order to consolidate the financial position and results of Arcapita Bahrain with AGHL certain conditions have to be met. These conditions have not been fulfilled at this time and Arcapita Bahrain results cannot be consolidated with AGHL.
Therefore, in order to provide supplementary information to the shareholders we provide below a summarized pro-forma consolidated statement of income and financial position.
ARCAPITA ANNUAL REPORT 2016 49 Arcapita group pro-forma statement of financial position
As at 30 June 2016 AGHL Group Arcapita Bahrain Consolidation adjustments Arcapita Group USD ‘000 USD ‘000 USD ‘000 USD ‘000 ASSETS Cash and cash equivalents 61,394 7,398 - 68,792 Investments 43,858 - - 43,858 Receivables 29,722 1,084 (108) 30,698 Other assets 1,149 - - 1,149 TOTAL ASSETS 136,123 8,482 (108) 144,497
LIABILITIES Accrued expenses and other liabilities 13,340 982 - 14,322 Payable to AGHL Group 108 - (108) - TOTAL LIABILITIES 13,448 982 (108) 14,322
EQUITY Share capital and premium 95,583 7,500 - 103,083 Reserves 19,828 - - 19,828 Proposed dividends 7,264 - - 7,264 TOTAL EQUITY 122,675 7,500 - 130,175 TOTAL EQUITY AND LIABILITIES 136,123 8,482 (108) 144,497
As at 30 June 2015 AGHL Group Arcapita Bahrain Consolidation adjustments Arcapita Group USD ‘000 USD ‘000 USD ‘000 USD ‘000 ASSETS Cash and cash equivalents 78,324 6,343 26 84,693 Investments 50,438 - - 50,438 Receivables 7,926 107 (994) 7,039 Other assets 1,257 1,067 - 2,324 TOTAL ASSETS 137,945 7,517 (968) 144,494
LIABILITIES Accrued expenses and other liabilities 45,438 - - 45,438 Payable to AGHL Group 11,394 2,517 (968) 12,943 TOTAL LIABILITIES 56,832 2,517 (968) 58,381
EQUITY Share capital and premium 61,667 2,646 - 64,313 Shares pending allotment - 2,354 - 2,354 Reserves 14,779 - - 14,779 Proposed dividends 4,667 - - 4,667 TOTAL EQUITY 81,113 5,000 - 86,113 TOTAL EQUITY AND LIABILITIES 137,945 7,517 (968) 144,494
50 ARCAPITA ANNUAL REPORT 2016 Arcapita group pro-forma statement of income
For the year ended 30 June 2016 AGHL Group Arcapita Bahrain Consolidation adjustments Arcapita Group USD ‘000 USD ‘000 USD ‘000 USD ‘000 INCOME Fee Income and other 36,141 12,381 (12,357) 36,165 Total operating income 36,141 12,381 (12,357) 36,165
EXPENSES Staff compensation and benefits (12,933) (8,757) 8,757 (12,933) General and administration expenses (5,853) (2,763) 2,479 (6,137) Professional and consultancy fees (2,809) (1,232) 1,232 (2,809) Arcapita equity incentive plan expenses (1,602) 111 (111) (1,602) Total operating expenses (23,197) (12,641) 12,357 (23,481) Foreign exchange (loss) / gain (714) 260 - (454) NET INCOME 12,230 - - 12,230
For the year ended 30 June 2016 AGHL Group Arcapita Bahrain Consolidation adjustments Arcapita Group USD ‘000 USD ‘000 USD ‘000 USD ‘000 INCOME Fee Income and other 35,463 12,674 (12,649) 35,488 Total operating income 35,463 12,674 (12,649) 35,488
EXPENSES Staff compensation and benefits (12,893) (8,489) 8,489 (12,893) General and administration expenses (4,779) (2,454) 2,547 (4,686) Professional and consultancy fees (5,383) (1,502) 1,502 (5,383) Arcapita equity incentive plan expense (1,481) (111) 111 (1,481) Total operating expenses (24,536) (12,556) 12,649 (24,443) Foreign exchange gain / (loss) 520 (118) - 402 NET INCOME 11,447 - - 11,447
ARCAPITA ANNUAL REPORT 2016 51 بسم اهلل الرحمن الرحيم
SHARI’AH SUPERVISORY BOARD’S REPORT TO SHAREHOLDERS
Assalam Alaikum Wa Rahmat Allah Wa Barakatuh, In compliance with the letter of appointment and article 110 of the Articles of Association of Arcapita Group Holdings Limited, we are required to submit the following report:
We have reviewed the contracts relating to the transactions undertaken by Arcapita Group Holdings Limited and its subsidiaries (“the Group”) during the year ended 30 June 2016. We have also conducted a review of the operations of the Group to form an opinion as to whether the Group has complied with Shari’ah rules and principles and the specific fatwas, rulings and guidelines issued by us.
The Group’s management is responsible for ensuring that it conducts its business in accordance with Islamic Shari’ah rules and principles. It is our responsibility to form an independent opinion, based on our review of the operations of the Group and to report to you.
We planned and performed our review so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give assurance that the Group has not violated the rules and principles of Islamic Shari’ah. The Shari’ah Supervisory Board will conduct site visits and audits to ensure Shari’ah compliance.
In our opinion: a) The contracts entered by the Group during the year are overall in compliance with Islamic Shari’ah rules and principles. b) The Group is managing an investment portfolio on behalf of its clients and this investment portfolio was acquired by its clients prior to establishing the Group and the investment portfolio was structured and approved by the client’s previous Shari’ah committee. c) The investments undertaken by the Group during the year has been reviewed by us and is overall in accordance with Islamic Shari’ah principles. d) The allocation of profit and charging of losses conform to the basis that had been approved by us in accordance with Islamic Shari’ah rules and principles.
We beg Allah the Almighty to grant us all success and straightforwardness.
Shari’ah Supervisory Board
Sh. Muhammad Taqi Usmani Chairman
Sh. Essam Mohammed Ishaq Sh. Mohammed Al Jamea Member Member
3rd July 2016
52 ARCAPITA ANNUAL REPORT 2016 ARCAPITA INVESTMENT MANAGEMENT B.S.C. (c)
REPORT OF THE BOARD OF DIRECTORS, INDEPENDENT AUDITORS’ REPORT AND FINANCIAL STATEMENTS SHARI’AH SUPERVISORY BOARD REPORT
FOR THE YEAR ENDED 30 JUNE 2016 INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS
OF ARCAPITA INVESTMENT MANAGEMENT B.S.C. (C)
Report on the financial statements
We have audited the accompanying financial statements of Arcapita Investment Management B.S.C.(c) (the “Company”), as at 30 June 2016 which comprised the related statements of income, cash flows and changes in equity for the year then ended. These financial statements and the Company’s undertaking to operate in accordance with Islamic Shari’ah Rules and Principles are the responsibility of the Company’s Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Auditing Standards for Islamic Financial Institutions issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of 30 June 2016, the results of its operations, its cash flows and changes in equity for the year then ended in accordance with the Financial Accounting Standards issued by AAOIFI.
Report on other regulatory requirements
As required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain (“CBB”) Rule Book (Volume 4), we report that: a) the Company has maintained proper accounting records and the financial statements are in agreement therewith; and b) the financial information contained in the Report of the Board of Directors is consistent with the financial statements.
We are not aware of any violations of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 4 and applicable provisions of Volume 6) and CBB directives, or the terms of the Company’s memorandum and articles of association have occurred during the year ended 30 June 2016 that might have had a material adverse effect on the business of the Company or on its financial position. Satisfactory explanations and information have been provided to us by management in response to all our requests. The Company has also complied with the Islamic Shari’ah Rules and Principles as determined by the Shari’ah Supervisory Board of the Company.
Partner’s registration no. 121
______2016
Manama, Kingdom of Bahrain
54 ARCAPITA ANNUAL REPORT 2016 ARCAPITA INVESTMENT MANAGEMENT B.S.C. (C)
REPORT OF THE BOARD OF DIRECTORS
The Directors have pleasure in submitting their report and the audited financial statements of Arcapita Investment Management B.S.C. (c) (the “Company”) for the year ended 30 June 2016.
Principal activities and review of business developments
The Company operates under an Investment Firm license - Category I (Islamic Principles) issued by the Central Bank of Bahrain (“CBB”), to operate under Islamic Shari’ah principles, and is supervised and regulated by the CBB. The Company’s principal activities are in dealing in financial instruments as an agent, and arranging, managing, safeguarding and advising on financial instruments.
Year ended Year ended 30 June 2016 30 June 2015 Financial Highlights USD ’000 USD ’000 OPERATING INCOME Fee and other income 12,381 12,674 Foreign exchange gain / (loss) 260 (118) Total operating income 12,641 12,556
OPERATING EXPENSES Staff compensation and benefits (8,646) (8,600) General and administration expenses (2,763) (2,454) Professional and consulting fees (1,232) (1,502) Total operating expenses (12,641) (12,556)
Auditors
EY have expressed their willingness to continue in office and a resolution proposing their appointment as auditors of Arcapita Investment Management B.S.C. (c), for the year ending 30 June 2017, will be submitted to the Annual General Meeting.
Signed on behalf of the Board
Chairman of the Board of Directors
14 July 2016
ARCAPITA ANNUAL REPORT 2016 55 ARCAPITA INVESTMENT MANAGEMENT B.S.C. (C)
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016
2016 2015 Note USD ’000 USD ’000 ASSETS
Cash and cash equivalents 5 7,398 6,343 Receivables and other assets 6 976 1,174 Due from a related party 108 - TOTAL ASSETS 8,482 7,517
LIABILITIES AND EQUITY LIABILITIES Accrued expenses and other liabilities 982 2,517 TOTAL LIABILITIES 982 2,517
EQUITY Share capital 7 7,500 2,645 Shares pending allotment 8 - 2,355 TOTAL EQUITY 7,500 5,000 TOTAL LIABILITIES AND EQUITY 8,482 7,517
Abdulaziz Aljomaih Atif A. Abdulmalik Chairman of the Board of Directors Chief Executive Officer and Director
56 ARCAPITA ANNUAL REPORT 2016 ARCAPITA INVESTMENT MANAGEMENT B.S.C. (C)
STATEMENT OF INCOME AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016
Year ended Year ended 30 June 2016 30 June 2015 Note USD'000 USD'000 OPERATING INCOME Fee and other income 9.1 12,381 12,674 Total operating income 12,381 12,674
OPERATING EXPENSES Staff compensation and benefits (8,646) (8,600) General and administration expenses (2,763) (2,454) Professional and consulting fees (1,232) (1,502) Total operating expenses (12,641) (12,556)
Foreign exchange gain / (loss) 260 (118) NET INCOME AND TOTAL COMPREHENSIVE INCOME FOR THE YEAR - -
Abdulaziz Aljomaih Atif A. Abdulmalik Chairman of the Board of Directors Chief Executive Officer and Director
ARCAPITA ANNUAL REPORT 2016 57 ARCAPITA INVESTMENT MANAGEMENT B.S.C. (C)
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2016
Year ended Year ended 30 June 2016 30 June 2015 Note USD’000 USD’000 CASH FLOWS FROM OPERATING ACTIVITIES Net income for the year - - Changes in operating assets and liabilities Due from a related party (108) 2,281 Receivables and other assets 198 (616) Accrued expenses and other liabilities (1,535) 1,779 Net cash (used in) / from operating activities (1,445) 3,444
CASH FLOWS FROM FINANCING ACTIVITY Proceeds from the issuance of share capital 7 & 8 2,500 1,818 Net cash from financing activity 2,500 1,818
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,055 5,262
Cash and cash equivalents at the beginning of the year 6,343 1,081 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 5 7,398 6,343
58 ARCAPITA ANNUAL REPORT 2016 ARCAPITA INVESTMENT MANAGEMENT B.S.C. (C)
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2016
Shares Share pending Retained Total capital allotment earnings equity USD’000 USD’000 USD’000 USD’000 As at 1 July 2015 2,645 2,355 - 5,000 Net income for the year - - - - Issuance of share capital 4,855 (2,355) - 2,500 As at 30 June 2016 7,500 - - 7,500
As at 1 July 2014 2,645 537 - 3,182 Net income for the year - - - - Issuance of share capital - 1,818 - 1,818 As at 30 June 2015 2,645 2,355 - 5,000
ARCAPITA ANNUAL REPORT 2016 59 ARCAPITA INVESTMENT MANAGEMENT B.S.C. (C)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016
1 ORGANISATION AND ACTIVITIES
Arcapita Investment Management B.S.C. (c) (“the Company”) is a closed joint stock company registered with the Ministry of Industry and Commerce in the Kingdom of Bahrain and operates under the commercial registration number 87184 obtained on 10 October 2013, which is the date the Company commenced its commercial operations. The address of the Company’s registered office is P.O.Box 1357, Arcapita Building, 5th floor, Bahrain Bay, Manama, Kingdom of Bahrain.
The Company operates under an Investment Firm license - Category I (Islamic Principles) issued by the Central Bank of Bahrain (“CBB”), to operate under Islamic Shari’ah principles, and is supervised and regulated by the CBB. The Company’s principal activities are in dealing in financial instruments as an agent, and arranging, managing, safeguarding and advising on financial instruments.
As at 30 June 2016, the Company has USD nil (30 June 2015: nil) assets under management.
These financial statements have been prepared for the year ended 30 June 2016 and were authorized for issue by the Board of Directors on 5 July 2016.
2 BASIS OF PREPARATION
2.1 Statement of compliance
The financial statements are prepared in accordance with the Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (“AAOIFI”), the Shari’ah Rules and Principles as determined by the Shari’ah Supervisory Board of the Company, the Bahrain Commercial Companies Law, Financial Institutions Law, the CBB Rulebooks, directives, regulations and associated resolutions and the terms of the Company’s memorandum and articles of association. In accordance with the requirements of AAOIFI, for matters for which no AAOIFI standard exists, the Company uses the relevant International Financial Reporting Standard (“IFRS”) issued by International Accounting Standards Board (“IASB”).
2.2 Accounting convention
The financial statements have been prepared under the historical cost basis and presented in the United States Dollar, which is the functional currency of the Company.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted in the preparation of these financial statements are: a. Cash and cash equivalents
Cash and cash equivalents include cash in hand, amounts due from banks on demand or with an original maturity of 90 days or less and balances held with deposit agents. b. Receivables and other assets
Receivables and other assets are carried at amortised cost. An estimate is made for impaired receivables based on a review of all outstanding amounts at the year end.
60 ARCAPITA ANNUAL REPORT 2016 c. Financial instruments
Recognition and de-recognition
Financial instruments comprise financial assets and financial liabilities.
All financial assets and financial liabilities are initially recognised on the trade date, i.e. the date that the Company becomes a party to the contractual provisions of the instrument.
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized where:
- the right to receive cash flows from the asset has expired; or - the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or - the Company has transferred its right to receive cash flows from the asset and either: (a) has transferred substantially all the risks and rewards of the assets, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset.
The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired. d. Accrued expenses and other liabilities
Accrued expenses and other liabilities are recognized for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. e. Amortized cost measurement
Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as such when the Company has the positive intention and ability to hold them to maturity. After initial measurement, these investments are measured at amortised cost using the effective profit rate (EPR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EPR. The EPR amortisation is included in the statement of profit or loss. The losses arising from impairment are recognised in the statement of profit or loss under ‘provisions’. f. Offsetting
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a legally enforceable or religious right to set off the recognized amounts and the Company intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously. g. Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured.
ARCAPITA ANNUAL REPORT 2016 61 Fee income
The fee income represents income the Company earns for asset management and administrative services rendered in accordance to the contractual terms agreed between the parties. h. Shari’ah supervisory board
The Company’s business activities are subject to the supervision of a Shari’ah supervisory board consisting of at least three members appointed by the general assembly. i. Earnings prohibited by Shari’ah
The Company is committed to avoid recognizing any income generated from non-Islamic sources. Accordingly all non-Islamic income is credited to a charity account where the Company uses these funds for various social welfare activities. j. Foreign currencies
Transactions in foreign currencies are initially recorded at the exchange rate prevailing on the date of the transaction.
Monetary assets and liabilities in foreign currencies are translated into United States Dollars at exchange rates prevailing at the statement of financial position date. Any gains or losses are recognized in the statement of profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial recognition. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. k. Employees’ end of service benefits
Bahraini employees are covered by the Social Insurance Organization scheme which comprises a defined contribution scheme to which the Company contributes a monthly sum based on a fixed percentage of the salary. The contribution is recognized as an expense in the statement of income.
The Company provides end of service benefits to its non-Bahraini employees. Entitlement to these benefits is usually based upon the employees’ length of service and the completion of a minimum service period. The expected costs of these benefits which comprise a defined benefit scheme are accrued over the period of employment based on the notional amount payable if all employees had left at the statement of financial position date. l. Impairment of financial assets
An assessment is made at each financial position date to determine whether there is objective evidence that a specific financial asset or a Group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss, based on the assessment by the Company of the estimated cash equivalent value, is recognized in the statement of income. Specific provisions are created to reduce all impaired financial contracts to their realizable cash equivalent value. Financial assets are written off only in circumstances where effectively all possible means of recovery have been exhausted.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment value was recognized, the previously recognized impairment loss is reversed.
62 ARCAPITA ANNUAL REPORT 2016 m. Events after the statement of financial position date
The financial statements are adjusted to reflect events that occurred between the statement of financial position date and the date the financial statements are authorized for issue, provided they give evidence of conditions that existed as of the statement of financial position date. Events that are indicative of conditions that arose after the statement of financial position date are disclosed, but do not result in an adjustment to the financial statements. o. Operating lease commitments
The Company has entered into property leases which are classified as operating leases. The Company has determined, based on an evaluation of the terms and conditions of the arrangements, such as the lease term not constituting a major part of the economic life of the property and the present value of the minimum lease payments not amounting to substantially all of the fair value of the property, that it therefore does not retain all the significant risks and rewards of ownership of these properties and accounts for the contracts as operating leases. p. Zakah
Individual shareholders are responsible for payment of Zakah.
4 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
Judgments
In the process of applying the Company’s accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the financial statements.
(i) Estimates and assumptions
The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Company. Such changes are reflected in the assumptions when they occur.
(ii) Going concern
The Company’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern. Therefore, the financial statements are prepared on the going concern basis.
ARCAPITA ANNUAL REPORT 2016 63 5 CASH AND CASH EQUIVALENTS
As at As at 30 June 2016 30 June 2015 Note USD’000 USD’000 Cash and balances with banks 7,398 3,989 Capital raise proceeds with deposit agent 5.1 - 2,354 7,398 6,343
5.1 Capital raise proceeds with deposit agent
Proceeds from the capital raise were held by the deposit agent, Arcapita Cayman SPE Limited through a segregated client account operated by a reputed international bank until allocation and issuance of shares.
6 RECEIVABLES AND OTHER ASSETS
Receivables and other assets comprise of prepaid expenses, reimbursables and equipment.
7 SHARE CAPITAL
As at As at 30 June 2016 30 June 2015 USD USD Authorized capital 26,455,030 ordinary shares with a par value of USD 1 per share 26,455,030 26,455,030 Issued and paid up capital As at 1 July (2015: 2,645,503 shares, 2014: 2,645,503 shares ) 2,645,503 2,645,503 Issued during the year (2016: 4,854,497 shares, 2015: Nil shares ) 4,854,497 - As at 30 June (2016: 7,500,000 shares, 2015:2,645,503 shares ) 7,500,000 2,645,503
8 SHARES PENDING ALLOTMENT
During the year ended 30 June 2015, the Company received USD 5,000,000 representing the full commitment as part of the first tranche of capital issuance. Out of the capital raised of USD 5,000,000, an amount of USD 2,354,497 was categorized as shares pending allotment at 30 June 2015 as the legal formalities necessary to issue shares were yet to be completed. These formalities were completed and the shares allotted to investors during the year ended 30 June 2016.
64 ARCAPITA ANNUAL REPORT 2016 9 RELATED PARTY TRANSACTIONS AND BALANCES
Related parties represent associated companies, major shareholders, directors and key management personnel of the Company, the Company’s Shari’ah Supervisory Board and entities controlled, jointly controlled or significantly influenced by such parties. Transactions with related parties arise from the ordinary course of business. Pricing policies and terms of these transactions are approved by the Company’s management. Outstanding balances at year end if any, are unsecured.
Income and expenses incurred with related parties is as follows:
Note 30 June 30 June USD ’000 USD ’000 Income Fee income 9.1 12,357 12,649 Expenses Key management personnel costs 4,978 3,670 Shari’ah supervisory board remuneration 45 53
Balances with related parties Assets Due from a related party 108 - Liabilities Payable to a related party - 968
9.1 Fee income
AIM Group Limited (AGL) an affiliate company, and Arcapita Investment Management B.S.C. (c) (Company) are under the common control of the same shareholders and governed by the same Board of Directors. In accordance with the terms of a ‘Service Agreement’, the Company provides advisory and administrative services to AGL (and its affiliates). AGL reimburses the expenditures incurred by the Company in respect of the services rendered.
10 SEGMENTAL INFORMATION
The Company’s sole business is the provision of advisory and administrative services. Therefore the Company does not have any other reportable segments for this financial period.
11 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received upon the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: a) In the principal market for the asset or liability, or b) In the absence of a principal market, in the most advantageous market for the asset or liability.
ARCAPITA ANNUAL REPORT 2016 65 The Company’s financial instruments have been classified in accordance with their measurement basis as follows:
At fair value through statement At cost/ of income amortised cost Total 30 June 2016 USD ‘000 USD ‘000 USD ‘000 ASSETS Cash and cash equivalents - 7,398 7,398 Receivables and other assets - 976 976 Due from a related party - 108 108 - 8,482 8,482
LIABILITIES Accrued expenses and other liabilities - 982 982 - 982 982
At fair value through statement At cost/ of income amortised cost Total 30 June 2015 USD ‘000 USD ‘000 USD ‘000 ASSETS Cash and cash equivalents - 6,343 6,343 Receivables and other assets - 1,174 1,174 - 7,517 7,517
LIABILITIES Accrued expenses and other liabilities - 982 982 - 982 982
Determination of fair value and fair value hierarchy
The Company uses the following hierarchy for determining and disclosing fair value of financial assets and financial liabilities:
Level 1: Quoted (unadjusted) prices in active markets for identical assets or 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 significant effect on the recorded fair value that are not based on observable market data.
As at 30 June 2016 and 2015, the fair values of the Company’s financial instruments approximated their carrying values.
Balances with banks represent cash and cash equivalents and are due on demand. The carrying value of these balances represents their fair value.
66 ARCAPITA ANNUAL REPORT 2016 The recoverability of receivable were determined by the management as part of impairment testing by calculating the net present values of the expected cash flows. The carrying amounts therefore approximate the fair value of these receivables.
Other liabilities are current in nature and the carrying value of these financial instruments represents their fair value.
12 CAPITAL MANAGEMENT
The objective of capital management is to ensure the Company’s ability to operate as a going concern by maintaining an appropriate capital base in line with regulatory requirements.
13 RISK MANAGEMENT
13.1 Introduction
The Company has established an independent risk management department and is in the process of implementing a robust risk management framework that is aligned to the Company’s business profile. While such a framework is being established, the risk management department in co-ordination with management has identified and is monitoring the risks identified below. Significant matters if any are brought to the attention of the Board of Directors.
13.2 Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company’s exposure to credit risk is limited due to minimal lending / placement activity and the fact that there are no investments in financial securities. The Company is exposed to credit risk on its bank balance and receivables. This risk is considered minimal as the bank balances are maintained in current accounts with reputable international banks having good credit standings. The receivable balances primarily represent prepayments to vendors and other receivables.
13.3 Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may also arise from an inability to realize a financial asset quickly at an amount close to its fair value. The Company’s exposure to liquidity risk is low given that the Company does not hold any investments on its balance sheet and maintains minimal balance sheet leverage. The Company has enough cash and bank balances available as of 30 June 2016 in order to discharge its financial liabilities when they fall due. All of the assets and liabilities as presented in the statement of financial position of the Company are of current nature with the exception of equipment.
13.4 Market risk
Market risk is the risk of losses due to adverse movements in market fundamentals such as profit rates, foreign currency exchange rates, equity markets / prices and commodity prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the risk adjusted return on capital. The Company’s exposure to market risk is low given that the Company does not hold any investments on its balance sheet, maintains minimal profit rate sensitive assets / liabilities and foreign currency net open positions (of non USD currencies that are not pegged to the USD) are also minimal.
The largest net foreign currency exposure is in GBP amounting to approximately USD 3.1 million (30 June 2015: USD 0.5 million). A 10 percent change in exchange rates, positive or negative would impact net income by USD 0.3 million (30 June 2015: USD 0.05 million). Exposures to other currencies are minimal.
ARCAPITA ANNUAL REPORT 2016 67 13.5 Operational risk
Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications or lead to financial loss. The Company minimizes the operational risk by maintaining a strong internal control environment and oversight by the Board of Directors.
14 COMMITMENTS AND CONTINGENCIES
30 June 30 June USD ‘000 2015 USD ‘000 Operating lease commitments relating to rented premises within one year 1,000 217 within two to five years 231 -
1,231 217
68 ARCAPITA ANNUAL REPORT 2016 بسم اهلل الرحمن الرحيم
SHARI’AH SUPERVISORY BOARD’S REPORT TO SHAREHOLDERS
Assalam Alaikum Wa Rahmat Allah Wa Barakatuh, In compliance with the letter of appointment and article 54(e) of the Articles of Association of Arcapita Investment Management B.S.C.(c) (“the Company”), we are required to submit the following report:
We have reviewed the contracts relating to the transactions undertaken by the Company during the year ended 30 June 2016. We have also conducted a review of the operations of the Group to form an opinion as to whether the Company has complied with Shari’ah rules and principles and the specific fatwas, ruling and guidelines issued by us.
The Company’s management is responsible for ensuring that the Company conducts its business in accordance with Islamic Shari’ah rules and principles. It is our responsibility to form an independent opinion, based on our review of the operations of the Company, and to report to you.
We planned and performed our review so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give assurance that the Company has not violated the rules and principles of Islamic Shari’ah.
In our opinion: The services agreement entered into by the Company with AIM Group Limited, and the transactions and dealings resulting from such agreement during the year ended 30 June 2016 are in compliance with the Islamic Shari’ah rules and principles.
We beg Allah the Almighty to grant us all success and straightforwardness.
Shari’ah Supervisory Board
Sh. Muhammad Taqi Usmani Chairman
Sh. Essam Mohammed Ishaq Sh. Mohammed Al Jamea Member Member
3rd July 2016
ARCAPITA ANNUAL REPORT 2016 69 OUR PEOPLE
BOARD OF DIRECTORS
Abdulaziz Hamad Aljomaih - Chairman Mr. Aljomaih has been the Head of International Investments at Aljomaih Holding Co. in Saudi Arabia since 1988. His other key positions include: member of the Board of Directors of Ittihad Etisalat (Mobily), Saudi Arabia; Dana Gas, United Arab Emirates; and Vice Chairman of Pearl Initiative (a U.N. initiative). A professional with over 26 years of experience, Mr. Aljomaih was Vice Chairman of Arcapita Bank’s Board of Directors from 1997 to 2013.
Ghazi Fahad Alnafisi Mr. Alnafisi is Co-Founder and Chairman of Salhia Real Estate Company K.S.C. , Kuwait . His other current positions include: Chairman of Kuwait Hotel Owners Association, Kuwait; and Co-Founder and Vice Chairman of Independent Petroleum Group s.a.k., Kuwait. A professional with over 40 years of experience, Mr. Alnafisi was a member of Arcapita Bank’s Board of Directors from 1999 to 2013.
Abdurrahman Abdulaziz Al-Muhanna Mr. Al-Muhanna joined the Almarai Company in the Kingdom of Saudi Arabia in 1979 and was appointed Managing Director and a member of the board in 1997. His other board memberships include ARASCO; the publishing company Al Jazirah; and the National Committee for Biodiversity, as well as various commercial establishments in Riyadh, Kingdom of Saudi Arabia. A professional with 30 years of experience, Mr. Al-Muhanna was a member of Arcapita Bank’s Board of Directors from 2000 to 2013.
Mahmood Hashim Al Kooheji Mr. Al Kooheji is a Director of Arcapita Group Holdings Limited. He is the Chief Executive Officer of Bahrain Mumtalakat Holding Company. Mr. Al Kooheji sits on the board of Gulf Air. He is also a board member at McLaren Automotive Limited and McLaren Group Limited. In addition, he sits on the boards of Durrat Khaleej Al Bahrain Company and the Arab Petroleum Investment Corporation (“APICORP”), and serves the role of Governor at the Royal College of Surgeons in Ireland, Bahrain. He holds a Bachelors Degree in Mechanical Engineering from Staffordshire University, and a Masters of Business Administration from Henley College of Management, Brunel University, UK.
Khalid Jassim Bin Kalban Mr. Kalban is a Director of Arcapita Group Holdings Limited. He is the Managing Director and Chief Executive Officer of Dubai Investments PJSC. His extensive experience covers the industrial, financial, investment and real estate sectors. He currently holds many important positions including: member of the Board of Directors of National General Insurance PJSC. Presently he is the Chairman of Union Properties PJSC. Mr. Kalban has a degree in Business Management from the USA. and also majored in management at the Metropolitan State College, USA.
Noorur Rahman Abid Mr. Abid is a Fellow Chartered Accountant from the Institute of Chartered Accountants in England and Wales. He has more than 35 years’ experience in the profession across Europe, the Middle East and Africa. Mr. Abid spent 33 years with Ernest & Young, joining them in 1979 and rising to become an Office Managing Partner, then the Assurance Leader for the MENA region. Mr. Abid previously served as the Chairman of the Auditing Standards Committee, and the Deputy Chairman of the Accounting and Auditing Standards Board of Accounting and Auditing Organization for Islamic Financial Institutions.
70 ARCAPITA ANNUAL REPORT 2016 Usama Mohammed Al Barwani Mr. Al Barwani is a Director of Arcapita Group Holdings Limited. He is an Executive Director of MB Holding, a major Omani family conglomerate, and is responsible for new projects and the investments of the MB Group. He is also Managing Director of United Engineering Services, a major oil and gas, and defense manufacturing business. He is on the Board of Directors of Ahli Bank SAOG, and Chairman of Ubar Hotels and Resorts both listed on the Muscat Securities Markets, as well as Nautilus Minerals which is listed on the Toronto Stock Exchange. He has obtained a B.Sc. in Petroleum Engineering from Tulsa University (USA) and an M.Sc. (Energy, Trade and Finance) from City University, London.
Atif Ahmed Abdulmalik - CEO Mr. Abdulmalik is the Chief Executive Officer and executive member of the Board of Directors of Arcapita. Previously, Atif was at Investcorp where he served in numerous management positions. In 2007, he was awarded The Proficiency Medal First Class by His Majesty King Hamad bin Isa Al Khalifa in acknowledgement of his outstanding contribution to the Kingdom of Bahrain. Atif obtained his BBA in Accounting, Finance and Management from Saint Edward’s University, Texas.
ARCAPITA ANNUAL REPORT 2016 71 SHARI’AH SUPERVISORY BOARD
Arcapita’s Shari’ah Supervisory Board is fully supported by the internal Shari’ah department and other Arcapita Group departments. The Shari’ah department is responsible for ensuring that there is an ongoing process of reviewing and auditing of the business of Arcapita generally, including existing and new investments. The Shari’ah Supervisory Board ensures that all investments undertaken by the lines of business are structured in a manner that comply strictly with Shari’ah principles and resolve any Islamic investment issues that may arise. The Shari’ah Supervisory Board also approves the audited financial statements of Arcapita, confirming adherence to Islamic Shari’ah principles.
The Shari’ah Supervisory Board is composed of the following prominent scholars:
Sheikh Muhammed Taqi Usmani Vice President, Darul-Uloom University, Karachi, Pakistan; Member of the Islamic Fiqh Academy; Ex-Member of the Shari’ah Appellate Bench of the Supreme Court, Karachi, Pakistan; Member of the Shari’ah Supervisory Boards of a number of Islamic banks and financial institutions.
Sheikh Esam Mohamed Ishaq Chairman of the Board, Muslim Educational Society, Bahrain; Director & Shari’ah Advisor, Discover Islam, Bahrain; Member of Board of Trustees, Al Iman Islamic School, Bahrain; Member, Accounting & Auditing Organization for Islamic Financial Institutions, Bahrain; Member of the Shari’ah Supervisory Boards of a number of Islamic banks and financial institutions.
Sheikh Mohammed Isa Al Jamea Sheikh Mohammed is the Director heading the Shari’ah department of the firm. Previously, he was with the Royal Bahraini Air Force. Sheikh Mohammed has a BS in Islamic Shari’ah Law from Imam Mohamed Bin Saud University, Saudi Arabia (UAE Branch), and several Shari’ah certificates/licenses in Islamic studies from different prominent scholars. He is a member of the Shari’ah Supervisory Board of the ARC Real Estate Income Fund. He has a BS in Aerospace Engineering from Northrop University in California.
72 ARCAPITA ANNUAL REPORT 2016 SENIOR MANAGEMENT
Atif Abdulmalik
Chief Executive Officer & Chairman of the Executive Committee Atif is the Chief Executive Officer and executive member of the Board of Directors of Arcapita. Previously, Atif was at Investcorp where he served in numerous management positions. In 2007, he was awarded The Proficiency Medal First Class by His Majesty King Hamad bin Isa Al Khalifa in acknowledgement of his outstanding contribution to the Kingdom of Bahrain. Atif obtained his BBA in Accounting, Finance and Management from Saint Edward’s University, Texas.
Hisham Al Raee
Chief Operating Officer & Member of the Executive Committee Hisham is the Chief Operating Officer and a member of the Executive Committee, responsible for the daily operations of the firm. He also serves as the Head of the Investors Relationship Management team with his extensive investor experience across the GCC region and Asia. Previously, Hisham was the Senior Director of Business Development with Reuters Middle East in Saudi Arabia for five years and prior to that he worked in the finance department at Citibank N.A., Bahrain. Hisham received his Master’s degree in Business Administration from the University of Hull, United Kingdom, and a CSD in Business Administration from the University of Bahrain.
Martin Tan
Chief Investment Officer & Member of the Executive Committee Martin is the Chief Investment Officer and a member of the firm’s Executive Committee where he is responsible for developing and overseeing the firm’s investment strategy and capabilities. Prior to joining Arcapita in 2007, Martin spent about 15 years in the real estate industry. As the CEO of CapitaLand Commercial & Integrated Development, he managed a global portfolio in excess of SGD 10 billion and he has extensive experience in listed and private real estate investments. Martin started his career in the manufacturing and construction industries, and obtained his MBA and Bachelor’s degrees from Washington State University.
Mohammed Chowdhury
Global Head of Financial Management Group & Member of the Executive Committee Mohammed is responsible for overseeing Corporate Finance, Shari’ah, Risk and Corporate Communications. Previously, Mohammed spent nine years in the accounting profession working for Ernst & Young in Bahrain and KPMG in London. Mohammed is a member of the Institute of Chartered Accountants in England and Wales, completing his training contract while working for KPMG in London. Mohammed is a graduate of the London School of Economics and has an MBA from the London Business School.
Essa Zainal
Global Head of Financial Control Essa is a Managing Director and the Global Head of the Financial Control Department, responsible for overseeing the Accounting, Internal Control, Finance and Investment Administration Operations. Previously, Essa was with Al Baraka Banking Group in Bahrain for three years as financial controller, responsible for the consolidation of Al Baraka’s financial institutions. Before then, he was with Arthur Andersen in Bahrain for more than 15 years, during which he headed the assurance and then the advisory services division. Essa has a BS in Accounting from the University of Bahrain and is a certified public accountant in the state of Georgia, USA.
ARCAPITA ANNUAL REPORT 2016 73 Jay Fortin
Managing Director & General Counsel Jay is responsible for overseeing all legal roles within the firm. Previously, Jay gained more than 25 years of experience in New York, representing financial institutions, private equity funds and developers in large international transactions in the Middle East, Latin America, Eastern Europe and Asia. His experience includes positions at Bennett Jones LLP in Qatar, Al Tamimi & Co.’s Qatar office, and international law firms including Patton Boggs LLP in New York and Abu Dhabi. Jay holds a law degree from the University of North Carolina at Chapel Hill and a degree in Business Administration with honors from the University of Rhode Island. He is admitted to the bar in New York and Connecticut, USA.
Nael Mustafa
Managing Director & Head of MENA Investments Nael is responsible for the origination, structuring and management of the MENA Investments. His role also involves approaching, developing and maintaining investor relationships at institutional and HNWIs level as well as creating and developing strategic partnerships. With over 26 years of investment banking experience, Nael has covered the areas of capital markets, corporate finance as well as Shari’ah compliant alternative investments. His expertise covers wide geographic areas including North America and the Middle East. Previously, Nael was heading the capital markets activity at TAIB Bank as the General Manager of TAIB Securities, prior to that he headed the fixed income desk and derivatives desk. He later headed the Corporate Finance at SICO leading a number of IPOs and M&A transactions. Nael is a CFA Charter holder and has an MBA from Edinburgh University.
Kevin Keough
Managing Director & the Global Head of Portfolio Management Group Kevin was previously an SVP with First Energy Corporation, a partner in the energy practice of McKinsey & Company, and an engineer officer in the US Army. Kevin holds an MBA from Stanford Business School and a BS in engineering, with honors, from the US Military Academy at West Point.
74 ARCAPITA ANNUAL REPORT 2016 MANAGEMENT TEAM
Chief Executive Officer Atif Abdulmalik, Chief Executive Officer & Chairman of the Executive Committee
Managing Directors Hisham Al Raee, Chief Operating Officer & Member of the Executive Committee Martin Tan, Chief Investment Officer & Member of the Executive Committee Mohammed Chowdhury, Global Head of Financial Management & Member of the Executive Committee Essa Zainal, Global Head of Financial Control Kevin Keough, Global Head of Portfolio Management Jay Fortin, General Counsel Nael Mustafa, MENA Investments
Directors Ahmed Al Shirawi, Investors Relationship Management Elaine Zhao, Investors Relationship Management Gagan Suri, Real Estate Gana Balaratnam, Financial Control Hafedh Al Najem, Financial Control John Montaquila, Real Estate Michael Casey, Real Estate Mohamed Al Jamea, Shari’ah Muhannad Buhindi, Investors Relationship Management Osama Al Tamimi, Financial Control Salah Al Shaikh, System Development & Integration Tony Nambiar, Human Resources Vivian Chian, Private Equity & Real Estate Yasser Al Raee, Real Estate
Principals Adrian Peck, Real Estate Ahmed Al Zayani, Investors Relationship Management Ahmed Salem, Investors Relationship Management Amin Jawad, Treasury Operations Amy Doshi, Legal Hassan Shujaie, Administration Mishal Al Hellow, Information Technology Mohamed Sharif, Investors Relationship Management Osama Al Haram, Investors Relationship Management Pik Sian Sim, Real Estate Yasser Al Khaja, Investors Relationship Management Yousif Al Abdulla, Real Estate
ARCAPITA ANNUAL REPORT 2016 75 Senior Associates Ahmad Roshan, Risk Management Basil Ahmed, Financial Management Group Farooq Aqeel, Financial Control Salwa Makarem, Human Resources Shakir Maka, Legal Vincent Favier, Investment Team
Associates Ali Ardati, Financial Management Group Ali Ghuloom, Information Technology Eman Sharif, Financial Control Isa Al Ghatam, Financial Management Group Joseph Mathai, Financial Control Kaleel Sainul, Human Resources Kevin Lockhart, IT & CM Khairul Abdullah, Investment Team Mani Kuttickal, Financial Control Matthew Seston, Investment Team Mohammed Al Maskati, MENA Investments Mohammed Al Saie, Information Technology
76 ARCAPITA ANNUAL REPORT 2016 Manama P.O. Box 1357 Manama Kingdom of Bahrain Tel: +973 17 218333
Atlanta 1180 Peachtree St NE Suite 3000, Atlanta, GA 30309 United States of America Tel: +1 404 920 9000
London 15th Floor, The Shard London SE1 9SG United Kingdom Tel: +44 20 7824 5600
Singapore 24 Raffles Place #16-03 Clifford Centre Singapore 048621 Republic of Singapore Tel: +65 6513 0395 www.arcapita.com