East Capital Explorer Publishes Annual Report 2008

East Capital Explorer AB Annual Report 2008

B E R A P L O R T A L E X E A S T C A P I

Annual Report 2008 Contact Financial information and calender AGM 2009 Investor Relations- and media contact:  Monthly Net Asset Value report on the The Annual General Meeting of East Capital Louise Hedberg fifth working day after the end of each Explorer AB (publ) will be held at 4.00 p.m. Head of Communications/IR month CET on Monday 27 April 2009 in Grüne- +46 8 505 97 720 waldsalen at Konserthuset in Stockholm,  Annual General Meeting in Stockholm [email protected] Sweden. Entrance from Kungsgatan 43. on 27 April 2009 Visiting address:  Interim report 1 January – 31 March Kungsgatan 30, Stockholm 2009 on 14 May 2009 Programme  Interim report 1 January – 30 June 2009  1.30 Registration opens Postal address: on 20 August 2009 Box 7214  2.00 Seminar on Eastern Europe with SE-103 88 Stockholm  Interim report 1 January – 30 Septem- representatives from East Capital Sweden ber 2009 on 12 November 2009  3.00 Guest presentation with explorer Ola Skinnarmo about his upcoming www.eastcapitalexplorer.com adventure through the North East Pas- The annual report, other financial reports and sage 2009, sponsored by East Capital information as well as press releases, are Your opinion is very welcome available on www.eastcapitalexplorer.com.  3.30 Coffee break Shareholders and other interested persons How can we improve our financial reports,  4.00 Annual General Meeting begins may sign-up on the website for a subscrip- investor service and website? Please email tion to East Capital Explorer’s reports and your suggestions or ideas to us at press releases to be sent directly to their [email protected]. Participation e-mail address. The printed annual report is sent to shareholders who have notified East To be entitled to participate in the Annual Capital Explorer that they wish to receive General Meeting, shareholders must: Change of address printed financial information from the Com-  Be recorded in the register of sharehold- Changes of address of physical persons pany. ers maintained by Euroclear Sweden AB who are registered as Swedish residents (formerly VPC) as per Tuesday, 21 April are made automatically by Euroclear Swe- 2009 den AB (formerly VPC). Please note that shareholders who have chosen not to  Have notified the company of their have their addresses updated automati- attendance no later than 4.00 p.m. CET cally must, themselves, notify their account- on Tuesday, 21 April 2009 operating institute. Shareholders whose holdings are registered in the name of a trustee, should Notification of attendance may be made: notify the trustee as soon as possible of  On the web: any changes in their name, address or www.eastcapitalexplorer.com/agm account number. Other shareholders must notify changes of address and changes of  By e-mail: account number to Euroclear Sweden AB [email protected] (formerly VPC), phone: +46 8 402 90 00,  In writing to: e-mail: [email protected]. East Capital Explorer AB (publ) Att: Sandra Mårtensson Box 7214 More information about our investment SE-103 88 Stockholm region Sweden Do you want to know more about what  By telephone to: happens in our investment region? Please Sandra Mårtensson, +46 8 505 977 27 visit our Investment Manager East Capital’s website www.eastcapital.com for news, When notifying attendance please state analyses and market comments. name, personal/company registration number, address, daytime telephone number, e-mail, number of shares as well as any assistants attending (maximum two). Please note that shareholders whose shares are not registered in the name of a nominee, must temporarily re-register their shares in their own name. Such registration must be in effect with Euroclear Sweden AB (formerly VPC) no later than Tuesday, 21 April 2009. Shareholders are requested to inform their nominees well in advance of this date.

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R SIBER 0 a EAST SE Audit Report Notes to the financial statements Financial statements Administration Report STATEMENTSFINANCIAL Fees Corporate responsibility Managing our risks Internal control Management The Board of Directors Q&A with the Chairman of the Board of Directors Corporate Governance Report CORPORATE GOVERNANCE Melon Fashion Group (MFG) East Capital Russian Property Fund East Capital Power Utilities Fund East Capital Bering New Europe Fund East Capital Bering Central Asia Fund East Capital Bering Balkan Fund East Capital Bering Ukraine Fund East Capital Bering Russia Fund Our portfolio on 31 December 2008 OUR PORTFOLIO Q&A with the Chairman of East Capital Our Investment Manager: East Capital How we invest Key sectors targeting long-term growth Our investment region Eastern Europe during 2008 HOW WE INVEST n The East Capital Explorer share Comment from the CEO This is East Capital Explorer IS EAST THIS CAPITAL EXPLORER g A

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Financial Statements Corporate Governance Our portfolio How we invest This is East Capital Explorer Komsomolets Island

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n g St Petersburg u h is n s e a TALLINN ty y Ir R O o r ESTONIA b u Yaroslavl' Perm' h A z 4750 E Nizhniy M d LATVIA a Yekaterinburg g Kronotskaya S RIGA m P l a i n Tomsk Sopka Novgorod Ka u Commander C h I Kazan' Krasnoyarsk z LT LITHUANIA MOSCOW SEA OF Islands BA l Chelyabinsk Omsk Novosibirsk D Ryazan' Ufa OKHOTSK VILNIUS Lake Baikal Tula a m Amur MINSK hi Ir Barnaul s ty (1637 m) Penza I s POLAND Samara r h BELARUS Irkutsk

Saratov ga ol U ASTANA WARSAW V Orenburg 4506 Sakhalin KIEV Belukha PRAGUE Voronezh s CZECH REP. SLOVAKIA Khabarovsk d UKRAINE Volgograd Lake Zaysan n BRATISLAVA a MOLDOVA Rostov-na-Donu KAZAKHSTAN sl BUDAPEST I CHISINAU (KISHINEV) Astrakhan' il Lake ur SLOV. HUNGARY ROMANIA Balkhash K ZAGREB Aral LJUBLJANA BELGRADE BUCHAREST Sea Almaty CROATIA BOSNIA& H. C be 5642 A (Alma-Ata) Vladivostok SERBIA Danu S SARAJEVO BLACK SEA Elbrus UZBEKISTAN 7439 BULGARIA PI BISHKEK SOFIA GEORGIA Pik Pobedy MONTENEGRO TBILISI A PODGORICA SKOPJE N KYRGYZSTAN BAKU TIRANA MACEDONIA ARMENIA S TASHKENT Istanbul YEREVAN Our business concept is to offer our share- ALBANIA E ANKARA AZERB. A Euphrates TURKMENISTAN holders investment exposure to unlisted and listed Izmir TURKEY Tigr is DUSHANBE TAJIKISTAN companies in otherwise hard-to-reach parts of the Eastern ASHGABAT European markets. This is primarily accomplished through investing in East Capital’s special fund products, such as the East Capital Bering funds and East Capital’s private equity funds. We also have the possibility to make direct investments in specific companies.

Our objective is to achieve long-term capital appreciation for The East Capital Explorer share offers access to: our shareholders. Investing in emerging markets is often related with significant risks, therefore all investments in these markets  A dynamic region: Eastern Europe is one of the most dynamic should be made assuming a long-term perspective. regions in the world - including almost 30 countries and 450 mil- lion people across 12 time zones Our strategy is primarily to invest in sectors that have the most to gain from the long-term development trends of the region, in this  An experienced Investment Manager: the investment activi- context, but not limited to, the catch-up process and EU conver- ties of East Capital Explorer are managed by East Capital who gence. Examples of some of our key sectors providing interesting is one of the largest investors dedicated to the region, having an investment opportunities over the long-term are the power utili- on-the-ground presence, a wide network and a 11 year track- ties, retail and consumer goods, real estate and finance sectors. record Read more about our current view on our key sectors on pages 14–15.  A well-diversified portfolio: we primarily invest in East Capi- tal’s Private Equity and Semi-public Equity funds which other- Dividend policy wise require high minimum investments and long investment East Capital Explorer does not intend to pay any dividends, periods, many of which are currently closed to new investors. At although the Board of Directors retains the flexibility to propose the end of December 2008, our portfolio included exposure to to do so. Any returns will, instead, be reinvested in accordance approximately 400 companies with the investment policy. This dividend policy reflects the judg- ment that the continuous reinvestment of the capital will best  Attractive sectors: East Capital Explorer invests broadly allow us to build a strong investment base and to generate long- across a number of sectors, all of which stand to gain from the term value for our shareholders. long-term growth prospects and development in the region

2 East Capital Explorer AB Annual Report 2008 Komsomolets Island

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8.5 Power Utilities 14.3 Russia

5.0 Retail 2.9 Ukraine Listed 20.1% 4.2 Banking & Finance 1.9 Kazakhstan 1.6 Consumer Goods 1.8 Serbia Unlisted 1.5 Oil & Gas 1.3 Turkey Cash 9.1% Cash Cash 70.8% 70.8% 1.3 Real Estate 70.8% 1.0 Romania 1.0 Constr. & Constr. Mtrl. 1.0 Slovenia 0.9 Media 0.8 Georgia 0.7 Electronics 0.7 Baltics 4.5 Other sectors 3.5 Other countries

Cash includes both EUR 176m in cash and deposits as well as any cash in the underlying funds on 31 December 2008.

2008 IN FIGURES Per 31 December (EUR) Total Per share

Net Asset Value 265m 7.31 Three new investments and one commitment totalling EUR 70m: (SEK 2,883m) (SEK 79.53) 21 April: EUR 10m invested in new East Capital Bering New Europe Fund 27 May: EUR 40m committed to new East Capital Russian Property Fund Market capitalisation 134m 3.69 28 October: First direct investment: EUR 10m invested in unlisted Russian (SEK 1,458m) (SEK 40.20) fashion retailer MFG Total cash and deposits 176m 4.85 13 November: Additional EUR 10m invested in newly issued shares in the • Committed capital 39m 1.08 East Capital Bering Balkan Fund • Available capital 137m 3.78

East Capital Explorer AB Annual Report 2008 3 Comment from the CEO

So much has been written about the historic events of 2008, ly, a crisis always presents opportunities. I will only make a few observations. Most importantly, how For some countries, it is an opportunity to stop being overly reliant on one sector or have the changes in the world affected East Capital Explorer? commodity and diversify their economies, Is our business model still valid? thus building a much more sustainable foundation for future growth. For others, it is an opportunity to correct the imbalanc- 2008 was a stark reminder of just how it even more important to be patient and es that have been so easy to build up over dynamic and fast-changing our world is. long-term and to see through all the noise the last few years due to relatively cheap The year began with economic growth in and data out there in order to discover the credit and high capital inflows. For nearly much of the world booming and inflation valuable pieces of information. Having all countries in our region, it is an opportu- running out of control. Policymakers wor- experts one can trust is therefore of even nity to improve in terms of transparency, ried about overheating and record high greater value. governance, rule of law, so that once mar- commodity prices. By year end, those So, how did we do in 2008? Our kets stabilise and attention returns to fun- concerns had disappeared and attention investments that were made in 2007 and damentals, they can once again benefit. shifted to the aftermath of the financial early 2008, according to what we had When risk appetite and sentiment recover, crisis and addressing its effect on the real promised at the time of our IPO in Novem- we are convinced that more investors will economy. ber 2007, were down by about 60 percent come back to these markets to get better It became obvious that the world during the year. As market uncertainty returns as the long-term development out- economy is truly global. Decoupling, the spread and turbulence increased, we held look of these economies remains good. theory that emerging markets could keep off investing, and focused on preserving We have not substantially revised our list on powering ahead despite problems in our cash, which at the year end stood at at the west, was quickly debunked. It turned out that whether Americans or Russians, we live on the same planet, and the global We look for companies with low debt and strong financial system is very interdependent indeed. management teams, who are likely to be able to turn We were also reminded what a fragile “ thing confidence is. While the positive sen- the tough market conditions to their advantage. timent lasted, confidence was so high that political risks, economic imbalances and EUR 176m, contributing to almost 70 per- of favorite sectors due to the events of unsustainable business models fuelled by cent of our net asset value. This is obvi- 2008. It is true that banking is a challeng” - excessive debt were often overlooked as ously a great strength in today’s environ- ing sector currently as considerable risks the rising tide lifted nearly all boats. Once ment, where access to external financing remain, but here too opportunities will confidence disappeared, the sentiment is limited and investors are receiving cash arise once greater stability has returned. changed so completely that markets and calls from many companies. For now, we focus very much on sectors companies were punished by equal meas- Looking ahead to 2009, we are quite that are relatively more resilient to chal- ure, no matter the fundamentals or inher- optimistic about our potential to con- lenging economic circumstances, such as ent values. The shift from overly optimistic tinue building an attractive portfolio for basic consumer goods and retail. Within to totally pessimistic, especially regarding our shareholders. First, East Capital, our these sectors, we look for companies Eastern Europe, has been quick and total. Investment Manager, has in its spine the with low debt and strong management Is it rational? invaluable experience from 1998-99, the teams, who are likely to be able to turn the As befits turbulent times and periods previous time our region was hit by a cri- tough market conditions to their advan- of high uncertainty, there has been lots sis. In fact, East Capital’s reputation was tage. Also, interesting opportunities have of speculation about “paradigm shifts”. earned very much by sticking to its vision started to appear in real estate, where Do the events of 2008 signal the end of in a time when these markets were out of distressed developers are looking to sell free market economic systems? Will the favor, when it was possible to find great assets to raise cash. We remain ready to role of the financial sector be fundamen- companies at bargain prices as few oth- take advantage of these opportunities, tally changed? Was investing in emerg- ers dared to invest. but we are not in a rush. ing markets simply a fad that is now over? Our region will clearly experience a Also, our general investment approach Well, the truth is that things are not black growth slow-down and many of the coun- remains unchanged. Having a diversified or white and it is wise not to get carried tries will go into recession in 2009. The portfolio continues to be an important away by dramatic prophesies, in any convergence trend has not reversed, mechanism to mitigate company-specific direction. The current environment makes though, just the pace has slowed. Actual- risks. Our core focus remains on private

4 East Capital Explorer AB Annual Report 2008 Q&A wIth CEO Gert Tiivas This is East Capital Explorer Capital East is This equity and illiquid investments, although The world looks very different from now that valuations in public markets when you launched in November 2007. have come down substantially, we may How has this affected East Capital take advantage of opportunities that arise Explorer’s business concept and objec- in listed small- and mid-caps. Finally, our tives? business model continues to be one that In short: yes, the world has changed very does not rely on leverage, and nowadays much, and no, this has not changed our it need not be explained why this is a clear business model. We are confident that advantage. the events of 2008 have not fundamental- We are not calling a bottom; market ly altered the long term attractiveness of timing is not our business. Similarly, we investing in Eastern Europe, and that our are not looking for a specific trigger that favorite sectors will continue to offer good would change investors’ attitudes. We are investment opportunities. The next few looking for great companies with sustain- years will surely be more challenging for able business models, which need capi- many of our countries and companies. But tal to grow and which are ready to invite we have a well-diversified portfolio, a busi- us in at the right terms. The good news is ness model that does not rely on lever- convergence process will not proceed as that “old-fashioned” values and business age, and we still have substantial financial quickly as the optimists would wish, what models are back: hard work, prudence resources. Those key competitive advan- really matters is the trend and motivation and humility are more important than lofty tages will allow us to deliver long term to improve, which has not broken. goals, sophisticated financial engineering attractive returns for our shareholders. and loud self-promotion. Fortunately for Why don’t you just invest in some of us, there are many hard-working entre- With the benefit of hindsight, would you the large caps now trading at much preneurs and solid companies out there in have done anything differently during reduced valuations? our part of the world. 2008? As a small investment company, we must We realize that our strong cash posi- Well, I think nearly all investors in the world have a clear focus: our niche remains tion now has several times the purchasing would wish they had just stayed in cash providing easy access to hard-to-reach power it had just a year ago. But we also during 2008. We made an active decision investments in Eastern Europe. We can realize the responsibility it entails, espe- not to invest when markets became turbu- be a bit opportunistic in public markets cially given the discount our share has lent and announced during the summer too, as it is now possible to find good been trading at compared to our net asset that markets conditions would affect the small and mid cap companies at quite value. As the value of cash has grown sig- speed of our investments. This has been attractive valuations, but our core focus nificantly for everyone, we must work even appreciated by our investors. Clearly, has not changed. harder now to ensure that our investments our substantial financial resources are deliver attractive returns for our share- even more valuable now. I think that is an The turbulence could continue for holders. attractive proposition for both existing and quite some time. When will you be fully potential shareholders. invested? We made a couple of new investments How has the harsh economic climate late in 2008. We are now working on a affected your view on the region? number of ideas, which look quite inter- Stockholm, March 2009 The people in our region have experienced esting. Again, we are not participating tough times and challenges many times in any race against a clock, our job is to before. Eastern Europe really deserves make good investments that will produce credit for the great job done in improving attractive returns for our shareholders. So the economy in the last 10-15 years. So I you can continue to expect us to be very am convinced that also this crisis will show cautious with the shareholders’ money. that many countries can turn it around into We have therefore decided not to set a Gert Tiivas an opportunity to push ahead with much- new date for being fully invested. CEO needed reforms. We will see these economies emerge even stronger and better diversified in a few years time. We should not underestimate our region’s capacity to change – the hunger for a better life is a very powerful driver. And even when the

East Capital Explorer AB Annual Report 2008 5 The East Capital Explorer share

The East Capital Explorer share was listed on the Stockholm Stock Exchange on 9 Novem- ber 2007. The share is traded on NASDAQ OMX Nordic List, Mid Cap. The closing price on 30 December 2008 was SEK 40.20, giving East Capital Explorer a market capitalisation of SEK 1,458m.

Share price development since listing 9 November 2007 Share price development during 2008

SEK Volume (shares) SEK Volume (shares) 120 1 200 000 120 1 200 000

100 1 000 000 100 1 000 000

80 800 000 80 800 000

60 600 000 60 600 000

40 400 000 40 400 000

20 200 000 20 200 000

0 0 0 0 09.11.2007 18.03.2009 01.01.2008 31.12.2008

: The East Capital Explorer Share : The East Capital Explorer NAV

Volume East Capital Explorer RTS 2 Index MSCI EM Europe Index RTS Index SAX IndexExplorer NAV OMXSPI: includes all share on NASDAQ OMX Nordic Exchange Stockholm. RTS 2 Index:Volume includesEast Capital Ex plor78er companiesRTS 2 Index MS onCI EM the Europe RTS Index thatRTS I ndehavex SA limitedX IndexE tradingxplorer NAV volumes. RTS Index: includes the 50 largest companies traded on the Russian Trading MSCI EM Europe Index: includes Russian, Polish, Hungarian, Czech and Turkish System (RTS). equities.

Net Asset Value and share price development 2008 2007* Net Asset Value per share, EUR 7.31 10.87 Net Asset Value per share, SEK 79.53 102.61 Net Asset Value development during the year, EUR -32.8% 0.7% Share price on 31 December, SEK 40.20 100 Market capitalisation on 31 December, MSEK 1,458 3,627 Share price development during the year -59.8% 0% Lowest, SEK 37.30 95.50 Highest, SEK 102 108 Total turnover, shares 15,696,617 6,157,487 Average daily turnover, shares 62,288 186,591

Development of relevant indices OMXSPI -42.0% -5.3% RTS 1 -66.9% 1.8% RTS 2 -75.1% 10.9% MSCI EM Europe -61.7% 3.4%

Share capital and number of shares Share capital at 31 December, EUR 3,627,016 3,627,016 Number of shares at 31 December 36,270,160 36,270,160 Average number of shares 36,270,160 35,032,755

Ownership structure Number of shareholders on 31 December 9,984 11,648 % shares held outside Sweden 35.1% 46.8%

* 9 November – 31 December 2007.

6 East Capital Explorer AB Annual Report 2008 This is East Capital Explorer Capital East is This

20 largest shareholders and custodians1 on 31 December 2008 Distribution of ownership by country* Number of shares Holding. % Great Britain 9.0% Alecta Pensionsförsäkring 2,400,000 6.6 Norway 6.8% Morgan Stanley & Co Intl PLC. 2,217,880 6.1 Luxembourg 5.3% East Capital Eastern European Fund 2,050,000 5.7 USA 4.2% Ireland 1.9% SEB-Stiftelsen 1,500,000 4.1 Sweden DNB NOR Bank ASA 1,456,200 4.0 64.9% Netherlands 1.8% East Capital Partners2 1,425,350 3.9 Switzerland 1.7% Apoteket AB Pension Foundations 1,409,828 3.9 Finland 1.1% Volvo Related Foundations 1,304,800 3.6 Denmark 0.6% Stena Sphere 1,114,400 3.1 Other 32 countries 2.7% Omnibus Account, State Street 981,958 2.7 * A majority of the shares registered by foreign shareholders are registered through custodians. Avanza Pension 769,173 2.1 This means that the beneficial shareholders are not officially registered and the actual domicile of SEB Trygg Liv 672,679 1.9 the shareholder cannot be verified and may be different from the domicile of the custodian. Handelsbanken fonder incl XACT 523,907 1.4 ABN AMRO BANK N.V. 490,860 1.4 Nordnet Pensionsförsäkring AB 483,182 1.3 Distribution of ownership by type of shareholder Skandia 460,000 1.3 Fjärde AP-Fonden 441,000 1.2 Banks and insurance companies 14.8% JP Morgan Bank 394,930 1.1 Other legal entities 13.9% Nordea Bank Finland ABP 379,113 1.0 Mutual funds 11.2% SIX SIS AG 376,770 1.0 Foreign shareholders Pension foundations 11.0% Total top 20 shareholders and custodians 20,852,030 57.4 35.1% Private individuals 11.1% Other 9,964 shareholders and custodians 15,418,130 42.6 Non-governmental Total 36,270,160 100.0 and labour organisa- tions 2.7% 1 A majority of the shares registered by foreign shareholders are registered through custodians. This implies that the beneficial shareholders are not officially registered. Swedish state and 2 East Capital’s own investment and investments by Partners in East Capital. municipalities 0.2%

Source: Euroclear Sweden AB (formerly VPC). Shares and voting rights East Capital Explorer has one class of shares, in total 36,270,160 shares. One share entitles the holder to one vote and all shares Own shares have equal rights in the assets and profits of the Group. The 2008 Annual General Meeting authorized the Board to decide on acquiring the company’s own shares. As of 31 Decem- ber 2008, no shares had been bought back by the company. See also “Key events after the end of the financial year” on page 58.

Distribution of ownership by size of holding SHARE FACTS % of % of No. of shares No. of share- No. shares per holding shareholders holders of shares and votes Listing: NASDAQ OMX Nordic, Mid Cap 1-500 7,770 77.8 1,653,220 4.6 Listed since: 9 November 2007 501-1,000 918 9.2 811,054 2.2 ISIN-code: SE002158568 1,001-5,000 920 9.2 2,390,502 6.6 GICS-code: 40203010 5,001-10,000 147 1.5 1,160,190 3.2 Ticker: ECEX 10,001-15,000 45 0.4 557,669 1.5 Reuters: ECEX.ST 15,001-20,000 38 0.4 715,320 2.0 Bloomberg: ECEX SS Equity 20,001- 146 1.5 28,982,205 79.9 Latest share price: See www.eastcapitalexplorer.com Total 9,984 100.0 36,270,160 100.0

East Capital Explorer AB Annual Report 2008 7 Eastern Europe during 2008 Certain important events in the region

Russian RTS index reaches an all-time-high on 19 May, closing at 2,488 and a market capitalization of USD 1,600bn.

On 1 January Slovenia Dmitri Medvedev wins Central banks in Russia becomes the first East- the Russian presidential and Ukraine actively ern European country to election on 2 March, intervene on the issue assume the Presidency with 70% of the votes. of increasing inflation. of the EU. Increases in banking re- The Ukrainian govern- serve requirements are Ukraine is welcomed as ment approves a list of announced in order to a WTO member. 406 companies set to suppress the countries’ sell their state-owned appetite for foreign shares during 2008. currency.

JANUARY FEBRUARY MARCH APRIL MAY JUNE

Kosovo declares Serbia signs the Stabi- President Saakashvili’s On 6 June, Russian independence on lisation and Association ruling party wins the power utility giant, 17 February. The US Agreement (SAA), an parliamentary elections RAO EES’ shares stop and several larger EU important milestone in in Georgia. trading on the Russian members acknowledge Serbia’s integration with exchanges ahead of the independence while Europe. Turkey’s stand-by- the break up of the Russia and Serbia do arrangement with the power monopoly and not. Croatia and Albania IMF comes to an end. In unbundling into 23 are invited to join November, Turkey and separate companies The ownership conflict NATO at the summit in IMF start discussions on 1 July. This is an between Russian TNK Bucharest. over a new stand-by important milestone and British Petroleum arrangement. in the ongoing power over the joint venture, reform and will attract TNK-BP, turns into a Bosnia and Herze- private investors into long-drawn out power govina signs the SAA the sector to help struggle over differing agreement, a first step finance the significant views on the company’s towards membership of investments needed in international expansion. the EU. coming decades.

8 East Capital Explorer AB Annual Report 2008 Lehman Brothers IMF approves a standby declares bankruptcy on arrangement with 15 September, sending Ukraine totalling USD On 19 December, shock waves through 16.4bn and a 17 month the IMF, together with global financial markets stand-by arrangement Nordic countries, an- including Eastern with Hungary totalling nounces plans to lend Europe. Moscow stock EUR 12bn. USD 2.4bn to Latvia to On 11 July, oil prices Several Eastern exchanges, RTS and Heavy leverage among support the stabiliza- rise to a new record European countries MICEX, close for sev- Russian oligarchs be- EBRD announces tion of the country’s peak at USD 147.27. report record harvests. eral days following the comes publically known. investments of EUR economy. In Ukraine the grain strict Russian market Loans from state-owned 7bn and additional in- On 21 July, Serbian harvest increased by rules to freeze market banks are offered to vestments of up to EUR On 21 December, oil is authorities arrest the almost 90%, compared activity in turbulent assist these companies 20bn together with trading at a year-low of war criminal Radovan to 2007. trading. through the crisis. partners during 2009. USD 33.87 per barrel, Karadzic. EU leaders less than one fourth of hail this as a key step in Turkey improves Serbia begins nego- the peak price in July. tiations with IMF which the Balkan nation’s ac- bilateral relations with invest we How cession to the Union. Armenia with the first result in a 15 month Turkish state visit in EUR 402m stand-by Armenia in ten years. arrangement being approved in mid-January 2009.

JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

Turkish Constitutional Kazakhstan announces Court rules against clo- comprehensive financial sure of the AKP which stimulus package of had been accused of USD 18bn. The pack- undermining the coun- age, equivalent to 20% try’s secular system. of the country’s GDP, includes emergency Uncertainty increases An armed conflict Orange coalition in funding for the bank- Gas conflict between as regards the Russian breaks out between Ukraine breaks down. ing, property and Russia and Ukraine. steel company Mechel. Russia and Georgia Despite this, political agricultural sectors and The conflict intensifies Prime Minister Putin over the break-away progress is made on small and medium sized in January 2009 with publicly announces republic of South certain new corporate businesses. gas shortages in several that Mechel has been Ossetia. regulations which will countries in Eastern applying unfair transfer improve the investment Russian Central bank Europe. pricing by selling coking climate. decides to expand the coal more expensively band in which the to domestic customers Serbia takes another rouble trades, effec- than through exports. step on its convergence tively a soft depreciation International investors path by ratifying the through a number of draw negative parallels SAA with the EU. mini-devaluations. with Yukos in 2004, and the Mechel share For the fifth year in a The Latvian state takes plunges more than row, Eastern Europe control of the country’s 60%. is the region that has second largest bank implemented most busi- Parex Banka in order to ness-friendly reforms in guarantee the stability the world, according to of the financial system. the World Bank’s yearly report, “The Cost of Doing Business”.

East Capital Explorer AB Annual Report 2008 9 Our investment region

A new chapter in modern economic No doubt, 2008 meant the end to the while, the European Investment Bank history decoupling hypothesis, the theory that (EIB) has promised a EUR 1bn loan to The abrupt halt in global economic activity emerging economies would be able to Romania and EUR 250m to Serbian small witnessed during the second half of 2008 remain immune to the events in the rest and medium-sized enterprises. Apart from has no precedents in modern economic of the world and to continue to grow. The the direct supportive effect of these meas- history in terms of speed and severity. The current crisis, although it may have origi- ures in the short-term, long-term effects better-than-expected performance in early nated in the US, has had clear and painful due to the conditions attached to this sup- 2008 was a sharp contrast to the financial repercussions all over the world. With the port can also be expected. Economically turmoil that followed, with many econo- signs of recession now evident in many necessary, but politically difficult, reforms mies around the world facing recession. countries, including the economies in our and tighter fiscal policies will hopefully be Forecasts for GDP growth and other key investment region, attention has turned realised, ensuring that these economies indicators have been revised constantly, from the credit crisis, so predominant dur- will come out stronger in the end. There and only in one direction. ing the last half of 2008, to the impact on is also a growing discussion about the Whilst acute financial shock and sharp the real economies. It goes without saying extent of help to be provided by the Euro- economic losses characterised, in partic- that there will be a focus on gauging the pean Union, and its various institutions, to ular, the US economy in 2008, it is clear gradual impact of the tremendous amount the Eastern European states, both those that all economies of the world have been of liquidity provided via the wide variety of that are members and those that are not. affected. The US economy is set to shrink government and multilateral rescue pack- by closer to 4 percent during 2009 while ages. Major challenges during 2009 the GDP in the 16 countries using the 2008 saw increased activity from multi- Inflation, one of the major concerns in Euro will shrink by closer to 3 percent in lateral institutions, such as the IMF, World 2008, will come down considerably in 2009, and will record modest growth of Bank and the European Central Bank 2009 on the back of falling commodity 0.6 percent in 2010. (ECB), promising increased support to prices and reduced growth. However, it As widely confirmed as the difficult the countries of Eastern Europe. IMF has is less clear how interest rates will adjust economic scenario for 2009 may be; cer- come to the help of Ukraine, Latvia, Ser- as many economies have had negative tain countries in the world, those that are bia, Belarus, and several other countries or very low real interest rates. Some of better balanced, less reliant on exports are in the negotiation process with the the more advanced economies in East- and more capital rich are relatively better IMF or very close to needing its help. A ern Europe will probably lower rates, but positioned to be able to withstand this significant contribution has also come not as much as or as rapidly as in West- challenging period. from the European Bank for Reconstruc- ern Europe, and certain countries will be tion and Development (EBRD) announc- forced to maintain, or even increase, rates Eastern Europe in the global economy ing a plan to invest EUR 7bn on its own, to defend their currencies, at least during So how have Eastern European econo- and up to EUR 20bn together with com- the first half of the year. mies fared in the general havoc of 2008? mercial partners, during 2009. Mean- Investments, which have been one of

GDP growth, %

10%

-2%

-4%

-6% G7 US Eurozone UK Hungary Czech Rep. Russia Poland Ukraine Kazakhstan -8%

20072008F 2009F

Source: Deutsche Bank, as of 11 March 2009 (2007 data on GDP and C/A is IMF WEO Oct 2008).

10 East Capital Explorer AB Annual Report 2008 the key driving forces behind the positive Currency devaluation 1 January 2008 – 13 March 2009 development in Eastern Europe, have now JPYEUR KZTNOK SEKRON RUBPLN TRYUAH seen a particularly abrupt decline, reflect- 20% 13.9 ing the impact of weakening demand, a drop in investor confidence, tighter financ- 10% ing conditions for companies and a lower availability of credit. This cycle is likely to 0% continue during 2009. -10% Also, capital inflows, both portfolio and -11.6 foreign direct investment flows, already -20% in 2008 reduced significantly from the -19.7 -20.5 highs reached in 2007, and these inflows -30% -25.0 -26.2 -29.2 -29.5 are expected to fall further in 2009. Many -31.6 -40% countries in Eastern Europe have ben- -38.1 invest we How efitted from access to capital markets, as -50% well as from bank financing, often through % change versus USD Western banks that have been active in Source: Bloomberg. the region. Capital market financing is now less available for all players. Conse- much more difficult for a country to export international investors and overleveraged quently, it is quite likely that loan growth, itself out of a negative scenario due to the oligarchs to aggressively sell off Russian which has been in high double digits in fact that many of the Western countries assets. many countries, will now fall substantially, are also going into recession and reduc- Specific corporate and political events or even turn negative, putting a break on ing their imports. Another barrier could be in Russia during 2008, such as the power growth for even the healthier companies growing protectionism; we have recently struggle in TNK-BP, the dispute in the and countries. seen worrying trends in the car indus- steel company Mechel and, not least, the Trade, which has been an important try and other sectors under pressure to conflict between Russia and Georgia over growth driver for certain countries in our enact anti-competition and protectionist the breakaway republics of South Ossetia region, is also falling. In spite of the deval- measures. On the other hand, falling real and Abkhazia, contributed to deteriorat- uation of real exchange rates throughout exchange rates make local production ing confidence in Russian markets. These many countries in Eastern Europe, it is cheaper in relative terms and countries developments also turned the spotlight with large domestic markets can, in partic- back onto the political risks of investing in Russia: a comparison with 1998 ular, benefit from import substitution, thus Russia and emerging markets. Internation- supporting, or even creating, industries al media and investors were quick to draw 1998 2008 that could serve as the base for the next parallels with the financial crisis Russia GDP (USDbn) 271 1,779 growth phase. experienced in 1998. Arguably, the dra- FX Reserves (USDbn) 8 427 matic decline of the Russian RTS index of Gov’t External Debt (% GDP) 50 2.89 VARIANCES BETWEEN COUNTRIES -75 percent in the seven months following GDP/Capita (USD) 1,834 12,579 Taking a closer look at the countries in its all-time-high on 19 May 2008, jogged Market capitalisation (USDbn) 17 265 our investment universe, variances are investors’ memories of the turbulent 1998 Average monthly wage (USD) 63 608 exaggerated by the rapid developments financial markets. However, it is important Retail sales, yoy growth (%) -15 12.95 and heavy volatility of the past six months, to remember that the current crisis origi- Mobile penetration (%) 0.5 119.3 making it even more difficult to generalise nated in the US, spreading across the Car sales (mn) 1.2 2.7 about the region. world, and is not primarily a Russian cri- Oil price USD/barrel 13 51 sis as was the case in 1998. It is equally Inflation rate(%) 84 14 Russia important to grant Russia credit for being a fundamentally very different country Interest rate (%) 150 13 In Russia, the sharply falling oil prices put major pressure on the rouble, and the today, compared with 1998 (see table to Political stability Weak Strong Russian Central Bank spent hundreds of the left: Russia: a comparison with 1998). Valuation (P/E) 3 3 billion of dollars to defend the currency. The Russian government’s response RTS performance Russia was particularly hit by an increas- during the autumn was relatively far- following year (%) 197 ? ing aversion to risk during 2008 and the reaching, including a wide variety of Sources: Haver, IMF WEO Oct 2008, Autostat, global deleveraging process that fol- measures spanning from tax cuts, such EBRD, BOFIT, Bloomberg, East Capital. lowed, forcing hedge funds and other as decreased customs duties, quicker

East Capital Explorer AB Annual Report 2008 11 VAT refunds, reduced tax on profits for pressure on the currency added to the and widespread destruction. Whilst the businesses, to higher welfare payments country’s problems. In November the current situation is more stable, the com- and continued commitments to stimu- IMF announced a EUR 16.4bn loan that plex issues are far from being completely late housing. Although the package was will provide some liquidity and help drive resolved and many geopolitical analysts launched quickly, which was impressive, reforms in the country. For 2009, steel, have tried to understand the origins of the the government was less efficient in mate- mining, and machinery sectors are expect- conflict, going beyond the personalities of rialising many of these measures, with ed to face the steepest declines, while the individual leaders involved. Donor aid Russia loosing both valuable time and financially healthy companies in consump- estimated at USD 4.5bn and the removal investor confidence as a consequence. tion sectors, such as food and agriculture, of US import duties on 3,500 Georgian After a nine-year stretch of strongly pos- will be better positioned in the current products can support some rebuilding of itive growth in Russia, 2009 will, accord- economic climate. the economy, but the long-term geopo- ing to the latest forecasts, see negative litical basics indicate uncertain or uneven growth. The severity of the current crisis Czech Republic, Slovakia and Slovenia economic development. will hopefully provide sufficient incentive The many smaller economies show major for the country to push ahead with much- differences, both in terms of the degree Baltic region needed structural reforms, public infra- of development and in terms of economic The Baltic region is not one of East Capital structure investments and the instigation status quo. The Czech Republic, Slovakia Explorer’s key target areas, but we care- of pension reforms that should provide and Slovenia are well-developed econo- fully monitor developments. Similar to Bul- the equity market with the stable long- mies with no macro imbalances, but they garia and Hungary, the Baltic countries, term capital it is lacking today. In addition, are also very dependent on export and which are very dependent on exports, Russia has a well-educated population foreign direct investment. Furthermore, have accumulated large imbalances and these countries were hit by recession already in the third quarter 2008. Crisis- The current crisis could accelerate a well-needed hit Latvia succeeded in obtaining medium- term financial aid from the EU, up to EUR move away from commodities dependence 3.1bn, EUR 1.7bn from the IMF, as well as “ EUR 1.8bn from Sweden, Denmark, Fin- towards a more diversified economy. land and Norway. This bailout and other support are provided in exchange for an austerity plan keeping the exchange rate with strong capabilities in science and the exposure to the car industry, with 20 pegged and pushing down real wages engineering and this advantage has not percent of the Czech” GDP and 25 per- and budget spending. been fully utilised in the corporate sector. cent for Slovakia, will be a negative factor. In other words, the current crisis could With recent structural changes, political Turkey accelerate a well-needed move away reforms, and the convergence with the Turkey, although a smaller part of East from commodities dependence towards a EU, these countries are forecasted to be Capital Explorer’s portfolio, could benefit more diversified economy. able to record some degree of growth from certain aspects of the current eco- during 2009. nomic environment, such as a lower oil Kazakhstan price. This country went through a finan- Kazakhstan, also oil price dependent, has Romania, Serbia and Croatia cial crisis as late as 2001, which implies significant national reserves amounting to Romania, Serbia and Croatia will also that the banking sector is better capital- USD 47 billion, greater than the total for- experience a sharp slow-down in growth, ised and is subject to stricter rules, and eign debt of the entire banking sector. The but are growing from relatively low levels. is, consequently, in relatively good shape. country has also been negatively affected The countries have certain imbalances The reform momentum that has served by falling commodity prices and significant and currency problems could arise in cer- Turkey well since 2001 should be reinvig- capital outflows. Here a massive stimulus tain of the Southeastern European econo- orated with another IMF agreement. plan was put into place in 2008, equiva- mies. Depreciating exchange rate levels lent to around 20 percent of GDP, making could have a negative psychological Smaller frontier markets it the largest rescue package in the world impact on investors, even if these coun- Our investment universe also includes in relation to the size of the economy. Sig- tries are not facing acute external debt a number of smaller, diverse economies nificant support packages to the banking problems. The convergence process with in the Caucasus, Central Asia, Balkans sector have provided stability to the most Europe/EU continues to progress, with as well as Belarus and Moldavia. These important banks in the region, with nation- Serbia, for instance, receiving IMF sup- are still frontier markets, which are less alization of BTA and Alliance banks in early port in the form of a stand-by agreement dependent on global financial systems, 2009 as a consequence. and instigating fiscal reform measures, but which are very dependent on the for example, a limit on the 2009 deficit of outside world for trade and remittances. Ukraine 1.75 percent. Here, some, but limited growth can per- Ukraine, where corporate profitabil- haps be foreseen. ity had been at a record high in the first Georgia half of 2008, suffered significantly dur- The fighting in Georgia’s breakaway ing the second half of 2008. High politi- region of South Ossetia in August result- cal turbulence, weak state finances and ed, tragically, in many unnecessary deaths

12 East Capital Explorer AB Annual Report 2008 History meets the future: Guardsman of the Semen- ovsky Regiment in front of the modern type business center that today are a common sight in Moscow. How we invest we How

East Capital Explorer AB Annual Report 2008 13 Key sectors targeting long-term growth

The selection of East Capital Explorer’s key sectors and preferred investment exposure is based on the experience and track-record that our Investment Manager has acquired during more than ten years of investing in Eastern Europe. Our key sectors are the areas of the economy that stand the most to gain from the generally strengthened macroeconomic frameworks and the continuing structural reforms in the region. Our sector focus is likely to remain the same over time, but market conditions will mean that we, at times, choose to prioritise and focus on certain sectors more than on others.

POWER UTILITIES REAL ESTATE

Rationale: Russia is the fourth largest energy market in the Rationale: In recent years, healthy GDP growth and an improved world in terms of installed capacity and electricity output. The macroeconomic situation have led to a general lack of mod- powerhouse nature of the Russian economy during the past ten ern property across Eastern Europe, especially in Russia and years has resulted in increased domestic energy consumption, other CIS countries. In spite of rapid developments, there have with the main limitation being the capacity of the country’s power remained significant shortages in supply, not the least as regards production facilities. Insufficient investments over the years have retail and office space. Premises usually are of a low standard left the country with outdated technology, unable to produce suf- and are unsuitable for new businesses, such as modern retail ficient power for the fast-growing economy, especially in major concepts. centres. With major investments required in power generation and other important sub-sectors, a restructuring programme for the entire sector was initiated in 2000. In 2006, a five-year plan was adopted for the development of the electricity and gas markets. The plan stipulates that the electricity market should be fully deregulated by 2011 and that electricity generation, sales and repair companies will be privatized to be able to operate in open and competitive markets with market prices. We believe that the restructuring and price liberalisation will improve the cost structure and efficiency of the Russian power sector, which is currently lagging behind Western Europe and, consequently, increase the valuations of Russian power companies. Current view: Despite recent market developments, the long- Current view: 2008 held many important milestones for the sec- term fundamentals and underlying key drivers of the Russian real tor. 25 percent of the production was set at market prices and estate market remain the same. The market is undersupplied in the large Russian power monopoly, RAO EES, was unbundled both quantity and quality of retail and office space and regional according to plan. A number of foreign and domestic investors city development is just beginning. With developers’ problems entered the sector in the first half of 2008 on the back of the resulting in fewer completed projects and delays in completion, reform process. With the current downturn in manufacturing the undersupply is likely to persist. dampening demand, the production facilities can perhaps focus Current market corrections should, in a medium to long-term on improving on the fundamental side in the face of privatisa- perspective, generally be seen as healthy for real estate markets tion and consolidation. Most recently, during December 2008, in Eastern Europe. Following many recent years of exceptional the utilities sector was a favourite among investors reflecting the growth, increasing rent levels and hardly any vacancies, these Russian Ministry of energy’s willingness to support delays in new markets have been showing clear signs of overheating. capacity introductions by generators. Coal and hydro generating After at least four years of compressed yields in Moscow and companies will benefit from rising gas prices and the determined other Russian cities, yields are currently moving upward due to liberalisation process of the wholesale power market. forced selling and liquidity problems. This could result in unique Read more about the power utilities sector and our investment opportunities to acquire properties with good tenants and reaso- in the East Capital Power Utilities Fund on pages 32–33. nable rental rates at low, or even distressed, prices. In June East Capital Explorer committed EUR 40m to the newly launched East Capital Russian Property Fund, read more about the fund on page 34.

14 East Capital Explorer AB Annual Report 2008 RETAIL AND CONSUMER GOODS BANKING AND FINANCE

Rationale: Western consumption patterns are well entrenched Rationale: Investing in the banking and finance sector is gener- within the Eastern European economies with these populations ally one of the best ways of gaining exposure to a developing having seen significant major increases in the level of disposable economy as banks with well diversified client bases are, effec- income during recent years. Low levels of private income tax, low tively, a naturally leveraged investment into the broader economy. indebtedness, relatively low levels of utilities and other fixed liv- A growing economy creates the need for efficient financial inter- ing costs have kept income free for increased consumption of mediation, so each economy needs a banking system in which cars, clothes, better food and holidays. There is also a great deal transactions are undertaken smoothly and financing is accessi- of potential to develop the general structure of the retail sector. ble at appropriate risk-based pricing levels. Since a developed Modern retail concepts, such as large supermarkets, shopping banking system is essential for a sound economy, the majority of centres and retail chains are still relatively uncommon in East- governments make a concerted effort to develop their banking ern Europe. Western concepts in marketing, display techniques, systems and the regulatory framework in the sector. shop interiors, and cross selling can be introduced and utilised Despite growth in recent years, the banking sector is still invest we How to further jump start strong consumer activity. underdeveloped in Eastern Europe. In Russia for example, ratio of banking assets and loans to GDP amounted to 67 percent Current view: Basic retail and consumer goods with defensive and 40 percent, respectively, at the end of 2008 compared to characteristics probably offer the best investment opportunities the euro area average of 332 percent and 115 percent. The retail also in a more difficult economic scenario. Although consump- banking market has been the most rapidly expanding sector in tion will be dampened against the current economic back-drop, Russian banking in recent years, but there is still a clear need the new consumption patterns will continue to fuel consumer for development of basic retail banking products, such as credit cards and savings products. The average household loans per capita in 2008 was only USD 900 in Russia, while it was around USD 19,300 in euro area and USD 45,500 in US. Furthermore, the Russian banking market remains heavily fragmented with over 1,000 banks which will mean a need for consolidation in the future.

Current view: There is currently a risk that the global crisis may delay the development of the banking sectors in our markets, not the least by diminishing the activity levels of foreign banks and sharply reducing access to external financing. The banking sector, which generally showed resilience in the first half of 2008, in spite of some growth deceleration, is now facing major prob- demand. Not the least, in the larger economies, we deem that lems, which are compounded in many countries by devaluation household consumption will continue, primarily due to the lack of of the local currency. Liquidity has been injected by the major- dependence on credits. Total household loans (retail credit and ity of governments into the sector, although it is clear that not mortgages) are only 10 percent of GDP in Russia and Turkey everyone who has applied for state funding will be bailed out. and 22 percent in Poland, which can be compared to around The programs to recapitalise and provide liquidity for banks in 100 percent in the US and the UK or over 40 percent in Estonia many Western European countries will hopefully imply that their and Croatia, which have the highest ratios in Eastern Europe. subsidiaries in Eastern Europe will receive the support they need Even in the downward revised growth outlook for the region, in tough markets. Also, consolidation is expected to accelerate, there are companies offering basic consumer goods, with low as stronger banks will take over smaller and weaker institutions. leverage that are likely to be more resilient in the downturn. Finally, once some stability returns, the banks that come through Our first direct investment was announced in 2008; East Capi- this turbulence will be stronger and able to earn higher profits tal Explorer invested EUR 10m in the unlisted Russian fashion due to weaker competition. retailer Melon Fashion Group. MFG, offering basic fashion in a middle-lower price segment, is a good example of the type of company that can outperform in a harsher economic climate. Read more about MFG on pages 36-37.

East Capital Explorer AB Annual Report 2008 15 How we invest

The East Capital Explorer share, listed on the NASDAQ OMX Nordic Exchange, offers all investors, private as well as institutional, easy access to private equity and other less liquid investments in this region. The investment activities of East Capital Explorer are managed by East Capital, under the terms of an Investment Management Agreement and within the framework of an Investment Policy.

INVESTMENT POLICY Market conditions will mean that we, at Cash management The Investment Policy describes East times, choose to prioritise and focus on Pending investments or draw-downs to a Capital Explorer’s key geographical seg- some sectors more than others. Read fund to which capital has been committed, ments and investment themes and the more about our current view on our key the Investment Manager may invest cash types of investments which may be under- sectors on pages 14–15. in deposits, investment grade securities taken. It also stipulates certain limitations and other marketable securities or capi- in order to assure diversification and an Asset types tal guarantee products or East Capital’s appropriate risk level. The key elements of East Capital Explorer invests primarily in public equity funds. our investment policy can be summarised East Capital’s existing and future semi- in the following points: public equity funds (with both listed and Investment restrictions unlisted investments), as well as East East Capital Explorer is subject to the fol- Countries Capital’s future private equity (unlisted lowing investment restrictions: East Capital Explorer may invest in Russia investments) and real estate funds. and the CIS countries, the Balkans, the East Capital Explorer also has the  Investments in any one of East Capi- Baltics, Central Asia and Central Europe. possibility to make direct investments in tal’s funds must not exceed 40% of East selected companies, as well as smaller Capital Explorer’s NAV at the time of the Sectors investments in East Capital’s open-ended investment. East Capital Explorer targets the sectors daily-traded funds. standing the most to gain from the posi- More specifically, investments can be  No single direct investment may tive long-term development trends in East- made in several asset types, including exceed 15% of East Capital Explorer’s ern Europe. The key sectors that we have fund units, shares, options, convertibles, NAV at the time of the investment. identified, based on this, include power derivative instruments and other equity- utilities, retail and consumer goods, real related instruments. Debt investments  Investments in East Capital’s open- estate, as well as banking and finance. are also permitted if related to an equity ended, daily-traded equity funds may We always take a long-term view when investment. In conjunction with invest- in total not exceed 5% of East Capital making decisions on the target weighting ments in the real estate sector, permitted Explorer’s NAV at the time of the invest- of the portfolio. Although our sector focus investments also include land, real estate ment. is likely to remain the same over time, sec- and other property. tors are monitored on an ongoing basis.  Debt may not exceed 30% of East

INVESTMENT DECISION PROCESS

East Capital Explorer AB (publ) Investment Manager Board appointed by shareholders

• Major asset allocations (>15% of NAV) • Deployment planning Investment • Investments outside Investment Policy proposals • Fund structuring • Direct Investments • Deal sourcing and negotiation • Conflicts of interest • Cash management: deposits within cash management mandate East Capital Explorer Investments AB Board appointed by Investment Manager

• Fund investments and co-investments within the Investment Policy • Cash management: deposits outside cash management mandate

16 East Capital Explorer AB Annual Report 2008 Capital Explorer’s NAV at the time debt is equity and real estate funds launched by OUR INVESTMENT MANAGER: incurred, except in real estate investments East Capital. EAST CAPITAL where a maximum debt-to-equity ratio of East Capital was founded in 1997 by 80/20 may be applied. Such real estate Significant investment decisions individuals with a common interest in investments may, however, not exceed undertaken by the Board investing in the Eastern European mar- 30% of East Capital Explorer’s NAV at Whilst the ordinary investment decisions kets, convinced that the region would the time of investment. within the investment policy framework develop into functional, mature and sta- are taken in East Capital Explorer Invest- ble markets. By combining fundamental Focused approach to private equity ments AB, the Board of East Capital macroeconomic and political knowledge investing Explorer always decides upon the follow- with the input of personal visits and meet- The exposure to unlisted investments ing, more significant matters: ings in the region, East Capital’s manag- that East Capital Explorer offers is sig- ers continuously review and analyse the nificantly different from the typical private  Decisions concerning investments most important development trends in equity investments found in Western constituting more than 15% of NAV at the the region. The investment teams spend a invest we How Europe and in the US. Instead of taking time of the investment great deal of time travelling in the region, a majority stake in a company using high in validating the investment themes, in leverage and a turn-around approach, our  Direct investments (with no co- selecting the companies with the great- Investment Manager’s approach is based investment) est potential for value growth and, as a on strong minority stakes (10–30%) with final step, in determining the most appro- board representation. Leverage is gener-  Deviations to the Investment Policy, as priate financial instruments for the invest- ally not used at all. agreed with the Investment Manager ment in question. Strong emphasis is placed on the qual- As per 31 December 2008, East Capi- ity of the existing management team and  Investments implying a conflict of inter- tal had EUR 1.8bn in assets under man- other shareholders, in order to ensure est between East Capital Explorer and agement and is, thereby, one of the largest a common interest for the future of the East Capital which are not already con- independent asset managers in the world company. Even as a minority investor, templated by the Investment Policy specialising in Eastern Europe. East Cap- it is an advantage to be able to exercise ital manages eight public equity funds, active participation through the Board of Controlling and supervisory function of six semi-public equity funds, two private Directors. East Capital Explorer and East the Board equity funds and two real estate funds. Capital can contribute sector knowledge, The Corporate Governance Report (see A number of the funds have received financial structuring experience and page 38) describes both the role of the numerous awards, including Lipper Fund know-how to the portfolio company, as Board in monitoring the investment activi- Awards and Golden Star Awards from well as enhance standards of corporate ties undertaken by the Investment Man- Dagens Industri and Morningstar. governance and other best practices. This ager and the responsibilities of the Audit The members of East Capital’s invest- is valuable for companies needing to raise Committee regarding the review of the ment teams (many of whom are nationals capital in international capital markets, or Investment Policy and the investment of the countries in which they invest) have in implementing new business strategies. activities. the regional experience and the network East Capital’s broad network in the region key to identifying forthcoming investment and senior advisor relationships are clear- Control duties of the executive man- opportunities, especially companies that ly key competitive advantages in sourcing agement are located in less developed areas in the unlisted investment opportunities. The control duties of the executive man- investment region. East Capital’s invest- agement team are also described in the ment teams are known for their focus, INVESTMENT MANAGEMENT internal control report and include com- local presence and extensive travelling AGREEMENT ments on the continuous work undertaken which helps retain and create new con- The Investment Management Agreement to minimise all material risk impacting the tacts, providing an important competitive stipulates the duties and responsibilities optimum achievement of the investment advantage. of the Investment Manager including the strategy. These control activities include, East Capital has 170 employees, identification, evaluation and negotiat- amongst other things, reviewing the proc- with 26 different nationalities, and differing of potential investments. The Agree- esses for valuations and NAV calculations ent investment teams with a total of 38 ment specifically defines the allocation of in order to assure the reliability of the NAV investment professionals. There are 7 responsibilities between the Investment reporting and continuous discussions and offices worldwide. Manager and East Capital Explorer, and contacts with the key individuals within assures East Capital Explorer of prefer- the Investment Manager. For further information regarding East ential access to new semi-public, private Capital refer to www.eastcapital.com.

17 Q&A Peter Elam Håkansson, Chairman of the Investment Manager, East Capital

How have the high. At the same time, we know that the events that significantly damaged investor events of 2008 banks that survive this crisis will be the confidence in Russia, which had a broad affected your most profitable and best positioned once impact across the entire financial market. view on Eastern the turmoil settles. That was the case in These events also underlined the impor- Europe? Sweden in the 1990’s, in Turkey in 2001 tance of a stock picking approach based East Capital has and this will also be the case in countries on a fundamental understanding of the been investing in like Kazakhstan, Ukraine and Russia. markets. In volatile markets a general risk Eastern Europe for diversification becomes more important more than 10 years, Is Russia strong enough to manage its than ever. Already today, we have made and we actually launched our first public way out of the crisis? sure that East Capital Explorer offers a equity fund in the midst of the Russian Certainly, Russia is a much stronger broad and well-diversified portfolio, and we crisis in 1998. Throughout the years, nation today than in 1998 and the coun- will naturally continue with this strategy. we have experienced significant market try’s development in just ten years is truly turbulence on several occasions, but remarkable, and can be illustrated with Valuations on listed companies are at have always maintained our long-term some photos I have taken on site (see a historic low, is Private Equity still an positive view on this dynamic region. We below). The Russian leadership has rec- attractive route for East Capital Explor- have been impressed by the strong and ognized the importance of international er? resourceful populations in these coun- investors and their confidence in the mar- Yes, one of our main reasons for launch- tries, in particular when it comes to using ket place. They launched an impressive ing East Capital Explorer in the fall of tougher times as a catalyst for positive support package and also met with inter- 2007 was to offer investors easy access change. Based on our previous experi- national investors, including ourselves, to investments that are otherwise hard to ence, we are fully convinced that the long- to try and restore confidence in Russia. reach. Investing in unlisted and small and term trends of convergence and catching What is quite typical for Russia, however, mid cap companies is also often the only up with the western world will continue as is the delayed implementation of the swift- way to gain exposure to our key sectors. a key driver for positive change and devel- ly launched measures. We are still waiting Shareholders who wish to complement opment in this region. to see the full effects of the package. this exposure with large caps can easily I hope that recent market events will buy these equities, themselves, or invest What is your current view on East Capi- encourage the Russian leadership to through daily traded funds. tal Explorer’s key sectors? focus on diversifying the Russian econo- Today we also see a large number of East Capital Explorer’s key sectors are my from oil and gas dependence, and to companies struggling with their debt based on the same investment strat- push ahead with pension reforms that will situations. This could mean interesting egy as East Capital’s products – to gain create stronger and longer-term domes- investment opportunities, as East Capital exposure to companies and sectors that tic investors. In times like these, I think we Explorer is very well capitalized and does stand the most to gain from the long-term will also see the population stand behind not rely on leverage to create value. positive development trends mentioned this leadership. above. This strategy has certainly paid off What are your expectations for 2009? in the last 10 years, and we are confident How do you view the risks in Russia? 2009 will be challenging for many coun- that these sectors will continue to offer the A key dimension when considering invest- tries in our region, but it will also offer best long-term investment opportunities. ments in Eastern Europe is the continu- many opportunities for us as focused This said, from time to time we may nat- ous evaluation of both risks and the long- specialist investors, just as in the years urally come to focus more on certain sec- term opportunities. Arguably, the risks in following the Russian crisis in 1998-99. tors than on others. In the banking sector, Russia and other emerging markets are, I am confident that once stability and risk for example, we certainly still see the long- and rightly should be, perceived as higher appetite returns, we will see a signifi- term potential of the sector, but the risks than in more developed markets. cant inflow of investors into this region in and uncertainties are currently still very During 2008 there were a number of search of attractive returns.

1998 2008 1998 2008

18 East Capital Explorer AB Annual Report 2008 Ukraine’s capital Kiev is the seventh largest city in Europe in terms of inhabitants. Despite significant political instability, Ukraine has made many important positive developments since the Orange revolution in 2004. Although 2009 will be a challenging year for Ukraine, the country remains one of the most important in the region. How we invest we How

East Capital Explorer AB Annual Report 2008 19 Our portfolio on 31 December 2008

East Capital Explorer’s portfolio comprises investments in Semi-public Equity Funds, Private Equity Funds, Public Equity funds, Direct Investments, as well as cash and short-term deposits. On 31 December 2008, total net asset value amounted to EUR 265m, corresponding to EUR 7.31 per share.

The fair value change of the total portfolio was -32.8 percent during 2008. The fair value change of East Capital Explorer’s investments was approximately -60 percent during the year. Cash and short-term deposits constituted a major part of the portfolio and amounted to EUR 176m, corresponding to EUR 4.85 per share on 31 December 2008.

Fair value Acquisition 31 Dec Fair value Fair value NAV/ Number of value 2007 31 Dec 2008 change, % Share % of units tEUR tEUR tEUR 1 Jan–31 Dec EUR NAV Semi-public Equity Fund Investments East Capital Bering Russia Fund 537,844 23,590 23,981 7,377 -69.2 0.20 2.8 East Capital Bering Ukraine Fund 1,212,296 24,411 - 1 7,630 -68.7 0.21 2.9 East Capital Bering Balkan Fund 4,538,686 34,938 25,684 2 17,631 -50.6 0.49 6.7 East Capital Bering Central Asia Fund 2,486,454 19,528 - 1 7,389 -62.2 0.20 2.8 East Capital Bering New Europe Fund 1,560,000 9,997 - 3 6,842 -31.6 0.19 2.6 East Capital Power Utilities Fund4 162,000 81,000 82,152 26,515 -67.7 0.73 10.0 193,465 73,383 -60.5 2.02 27.7 Direct investments MFG (OAO Melon Fashion Group) 4,996 9,941 - 5 9,941 - 0.27 3.8 Private Equity Fund Investments East Capital Russian Property Fund 400 855 - 6 513 - 0.01 0.2 Public Equity Fund Investments East Capital (Lux) Eastern European Fund 182,500 18,250 17,903 5,814 -67.5 0.16 2.2 (EUR) Short-term Investments Cash and deposits7 175,789 4.85 66.3

Total Portfolio 265,440 7.32 100.2

Other assets and liabilities net -415 -0.01 -0.2 Net Asset Value (NAV) 265,025 -32.8 7.31 100.0

1 The fund units were received on 2 January 2008. 2 An additional investment of EUR 10m, corresponding to 2,449,648 newly issued shares, was made in December 2008. The initial investment of 2,089,038 shares amounting to EUR 24.9m in acquisition value has decreased 70.3% during 2008. The total decrease of East Capital Explorer’s investment in the fund was 50.6% for 2008. 3 The fund units were received on 2 May 2008. 4 The East Capital Power Utilities Fund is reported as an investment in the portfolio report above but is consolidated in the financial statements. 5 The investment in MFG was completed in November 2008. 6 The acquisition value of EUR 0.9m is a first draw-down of the total committed EUR 40m to the East Capital Russian Property Fund. The total commitment of EUR 40m is for the total amount of 400 shares. 7 Includes the remaining EUR 39.1m that has been committed to the East Capital Russian Property Fund but that has not yet been drawn-down.

20 East Capital Explorer AB Annual Report 2008 The portfolio on 31 December 2008

Shareholders

East Capital Explorer Board of Directors

Investment Manager: East Capital

% of our portfolio 2.8% 2.9% 6.7% 2.8% 2.6% 10.0% EUR 3.8% on 31 Dec 39 m* 2008

Fund East Capital East Capital East Capital East Capital East Capital East Capital East Capital Direct Investment Bering Russia Bering Ukraine Bering Balkan Bering Central Bering New Power Utilities Russian Investment Fund Fund Fund Asia Fund Europe Fund Fund Property Fund

Exposure to approx. 400 companies

Progress Pegas Retail Example Capital Chumak Pinar et Populi Nonwovens SA RusHydro Properties MFG

EUR 176m in cash and short-term deposits (of which EUR 136m was available for future investments)*.

* EUR 39.1m of cash is committed to the East Capital Russian Property Fund but has not yet been drawn-down.

NAV and share price development during 2008 Net asset value and share price

NAV and share price (SEK) East Capital Explorer’s monthly net asset value per share and Premium/ Discount share price development during 2008 are presented in the graph 100.00 0.0%

to the left. The net asset value per share decreased 32.8 percent portfolio Our 90.00 -10.0% (EUR) during 2008, while the share price decreased 59.8 per-

80.00 -20.0% cent (SEK).

70.00 -30.0% During the first half of 2008, East Capital Explorer traded in

60.00 -40.0% a narrow range to the net asset value, at an average discount between the net asset value and the share price of 4 percent. 50.00 -50.0% During the second half of the year, the discount widened follo- 40.00 Share price (SEK) -60.0% NAV (SEK) wing the increased turbulence on the global financial markets. Premium/discount (%) 30.00 -70.0% On 31 December 2008, the East Capital Explorer share traded 20.00 -80.0% at a discount to NAV of 50 percent. Average discount during

10.00 -90.0% 2008 was 19 percent. JanFeb Apr May JunJul AugSep SepOct Nov Dec Please note that the base currency for East Capital Explorer’s Net asset value calculation net asset value is EUR, while the base currency for the share A monthly indicative net asset value (NAV) per share is calculated price is SEK. Conversions of the net asset value to SEK and the per the last day of each month. East Capital Explorer’s net asset share price to EUR are made only for information purposes. The value is calculated as the value of total assets (all investments resulting figure may vary according to the source and point in plus all other assets, such as cash) less all liabilities, divided by time of the conversion. East Capital Explorer has obtained the the number of issued shares. The value of East Capital Explorer’s applied exchange rates from Reuters at 16.00 GMT +01:00 on investments is based on the monthly net asset value reported for the respective dates. each respective East Capital fund in which we have invested. For more information on the applied valuation principles, Note 1, page 67. The net asset value is published through a press release and on our website five working days after the end of the month. The net asset value reports are not subject to review by the The latest portfolio report and net asset value report are always Company’s auditors. available on our website: www.eastcapitelexplorer.com

East Capital Explorer AB Annual Report 2008 21 East Capital Bering Russia Fund

FUND FACTS OUR INVESTMENT Launch date: 1 June 2004 Invested amount: EUR 24m Risk: High Date of investment: 3 December 2007 Volatility: 33.8% Number of fund units: 537,844 Sharpe ratio: 0.5 Fair value on 31 Dec 2008: EUR 7.4m Alpha: 117.5% % of NAV on 31 Dec 2008: 2.8 Number of holdings: 150 Change in value 2008 (EUR): -69.2% Listed/unlisted exposure: 75%/18% Fees: 2% management fee, 20% performance fee ISIN code: KYG290611014 Bloomberg: BERINGF KY Benchmark index: RTS2 Index For definitions, see pages 54–55 and 81.

Sector exposure, % Country exposure, % 11.0 Metals & Mining 11.0 Ukraine Transpor- 9.3 Engineering Kazakhstan 4.5 Baltics tation 12.7 14.4 7.2 Retail 7.2 Cash 5.9 Constr. & Constr. Mtrl. Banking & Finance 4.5 Consumer Goods 16.1 4.4 Electronics 3.7 Real Estate Russia 16.3 Other sectors 64.6 7.2 Cash

Aim of the fund Performance 2008 (EUR)

The aim of the fund is to achieve long term capital appreciation NAV (EUR) from investments in listed and unlisted equities in Russia and the 50 former Soviet Union. The Fund may also invest in companies that 45 have significant trade with, or active investments in Russia or the 40 countries of the former Soviet Union. 35 30 Fund performance during 2008 25 The NAV per unit of the East Capital Bering Russia Fund 20 decreased 69.2% in EUR terms during 2008. In USD terms, 15 the NAV per unit decreased 70.6% during the year compared 10 to the RTS2 Index which posted a decline of 79.6% during the 5 same period. On 31 December 2008 the NAV per unit in the 0 fund amounted to USD 19.34. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

East Capital Bering Russia Fund RTS2 Index

See page 81 for an index definition.

22 East Capital Explorer AB Annual Report 2008 Q&A with Jacob Grapengiesser, Partner and member of the Portfolio Management Team, East Capital

What were the for being a fundamentally different coun- Looking ahead to 2009, where do you main events aff- try today compared to 1998. Russia has see the most attractive investment ecting the fund come along in these ten years – structur- opportunities? during 2008? ally, financially and socially. Of course, the rapidly falling oil price 2008 was a year While 1998 was a Russian crisis, with affects the entire Russian economy, with of highs and lows the country going into bankruptcy, default- the budget balancing at USD 50 per bar- for Russia. Highs ing on its debt obligations, the crisis we rel. Looking at companies on the market, included the all- saw unfolding during 2008 is a global crisis there are certainly opportunities which are time-high on the that originated in the US and then spread less exposed to lower prices of raw mate- Russian RTS ex- across the world, including to Russia. rials. The fund has less than 3% exposure change on 19 May and the oil price peak- Recent market turbulence has, of course, to the oil sector and the strategy is, rather, ing at USD 147 in July. In August we saw reminded the international investor com- to focus on sectors providing exposure global markets go into full reverse and munity that emerging markets are more vol- to the growing domestic economy and rapidly falling oil prices that did not help atile and sensitive to external shocks, such on the fact that more and more Russians the financial markets, or the economy. The as the US crisis, than developed markets. come under better social circumstances. effect was a prompt change in sentiment Although the current economic climate will and the investors’ fear of risk at very high How are the companies in the fund per- certainly affect the economy as a whole levels not seen in the markets for a very forming? and certain sectors more than others, we long time. Wanting to decrease the risk in Performance has naturally varied depend- maintain our positive view on basic con- their portfolios, investors typically exited ing on the sector. Most companies are car- sumer goods, for example. In current mar- Russian investments – at any price. This, rying on with their operations, but adjusting kets we will increase our focus on invest- in turn, led to a number of days during the to changing economic conditions. The larg- ments in this sector and on companies autumn during which margin calls led to est threat to companies in Eastern Europe such as Progress Capital (see below), collapsing stock prices and, in effect, dys- and Russia, in particular, is leverage. Debt with a strong position on the Russian baby functional exchanges. levels in the companies in the fund, howev- food market. er, are mostly under control with 102 com- What are the main differences between panies having a net debt/EBITDA of less the crisis in 2008 and 1998? than 1 and only 13 companies with a net

First of all, Russia deserves great credit debt/EBITDA level of more than 3. portfolio Our

Food for the youngest Russians Example of a portfolio company in East Capital Bering Russia Fund

Progress Capital is an unlisted Russian under the “Lipetsky Byuvet” brand. consumer goods company with a total tur- From an investment perspective, Pro- nover of USD 250m in 2008. The compa- gress Capital offers a good defensive play ny has two main divisions: baby food (40% in current markets where fast consumer of revenues) and mineral water (60% of goods are less likely to be affected in a revenues). These divisions were formerly slowing economy. The company is relati- part of Russian Lebedyansky JSC, the vely well-positioned to be able to preserve largest juice producer in Eastern Europe. its margins (EBITDA 2008 of approxima- When Lebedyansky’s juice production tely 26%). Recently implemented family business was sold to PepsiCo in August friendly state policies have boosted Rus- 2008, the baby food and water divisions sian birth rates and the market for baby were spun-off into Progress Capital. food to an annual growth of 20–25%. In With a market share of approximately 2008, the company’s revenues from baby 10%, Progress Capital is, today, one of food grew by 50% and mineral water by the main players in the Russian baby food 100%. The current baby boom coupled market. The company has a strong portfo- with the global focus on health and nutri- Investment facts: lio of brands. Baby food and purees are tion, also witnessed in Russia, provides East Capital invested since: 2008 marketed under the “FrutoNyanya” brand strong ground for Progress to continue to East Capital Bering Russia Fund’s holding and mineral water products are marketed enjoy robust organic growth. in company: 0.6%

East Capital Explorer AB Annual Report 2008 23 East Capital Bering Ukraine Fund

FUND FACTS OUR INVESTMENT Launch date: 29 July 2005 Invested amount: EUR 24m Risk: High Date of investment: 2 January 2008 Volatility: 29.9% Number of fund units: 1,212,296 Sharpe ratio: -0.1 Fair value on 31 Dec 2008: EUR 7.6m Alpha: 26.9% % of NAV on 31 Dec 2008: 2.9 Number of holdings: 54 Change in value 2008 (EUR): -68.7% Listed/unlisted exposure: 24%/65% Fees: 2% management fee, 20% performance fee ISIN code: KYG290651028 Bloomberg: BERINGU KY Benchmark index: PFTS Index For definitions, see pages 54–55 and 81.

Sector exposure, % Country exposure, % 11.8 Consumer Goods 3.4 Baltics 6.4 Banking & Finance 2.0 Georgia Retail 3.4 Electronics 1.7 Estonia 24.5 1.9 Power Utilities 1.1 Russia 1.8 Agriculture 0.8 Lithuania 1.6 Constr. & Constr. Mtrl. 11.9 Cash Ukraine Real Estate 1.2 Oil & Gas 79.0 32.9 2.6 Other sectors 11.9 Cash

Aim of the fund Performance 2008 (EUR) The aim of the fund is to achieve long term capital appreciation NAV (EUR) from investments in Ukrainian equities, both listed and unlisted. 25 The Fund may also invest in companies that have significant trade with, or exposure to, the Ukraine and other countries of the 20 former Soviet Union.

15 Fund performance during 2008

The NAV per unit of the East Capital Bering Ukraine Fund 10 decreased 68.7% in EUR terms during 2008. In USD terms, the NAV per unit decreased 69.3% during the year compared 5 to the PFTS Index which posted a decline of 83.1% during the same period. On 31 December 2008 the NAV per unit in the 0 fund amounted to USD 8.87. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

East Capital Bering Ukraine Fund PFTS Index

See page 81 for an index definition.

24 East Capital Explorer AB Annual Report 2008 Q&A with Aivaras Abromavicius, Partner and member of the Portfolio Management Team, East Capital

What were the recently demonstrated in the gas dis- Looking ahead at 2009, where do you main events pute? see the most attractive investment affecting the fund The gas dispute has become a recurring opportunities? during 2008? annual conflict in past years but this year Ukraine is facing some tough decisions While Ukraine was the conflict was considerably more acute, and major challenges. 2009 could well one of the best per- partly because of the forthcoming presi- be the most difficult year for the Ukrainian forming stock mar- dential elections in Ukraine in January economy since the era of hyperinflation in kets in the world in 2010. Russia-Ukraine relations are at an the early 1990’s. One of the major chal- 2007, with a 137% all time low and it is very likely that they will lenges for companies in Ukraine is poten- gain of the PFTS Index, it was one of the improve considerably following the elec- tial debt defaults triggered by the ongo- world’s worst performing markets in 2008, tions in Ukraine. ing devaluation of the Ukrainian hryvna. with PFTS loosing more than 80%. This is Although general debt levels are low, most the kind of volatility we can experience in How are the companies in the fund per- debt is issued in foreign currency. This will emerging markets which is challenging to forming? mean difficulties for companies without a us as fund managers. Similar to the majority of companies in our natural hedge from cash inflows. One of the highlights during the year investment region, Ukrainian companies Investors will return but not before they was our investment during the spring in generally performed as usual during most see stabilisation in the hryvna and a sta- Chumak (see below). This is an inspiring of 2008. However, 2009 will no doubt be bilisation in the global equity markets. As company that we have come to known well a difficult year for Ukraine and surely also an investor in the region, we keep the lev- during quite a long time, and we are happy as regards certain of our fund holdings. So erage situation under special observation that we finally were given the opportunity far, we have seen one real estate company and continue to focus on companies pro- to become shareholders. in the fund portfolio, albeit with very mar- viding products to meet basic consumer ginal weight in the fund, showing trouble- demands. What is your view on the tension some leverage levels that are likely to jeop- between Russia and Ukraine, most ardize the future survival of the company.

From field to table Example of a portfolio company in East Capital Bering Ukraine Fund portfolio Our Chumak is a leading Ukrainian producer of The primary focus is on a nationwide dis- high-quality food products, such as ketch- tribution to retail and food service outlets, up, mayonnaises, condiment sauces, but the company also exports selectively salad dressings, cooking sauces, tomato to Russia, other CIS countries and to paste, juices, pasta and canned vegeta- Ukrainian/Russian diasporas consumers bles. The company was founded in 1996 in the United States, Israel and Canada. in Kakhovka, South Ukraine, and Chumak Chumak has a modern agriculture and round staff and also represents a signifi- is currently one of the most important has introduced world-standard cultiva- cant indirect employment source for up companies in this region. tion technologies such as drip-irrigation, to 20,000 agricultural workers during the The Swedish founders, a family with hybrid seedling and other best practices. growing season. Over 450 people are strongly rooted traditions in food process- Production sites close to the fields ensure directly involved in sales and promotion, ing and packaging, entered Ukraine at the an uninterrupted supply of raw materials ensuring that the Chumak assortment can beginning of the 90s at a time of upheaval during harvest season and are a key com- be found at over 40,000 points of sale within the agriculture sector. The strat- petitive advantage. A suitably dry climate throughout Ukraine. egy was to provide high quality vegetable in the heart of one of the world’s largest based products with tastes tailored to man-made channel irrigation systems pro- Ukrainian consumers, in modern packag- vides an excellent foundation for agricul- ing and promoted under a local brand. The ture with sustainable advantages. Investment facts: Chumak brand has, since then, developed Chumak is owned by the management East Capital invested since: 2008 into one of the most popular food brands and two financial investors, Dragon Capi- East Capital Bering Ukraine Fund’s hold- in the country, holding a 30% market tal and East Capital Bering Ukraine Fund. ing in company: 22% share of the local ketchup and cooking The 2008 turnover amounted to USD sauce markets and almost 50% of the 72m and the EBITDA-margin was 12%. Learn more about Chumak on: local dressing and tomato paste market. Chumak employs approximately 900 year www.chumak.com/eng

East Capital Explorer AB Annual Report 2008 25 East Capital Bering Balkan Fund

FUND FACTS OUR INVESTMENT Invested amount: EUR 25m (2007), Launch date: 31 July 2006 additional EUR 10m (2008) Risk: High Date of investment: 3 December 2007, 2 December 2008 Volatility: 36.8% Number of fund units: 2,089,038 (2007), Sharpe ratio: -0.6 additional 2,449,648 (2008) Alpha: 9.0% Fair value on 31 Dec 2008: EUR 17.6m Number of holdings: 72 % of NAV on 31 Dec 2008: 6.7 Listed/unlisted exposure: 66%/18% Change in value 2008 (EUR): -50.6% Fees: 2% management fee, 20% performance fee ISIN code: KYG290601031 Bloomberg: BERINGB KY Benchmark index: The fund currently has no relevant benchmark index For definitions, see pages 54–55 and 81.

Sector exposure, % Country exposure, % 8.3 Investment Companies 14.8 Turkey Media 7.8 Consumer Goods Romania 14.0 Slovenia 13.3 6.6 Constr. & Constr. Mtrl. 15.3 6.5 Bosnia 3.4 Real Estate 2.2 Montenegro Banking 3.3 Hotels 1.8 Croatia & Finance 2.5 Engineering Serbia 1.4 Bulgaria 23.5 26.5 2.3 Oil & Gas 0.8 Macedonia 12.7 Other sectors 0.4 Austria 16.3 Cash 16.3 Cash

Aim of the fund Performance 2008 (EUR)

The aim of the fund is to achieve long term capital appreciation NAV (EUR) from investments in Balkan equities, both listed and unlisted. The 14 Fund’s investment focus is linked to the Balkan economy and geographically comprises Albania, Austria, Bosnia-Herzegovina, 12

Bulgaria, Croatia, Greece, Macedonia, Montenegro, Romania, 10 Serbia, Slovenia and Turkey. 8

Fund performance during 2008 6 The NAV per unit of the East Capital Bering Balkan Fund 4 decreased 70.3% in EUR terms during 2008. In USD terms, the NAV per unit decreased 69.5% during the year. There is cur- 2

rently no relevant benchmark index available for this fund. On 0 31 December 2008 the NAV per unit in the fund amounted to Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

USD 5.52. East Capital Explorer has made two investments in East Capital Bering Balkan Fund the fund and the total change in value of the investment during 2008 was -50.6%.

26 East Capital Explorer AB Annual Report 2008 Q&A with Jacob Grapengiesser, Partner and member of the Portfolio Management Team, East Capital

What were the uals in the Balkan countries is significantly asset value. We will also look at increas- main events aff- lower compared to the Baltic economies. ing exposure to companies that are non- ecting the fund This is a key difference. Development in cyclical with stable cash flows and which during 2008? terms of GDP/capita is another obvious are attractively valued. Pinar Et, the larg- The Balkan markets difference. The average GDP/capita in est meat processing company in Turkey are still relatively the Baltic States of USD 9,000 is almost (see below), certainly fulfills all these pre- small and young, twice as high as the GDP average in the requisites. with investors first Balkans of USD 4,900. This means that starting to show the Balkan countries still have significant Looking ahead to 2009, where do you interest in these catch-up potential. see the most attractive investment markets as recently as 1–2 years ago. Dur- opportunities? ing this market turbulence, we saw a lot of In November East Capital Explorer Looking at Eastern Europe from a relative international investors heading for the exit, made an additional investment of EUR point of view, the Balkan region probably not really looking at fundamentals or valu- 10m in newly issued shares in the fund. offers the best macroeconomic prospects ations. When stability returns to global How will you invest this capital? in 2009, even though there are many markets and the focus is, again, allowed East Capital Explorer’s additional invest- questions marks at this point in time. The to shift to fundamentals, there should be ment means that we can capitalize on EU-convergence process progresses room for increasing stock prices. some of the opportunities we see in this and the advantages of being a part of the part of our investment region. Per 31 EU become even more evident in current What about the parallel that many draw December, cash in the fund amounted to markets. Contribution from EU funds, as with the negative developments in the 16.3%. Following the unjustly harsh der- much as 4% of GDP in Romania and Bul- Baltics? ating of Balkan markets, we currently see garia for example, will be helpful and I think The expansion in the Baltic States has plenty of undervalued investments. One these countries can expect extra help from been fuelled, in part, by credit from the example is the Romanian privatization EU, if needed. Scandinavian banks in the region. Lever- funds with attractive holdings currently age among companies and private individ- trading at a 70% discount to their net

Tasty products for the Turkish consumers portfolio Our Example of a portfolio company in East Capital Bering Balkan Fund

Pinar Et is one of Turkey’s leading verti- 14.5% and net margin levels of 10% in cally integrated meat processors, includ- the past few years. ing both a feed mill, slaughter-house and From an investment perspective, Pinar a meat processing unit. The company is a Et is well-positioned to continue to grow pioneer in the Turkish meat industry and on the Turkish market for processed today offers a wide range of premium beef meat products. Competitive advantages and turkey based fresh, processed and include high quality EU standard produc- frozen products as well as meat-based tion, a strong and valuable brand image ready meals. Pinar Et is a clear market and wide-spread distribution network. leader with a 20% share of the Turkish 83% of sales is distributed through the processed meat market. The company is group’s distribution company (second listed on the Istanbul Stock Exchange. largest food sales and distribution net- By meeting demand from an increas- work in Turkey) while 16% is direct sales ingly health-conscious young population, and 1% is exported. the company has demonstrated strong growth with a 10% annual growth rate for Investment facts: the period 2004 to 2007. In the first nine East Capital invested since: 2007 months of 2008, turnover increased 12% East Capital Bering Balkan Fund’s hold- with an estimated turnover for the full year ing in company: 3.5% 2008 at USD 235m. The business is profitable with relatively stable gross margin Learn more about Pinar Et on: levels of 22%, EBITDA margin levels of http://eng.pinar.com.tr/

East Capital Explorer AB Annual Report 2008 27 East Capital Bering Central Asia Fund

FUND FACTS OUR INVESTMENT Launch date: 28 February 2007 Invested amount: EUR 20m Risk: High Date of investment: 2 January 2008 Volatility: 30.8% Number of fund units: 2,486,454 Sharpe ratio: -1.5 Fair value on 31 Dec 2008: EUR 7.4m Alpha: 7.6% % of NAV on 31 Dec 2008: 2.8 Number of holdings: 35 Change in value 2008 (EUR): -62.2% Listed/unlisted exposure: 70%/18% Fees: 2% management fee, 20% performance fee ISIN code: KYG2906R1048 Bloomberg: BERINGC KY Benchmark index: KASE Index For definitions, see pages 54–55 and 81.

Sector exposure, % Country exposure, % 7.1 Agriculture 5.4 Ukraine 6.5 Real Estate 4.5 Turkmenistan Georgia Oil & Gas 3.8 Retail 19.5 2.4 Armenia 23.7 2.4 Metals & Mining 2.1 Azerbaijan 1.4 Power Utilities 1.1 Uzbekistan 0.6 Bonds 0.5 Russia 0.5 Transportation 11.9 Cash Banking Kazakhstan & Finance 0.6 Other sectors 52.6 41.5 11.9 Cash

Aim of the fund Performance 2008 (EUR)

The aim of the fund is to achieve long term capital apprecia- NAV (EUR) tion from investments in Central Asian equities, both listed and 9

unlisted. The Fund can invest in Armenia, Azerbaijan, Kyrgyzstan, 8

Moldova, Tajikistan, Turkmenistan, Uzbekistan, Russia, Ukraine, 7 Kazakhstan and Georgia. 6

Fund performance during 2008 5 The NAV per unit of the East Capital Bering Central Asia Fund 4 decreased 62.2% in EUR terms during 2008. In USD terms, the 3 NAV per unit decreased 62.8% during the year compared to the 2 KASE Index which posted a decline of 66.1% during the same 1 period. On 31 December 2008 the NAV per unit in the fund 0 amounted to USD 4.19. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

East Capital Bering Central Asia Fund KASE Index

See page 81 for an index definition.

28 East Capital Explorer AB Annual Report 2008 Q&A with Aivaras Abromavicius, Partner East Capital and member of the Portfolio Management Team, East Capital

What were the What effects did the Russia-Georgia These are very underdeveloped, com- main events conflict have on the region? pletely illiquid markets and will most prob- affecting the fund While the tragic consequences for the ably stay off the investors’ radar screens during 2008? civilian population are obvious, the full for at least another couple of years. We In short, 2008 was effects of the conflict on the real econo- will continue to concentrate on our key an eventful year my are still difficult to estimate. Investor markets, Kazakhstan and Georgia, which in this region with interest in Georgian stocks decreased currently offer many attractive investment a rapidly chang- considerably because of the increased opportunities at low valuations. ing economic out- country risk and unstable political situa- look in Kazakhstan and the unfortunate tion, even after the military activities came Looking ahead to 2009, where do you conflict in Georgia. Although Kazakhstan, to an end. see the most attractive investment is better positioned to withstand an eco- The global financial markets meltdown opportunities? nomic downturn than certain of the other pressured Georgian shares even fur- Although 2009 will be a challenging year countries in Central Asia, it has also been ther in the last quarter of the year. On 31 also for this region, there will be interest- negatively affected by falling commodity December 2008, the fund’s exposure to ing investment opportunities when inves- prices and significant capital outflows. Georgia amounted to 19.5% of the port- tors, once again, start focusing on funda- Major support packages to the banking folio and we continue to invest actively in mentals. Companies with strong balance sector have provided stability to the sys- Georgia where we currently see interest- sheets, limited debt and foreign currency temic banks in the region, with nationali- ing investment opportunities such as the revenues should do best in an environ- zation of BTA and Alliance banks in early Populi retail chain (see below). ment of weakening domestic currencies. 2009 as a consequence. Kazakh resource companies should do Going forward, major concern remains When do you foresee an increase fairly well in the long run. as regards Kazakhstan’s ability to main- in investment activities in countries tain their sound public finances. Political like Tajikistan, Turkmenistan and Kir- stability appears to remain intact. gizstan?

Retail from Express to XL

Example of a portfolio company in East Capital Bering Central Asia Fund portfolio Our

Unlisted Populi is the true pioneer of the butchery and bakery serv- another means to expand organized Georgian food retail market ices, as well as Populi’s the service offering. and is today the largest multi-format food own ready-made take- In an agreement with retailer in Georgia. The company’s turno- away cuisine. the European Bank for ver has grown from USD 1m in 2005 to From an investment Reconstruction and around USD 50m in 2008. Populi has perspective, the Georgian Development, Populi has grown significantly in recent years and food retail sector is inter- recently received debt the net selling space totalled 15,750 m2 esting because it is still in financing of up to USD in 2008 with more than 1,500 employees its nascent form, with over 12m at attractive interest working across three well-defined retail 55% of food sales taking rate and leverage condi- formats. Populi’s retail network includes place in open air markets. tions. This makes Populi 27 Populi Supermarkets, ten Populi XL In the next three years, well-positioned to add stores and four Populi Express stores. the sector is projected new stores to its retail With 34 locations in Tbilisi, Populi stores to grow at 20% annu- network and continue to are a common sight in the Georgian ally. Currently, there are only a few com- gain market shares during 2009. capital. With an estimated market share petitors within the different retail formats, of 6-7%, the Populi retail network wel- most of them are smaller and less well Investment facts: comed over 30,000 customers every day capitalised. The recent successful launch East Capital invested since: 2006 in 2008. of the Populi Express format is a good East Capital Bering Central Asia Fund’s Products from more than 300 inter- example of how the company creates holding in company: 14% national and local suppliers as well as growth by extending formats to efficiently more than 100 products under the Populi satisfy diverse customer preferences. brandname, can be found in the stores. Introducing “Populi Credit”, a credit card Learn more about Populi on: Many of the stores also offer fresh fish, for Populi customers, during 2008 was www.populi.ge

East Capital Explorer AB Annual Report 2008 29 East Capital Bering New Europe Fund

FUND FACTS OUR INVESTMENT Launch date: 30 April 2008 Invested amount: EUR 10m Risk: High Date of investment: 2 May 2008 Volatility: n/a Number of fund units: 1,560,000 Sharpe ratio: n/a Fair value on 31 Dec 2008: EUR 6.8m Alpha: n/a % of NAV on 31 Dec 2008: 2.6 Number of holdings: 34 Change in value 2008 (EUR): -31.6% Listed/unlisted exposure: 51%/23% Fees: 2% management fee, 20% performance fee ISIN code: KYG2906N1034 Bloomberg: BERINGN KY Benchmark index: The fund currently has no relevant benchmark index For definitions, see pages 54–55 and 81.

Sector exposure, % Country exposure, % 10.8 Constr. Constr. Mtrl. 13.5 Hungary

Electronics 10.5 Utilities Baltics 12.7 Poland 15.2 7.9 Banking & Finance 15.2 11.1 Slovakia 5.4 Information Technology 2.4 Lithuania Consumer 2.7 Chemicals Czech Rep. 2.0 Estonia Goods 15.6 16.8 1.8 Engineering 0.6 Austria 0.8 Metals & Mining 26.9 Cash 0.6 Hotels 0.6 Other sectors

26.9 Cash

Aim of the fund Performance 2008 (EUR) The aim of the fund is to achieve long term capital appreciation from investments in Central European and Baltic equities, both NAV (EUR) 7 listed and unlisted. The Fund’s investment focus geographically comprises the Czech Republic, Estonia, Hungary, Latvia, Lithua- 6 nia, Slovakia and Poland. 5

Fund performance during 2008 4 The East Capital Bering New Europe Fund was launched on 30 3 April 2008. The NAV per unit of the fund had decreased 31.6% 2 in EUR terms on 31 December 2008. In USD terms, the NAV per unit had decreased 38.2% during the same period. The fund cur- 1 rently has no relevant benchmark index. On 31 December 2008 0 the NAV per unit in the fund amounted to USD 6.18 and slightly Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec more than 70% of the fund was invested. East Capital Bering New Europe Fund

30 East Capital Explorer AB Annual Report 2008 Q&A with Andras Szalkai, Member of the Portfolio Management Team, East Capital

What were the domestic demand, relatively little depend- reforms. On the other hand, many of the main events ency on exports and guest workers’ remit- countries in Eastern Europe will find EU affecting the fund tances contributing to the economy. Hun- funds a helpful contribution to GDP, and during 2008? gary had significantly overspent its 2004- have welcomed financial support offered Central European 2005 budgets and was, consequently, by the ECB. This support has certain con- equities, which in forced to bring budget levels back in line ditionality of reforms attached to it, so we a historic perspec- with normal European levels, dampen- will still see some degree of economic tive were attrac- ing growth and delaying necessary tax reforms push ahead. tively valued in the reforms. Relative to Poland, Hungary is spring of 2008, fell even further during much more dependent on sustaining Looking ahead to 2009, where do you the year. Until December 2008, Poland export levels. Another large risk in Hun- see the most attractive investment and Slovakia were still booming, report- gary is, currently, the extensive loans in opportunities? ing 4.8% and 7% GDP growth for 2008, foreign currencies which will become bur- The current depreciation of the local cur- respectively. During the fourth quarter the densome in times of limited credit market rencies creates a new situation. Compa- global economic outlook worsened sig- access and currency depreciation. nies with more defensive characteristics nificantly, reaching also Central Europe. such as Pegas Nonwovens SA (see The investment policy of the fund has Many of the countries in this region below) are clearly more attractive and are been reshaped somewhat to reflect the are already members of the European more likely to benefit from higher export economic reality and we have preserved Union, what will comprise the next revenues. We look for deep value, a stable the high cash level in the fund. We have incentive for reform? and safe product portfolio and good cash focused on investments in companies The path to the European Union has been flows. Another interesting theme is to shift benefiting from public construction and a strong driver for reforms in many of the focus back onto companies with high IT infrastructure projects financed by EU countries in Central Europe in the past dividend yields and companies that may funds, as we expect that these invest- few years. On the one hand, the negative become takeover targets, as we expect ments will be able to continue to perform developments within the current econom- the current crisis to become a catalyst for relatively well. ic environment, unfortunately, impose risk consolidation in some industries. of delaying or even overruling important The outlook for Poland and Hungary reform activities. It is still too early to tell

are very different, why is that? whether the crisis will delay or completely portfolio Our Poland’s economy has been booming halt important reforms currently on the in the past couple of years, with strong agenda, such as healthcare and pension

Meeting demand of personal hygiene products Example of a portfolio company in East Capital Bering New Europe Fund Pegas Nonwovens SA is a large Czech consumer goods producers including manufacturer of textiles from polypropyl- Procter & Gamble, Johnson & Johnson, ene and polyethylene. The company has SCA and Kimberly Clark. The company grown steadily in the last five years at an has increased its share of the European average growth rate of 10%. Full year market from 8% in 2005 to more than turnover 2008 is estimated to reach EUR 10% in 2008. 150m. Pegas Nonwovens is a profitable From an investment perspective, the company with EBIT 2008 expected to company is interesting since it supplies amount to EUR 25-30m, resulting in an the basic consumer goods industry which EBIT margin of over 20%. The company is more resilient in a deteriorating eco- is listed on the Prague stock exchange nomic climate. The company currently has Investment facts: since 2006, and market capitalization on a low valuation offering a 10% dividend East Capital invested since: 2008 31 December 2008 was EUR 78m. yield in EUR and a cash flow yield exceed- East Capital Bering New Europe Fund’s Pegas Nonwovens’ materials are ing 20% generating a stable cash flow. holding in company: 1.4% used in diapers, women’s hygiene prod- The weakening Czech koruna and sig- ucts, towels, filters and crop row covers. nificantly lower oil prices are other factors Learn more about Pegas Nonwovens on: The largest customers are international that make the Pegas case interesting. www.pegasas.cz

East Capital Explorer AB Annual Report 2008 31 East Capital Power Utilities Fund

FUND FACTS OUR INVESTMENT Launch date: 5 December 2007 Invested amount: EUR 81m Risk: High Date of investment: 5 December 2007 Volatility: n/a Number of fund units: 162,000 Sharpe ratio: n/a Fair value on 31 Dec 2008: EUR 26.5m Alpha: n/a % of NAV on 31 Dec 2008: 10.0 Number of holdings: 73 Change in value 2008 (EUR): -67.7% Listed/unlisted exposure: 80%/1% Fees: 2% management fee, 15% performance fee and 5% profit share after 7% hurdle and a 50/50 catch-up ISIN code: - Bloomberg: - Benchmark index: RTSeu For definitions, see pages 54–55 and 81.

Sector exposure, % Country exposure, % 12.9 Integrated 4.5 CIS Hydro 12.6 Distribution 19.1 Cash 15.9 5.1 Construction 5.2 Other 19.1 Cash Generation 29.2 Russia 76.4

Aim of the fund Performance 2008 (EUR) The aim of the fund is to target the many investment opportuni- NAV (EUR) ties arising from the ongoing power sector reform in Russia. The 600 fund invests in both listed and unlisted companies across sub- sectors of the industry including electricity generation, distribu- 500 tion and services. 400

Fund performance during 2008 300 The NAV per fund unit in the East Capital Power Utilities Fund decreased 67.7% in EUR terms during 2008. In USD terms, the 200 NAV per unit decreased 66%, outperforming the Russian power 100 utilities sector index, RTSeu, which decreased 72% during the

same period. On 31 December 2008 the NAV per unit in the fund 0

amounted to EUR 163.67 and 81% of the fund was invested. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

East Capital Power Utilities Fund RTSeu

See page 81 for an index definition.

32 East Capital Explorer AB Annual Report 2008 Q&A with Aivaras Abromavicius, Partner and member of the Portfolio Management Team, East Capital

What were the more cash on their balance sheets than acquire majority stakes in some of the larg- main events affect- their respective market capitalizations. The est power generators in Russia, including ing the fund during tariff hikes announced in December 2008 Fortum, Enel and EON which have already 2008? had a positive affect on share prices. made significant investments in Russia. The Russian utili- A major test of the market will take ties sector started place in July 2009 when 50% of the elec- Has price liberalization been negative to underperform tricity market is expected to be liberalized. for consumers in terms of decreased before the broad If this proceeds according to plans, the disposable incomes? market selloff in the Russian government will have proved its Russians still spend fifty percent less of fall of 2008. Once the wave of sales of commitment to sector reforms. A widely their disposable incomes on electricity generation assets to strategic investors discussed and already much delayed than Western Europeans do, and recent had passed, portfolio investors started introduction of capacity market payments hikes have had limited impact. Looking at to look at the sustainability of the elec- would also be welcomed by investors. the price development of electricity on the tricity market liberalization process. With free market, current prices are not very dif- Anatoly Chubais, the ideologist behind How will the current market develop- ferent from regulated prices. The continu- the electricity reform, leaving the position ment affect sector reforms and investing sector liberalization is not expected to of CEO of RAO EES, investors started ments? imply a dramatic increase in prices and to doubt if Russia would be able to fully It is very unlikely that the utilities sector will, therefore, not negatively impact con- liberalize the electricity sector accord- reforms will stop at this stage, as the gov- sumers in a harsher economic climate. ing to the initial plan and allow electric- ernment officials understand the impor- ity prices to increase at a time of already tance of sector modernization in meeting Looking ahead to 2009, where do you high inflation. On 1 July, EES was divided Russia’s need for increased capacity. Cur- see the most attractive investment into 23 separate companies which cre- rent bottlenecks in electricity infrastructure opportunities? ated a massive share overhang, putting would limit or prevent economic growth, Some of the most interesting opportuni- significant additional pressure on sector once the economy starts to recover. ties can be found among the companies performance. which shares fell the most during 2008. Is this one of Russia’s “strategic sec- Many companies in the power genera- What will trigger a revaluation of the tors” and do you see any risks for for- tion sub-sector, for example, are trading at

sector? eign investors? below the level of cash on account. There portfolio Our Russian utilities stocks have fallen 80–95% Formally, the utilities sector is not in the are also interesting examples in other sub- in value and valuations are currently very list of strategic sectors of the Russian sectors, such as the Federal Grid Com- low. Many companies in the sector trade Federation. The government has allowed pany with a market capitalization of almost at a negative enterprise value and have a handful of foreign strategic investors to USD 4bn and around USD 5.8bn in cash.

Clean energy to a low cost Example of a portfolio company in East Capital Power Utilities Fund RusHydro is the largest hydrogeneration than alternative sources of energy. Hydro 2010 – helped by large regulated tariff company in Russia with 2008 revenues power is consumed before all other types increases, preferential loans from state amounting to more than USD 2.2bn and is of power, which is a strong advantage banks, and state participation in share currently the second largest hydro power over fuel-fired generators. issues at relatively high prices. All in all, company in the world with a total installed RusHydro has the lowest operating this makes RusHydro one of the least capacity of 25.3 GW. The company is costs among domestic peers, enjoying a financially vulnerable generating compa- listed on Russian RTS and MICEX and is strong 36% EBIT margin as a result. Mar- nies, a significant advantage in current included in MSCI Russia and MSCI EM gins are likely to continue growing in the market conditions. Europe. 60.4% of the shares and votes next few years thanks to favourable regu- are held by the Russian state. lated tariffs and continued liberalization of Investment facts: From an investment perspective, hydro the electricity market. The company has a East Capital invested since: 2003 power companies are especially inter- relatively strong financial position with no East Capital Power Utilities Fund’s hold- esting in current markets. In addition to debt repayments falling due before 2010 ing in company: 0.2% being a clean, renewable natural resource and no need to borrow at market rates with operational reliability, the cost struc- during 2009. RusHydro will also receive Learn more about RusHydro on: ture of hydro power is significantly lower substantial state support through 2009- http://eng.rushydro.ru

East Capital Explorer AB Annual Report 2008 33 East Capital Russian Property Fund

FUND FACTS OUR INVESTMENT Launch date: 2 July 2008 Commited amount: EUR 40m Risk: High Date of commitment: 27 May 2008 Fees: 1% annual management fee on gross asset value. Profit- Amount drawn-down: EUR 0.9m sharing arrangement (investors 80% and East Capital 20%) Number of fund units: 400 above a hurdle rate of 10% and following a so-called 50-50 Fair value of amount drawn-down on 31 Dec 2008: EUR 0.5m catch-up. % of NAV on 31 Dec 2008: 0.2 ISIN code: SE0002577445 See pages 54–55 for fee glossary.

Aim of the fund Fund performance during 2008 The aim of the fund is to invest in shopping centres and other Per 31 December 2008, no investments had been made in the types of cash flow generating retail real estate in regional cities fund. An initial capital draw-down of EUR 0.9m to cover costs in with more than 500,000 inhabitants, primarily in Russia but also the fund was made during the fourth quarter. The remaining part in Ukraine and Kazakhstan. of East Capital Explorer’s commitment amounting to EUR 39.1m was still placed in cash and short-term deposits. Q&A with Biljana Bozic, Head of the Real Estate Team at East Capital.

What were the strategy in different ways. Firstly, we are confident that our real estate competence main events giving major cities some more attention. and investment strategy will generate affecting the fund Initially not of primary focus, Moscow and more attractive returns for our investors by during 2008? St Petersburg have become more interest- investing directly in properties. A lot has happened ing following the recent tumble in property since the fund was values and outflow of foreign capital. Looking ahead to 2009, where do you launched. Global Secondly, due to lack of reasonably see the most attractive investment real estate markets, priced debt financing, it is now an impor- opportunities? including Eastern tant consideration for our team to be able The current market conditions present Europe and Russia, have deteriorated sig- to assume existing debt from a seller when a very interesting opportunity in terms of nificantly following the collapse in the US considering potential property acquisi- acquiring well-performing shopping cen- housing market. Globally there is a lack of tion. We also analyze even more carefully tres and retail properties in strategic loca- liquidity in the market, resulting in very few the current tenants in the properties that tions at attractive prices. While there have real estate transactions and new develop- we are considering, in order to ensure that been very limited transactions recently, ment projects being put on hold. What they are positioned for long-term stability (as there is a mismatch between sellers has not changed is our view on the long in the economic slowdown. and buyers’ price expectations), the prop- term fundamentals of the Russian real erties that we are analyzing are offered at estate market and as regards the fact that Valuations of listed property compa- the yields exceeding 13-16%. We expect the market is significantly undersupplied nies are at historic lows, are these com- that in 2009 there will be more motivated in both quantity and quality across almost panies a possible investment route for sellers in the market willing to accept new all asset classes. The fund has not made the fund? pricing realities, as many property owners any investments. Although markets are No, we will not look to invest in property and developers are pressed to repay their admittedly very challenging, we strongly companies. Listed property companies short-term loans that are maturing, but believe that will be able to invest on attrac- are in fact development companies with have very few opportunities to refinance tive terms. very few if any income generating proper- these loans in the current credit environ- ties and many development projects and ment. Which new challenges do you have to land bank. Our investment strategy is to deal with in your investment process? acquire properties that are income gener- To respond to the new challenges we have, ating and we will work actively with them of course, reviewed the fund’s investment to initiate further improvements. We are

34 East Capital Explorer AB Annual Report 2008 The East Capital Russian Property Fund shall invest in attractive shopping centers and other commercial properties. For well- capitalized international retail concepts, the current economic climate offers an opportunity to expand at better terms and thereby gain market shares. In March 2009, H&M entered the Russian market under the slogan “Get ready for some real shopping”. Our portfolio Our

East Capital Explorer AB Annual Report 2008 35 Melon Fashion Group

In October 2008, East Capital Explorer made its first direct investment, investing a total of EUR 10m in the unlisted Russian fashion retailer Melon Fashion Group (MFG).

European design for the Russian woman Fashion and football MFG’s history begins in a small, local sew- MFG has a well-balanced brand portfolio ing school established in St Petersburg at comprising three retail chain concepts: the end of the 19th century (see separate Zarina, befree and recently acquired TAXI. article). Following more than 100 years While Zarina appeals to the classic woman of operations, MFG has developed into aged 35-45, befree’s target audience is a one of the ten largest retailers of women’s more fashion-oriented, trendier woman clothes in Russia, with a vision to be one aged 25-35. TAXI targets the glamorous, of Russia’s leading fashion groups. self-assertive young woman between 17 Based on a “European design adapted and 25 and will be re-branded into Love for the mentality of the Russian woman”, Republic during 2009. MFG has acquired a market share of Behind MFG’s success lies a modern 2-3% of the Russian branded women’s management approach and an increased clothes market. The company expanded focus on innovative marketing. In spring the number of stores from 14 in 2003 to 2008, MFG invited the Russian football 192 in December 2008. Approximately player Andrey Arshavin to design his half of the stores are located in St. Peters- own guest collection for the befree con- burg and Moscow and half in Russia’s cept. Arshavin became world famous fast-growing regional cities such as Kazan, after playing a key role in taking the Rus- Krasnodar and Nizhny Novgorod. MFG’s sian national football team to the semifinal stores are typically found in popular shop- in the European Championship 2008. The Zarina fashion concept appeals to the classic ping malls and other high street locations As a fashion designer at MFG, Arshavin woman. with good customer flows. MFG has a team of in-house design- was equally popular and participated in a ers. 90% of the manufacturing has been befree campaign and different action mar- outsourced to external producers, mainly keting events. As a result of the campaign, in China, while the remaining 10% is pro- befree’s brand recognition in Moscow duced in the company’s own manufac- and St Petersburg increased from 37% to turing facility in Ostrov, Pskov region in 50% during the first 6 months of 2008. Northwest Russia. Read more about the MFG transaction on Fast-growing retail chain page 52. MFG has exhibited a strong development in recent years thanks to its ambitious man- MFG IN FIGURES agement team and continuous improvements in its structure and operations. Per 31 Dec. 2008E 2007 2006 Although the current economic slowdown Turnover (RUB) 2.1bn 1.4bn 1.0bn will negatively affect consumption growth, EBITDA margin 7%* 8% 9% MFG’s brands in the mid-market segment Total number are likely to be more resilient than many of stores 192 117 93 other brands. The company has stable • Zarina 82 55 50 cash flows and no financial debt, which • befree 89 62 43 makes MFG better positioned to partici- • TAXI 21 - - pate in the consolidation of the highly frag- Employees 1,639 1,144 938 During 2008, the Russian football player Andrey mented Russian fashion retail market. * Estimated 9% before acquisition of TAXI in Arshavin designed a guest collection for the October 2008. befree concept.

36 East Capital Explorer AB Annual Report 2008 Q&A The history with Mikhail Urzhumtsev, CEO of Melon Fashion Group of MFG

sian consumer market rather challenged From a small sewing school to Melon further affected during 2009. On the Fashion Group other hand, MFG products are attractively priced basic consumer products which I Late 19th century A sewing school for expect will be better positioned to with- girls is established in St Petersburg in the stand an economic slowdown than more same building where MFG today has its expensive capital goods. headquarters.

A number of international fashion retail 1926 The sewing school is turned into a companies are establishing in Russia, state-owned factory producing women’s how will you manage increased com- clothes. petition? This is not really a new phenomenon, 1991 The factory’s employees acquire many international fashion retailers have the company, creating the closed joint- What were the highlights for Melon been present for a long time now – well- stock company Pervomayskaya Zarya. Fashion Group in 2008? known fashion brands like Mexx, Mango, The products are sold in the first Zarina 2008 has been an exciting year with many Benetton and Zara have all been around shop owned by the company. An addi- highlights. We completed the acquisition for at least 3–4 years. This hasn’t affected tional three shops are opened in the next of the TAXI chain with its 16 stores, which us negatively but has rather challenged few years. was an important step in making our brand us to grow even stronger as a company. portfolio even more well-balanced. I am Competition is not always negative since 1993 Launch of a product line for larger also very happy with our celebrity coop- it forces you to evaluate both your own sized women under the slogan “Big is eration projects. In spring 2008, football and your competitor’s strengths and beautiful”, and sold under the brand name superstar Andrey Arshavin helped us weaknesses, which I believe is fundamen- “Zarina Plus”. design a successful guest collection for tal to a company’s continued success. befree. We also invited the famous circus 1996 Swedish fashion entrepreneur fam- performers and brothers, Edgar and Askold ily, Kellermann, invest in MFG. Zapashnye, to take part in our marketing

campaign, which was popular among our 1997 The “Zarina” trademark is licensed. portfolio Our customers. The share issue completed in late 2008 makes us well-positioned to 2002 The fashion concept “befree” is continue growing – both organically with launched. East Capital makes its first our own fashion concepts and through the investment in MFG. acquisition of other brands. 2005 To increase efficiency and trans- How has recent financial turbulence Looking at 2009, what are your goals parency, Pervomayskaya Zarya is divided affected Russian consumption pat- and main opportunities? into two companies; the OAO Melon terns? Our first and foremost goal is to continue Fashion Group offering women’s cloth- Well, of course the effects of the global the expansion of stores. Right now we are ing; and Pervomayskaya Zarya, focusing financial turmoil are now very notable also focusing on the regional cities in Russia on real estate development. in Russia. We saw a clear effect during the and I hope we will be able to reach our last quarter of 2008 and I believe the Rus- goal of doubling the number of stores 2008 East Capital Explorer invests EUR between 2008 and 2011. But what is also 10m, corresponding to 16% of the very important this year is to keep moni- shares in MFG. SHAREHOLDERS toring the market. The financial crisis will March 2009 Holding, % Since undoubtedly affect all markets, but at the SMApS Group/ same time, people will need to continue to Kellerman family 36.3 1996 buy clothes. Nevertheless, tougher mar- East Capital Explorer 16.0 2008 kets always mean looking at further optimi- Swedfund 14.8 2002 zation of company structures and business East Capital Holding 11.6 2002 processes. I believe our well-known brands Management and other and our strong financial position will con- For further information on MFG, please private investors 21.3 - tinue to be key in profitable expansion and visit: www.melonfashion.ru/eng/, strengthening our market position. www.zarina.ru and www.befree.ru

37 Corporate Governance Report for East Capital Explorer AB (publ) The Company’s Corporate Governance report has not been reviewed by the Company’s auditors.

Corporate governance at East Capital Explorer is about how we operate and are structured so that we safeguard the interests of all our shareholders in our overall objective of delivering long-term attractive returns.

Framework for corporate governance The Investment Manager and investment structure East Capital Explorer is a public company listed on NASDAQ East Capital Explorer is structured to best meet our objective to OMX Stockholm, Sweden. Corporate governance at East Capi- achieve long-term capital appreciation for our shareholders. East tal Explorer is based on both external and internal frameworks. Capital Explorer is closely linked with the Investment Manager External frameworks comprise the Swedish Companies Act, the East Capital. This close association is governed by the Invest- rules of NASDAQ OMX Nordic Exchange including the Swed- ment Management Agreement (as described further below). ish Code of Corporate Governance, as well as other applicable The governance structure – in which the Investment Manager Swedish and foreign laws and rules. The Company’s internal retains significant control over the investment activities of East framework includes the Articles of Association, the Investment Capital Explorer – is tailor-made to ensure that our Board and Management Agreement with East Capital, the rules and pro- our Audit Committee are granted sufficient independence and cedures of the Board of Directors and the charter of the Audit control tools to fulfil their important monitoring duties as regards Committee, the instructions to the CEO and the policies that we the investment activities of the Investment Manager. have adopted. The structure creates the appropriate conditions for making investments in accordance with what is stated in the Company’s Purpose and nature of the Company Investment Policy and East Capital Explorer’s prospectus to list East Capital Explorer is a public limited liability company invest- on the NASDAQ OMX Exchange in November 2007. The struc- ing in Russia and other countries within the Commonwealth of ture also offers operational competitive advantages by allowing Independent States (CIS), the Balkans, the Baltic States, Cen- for a short decision-making process within the framework of the tral Asia and Central Europe, mainly indirectly through a selec- Investment Policy. It also creates stability and creates a clear tion of East Capital’s current and future funds. In addition, the division of responsibilities between the Investment Manager and Company may also invest directly in unlisted companies in this the Company’s Board. region. The Corporate Governance Report continues on page 42.

GOVERNANCE STRUCTURE

Shareholders

Ramsay Brufer, Alecta Anders Klein, SEB Eddie Dahlberg, Volvo Peter Elam Håkansson Nomination Committee Annual General Meeting Paul Bergqvist

Paul Bergqvist Audit Committee Board of Directors Anders Ek Lars Emilson Alexander Ikonnikov Investment Management Agreement

East Capital Explorer (publ) East Capital

Preference shares/ economic rights

East Capital Explorer East Capital PVC Management AB Peter Elam Håkansson Justas Pipinis Investments AB (Investment Manager) Aivaras Abromavicius Gert Tiivas Jacob Grapengiesser Magnus Lekander Kestutis Sasnauskas Ordinary shares/voting and management control

2.8% 2.9% 6.7% 2.8% 2.6% 10.0%EUR 3.8% 39 m*

East Capital East Capital East Capital East Capital East Capital East Capital East Capital Direct Bering Russia Bering Ukraine Bering Balkan Bering Central Bering New Power Utilities Russian Investment Fund Fund Fund Asia Fund Europe Fund Fund Property Fund

Progress Pegas Retail Capital Chumak Pinar et Populi Nonwovens SA RusHydro Properties MFG

EUR 176m in cash and short-term deposits (of which EUR 136m was available for future investments)*.

38 East Capital Explorer AB Annual Report 2008 Q&A Paul Bergqvist, Chairman of the Board of Directors

region. We do not intend to duplicate this dependent. With our stricter definition of investment competence, neither in the the concept of dependence, we wish to Board nor in the Company’s management underline that we are aware of the close team. relationship between our companies The members of the Board are always and the potential for conflicts of interest invited to participate as guests in the that could be perceived in our corporate meetings of the board of East Capital structure. Explorer Investments AB (see structure In discussions in which there has on page 38). I participated in a majority of been a risk for conflict of interest, we these meetings during 2008. Members of have requested these Board members the Board are always welcome to contrib- to refrain from participating in the discus- ute with their own insights, or to question sions or in that portion of the meeting. the current investment activities. How have you as a Board reasoned in What have you done in 2008 to further the case of share buy backs? What is the Board’s main role in the strengthen Corporate Governance We have appreciated having the tool at corporate structure? within the Company? our disposal and the Board has continu- The main responsibility of the Board of While a lot of the Board’s work during ously discussed share buy-backs since Directors is, of course, to ensure the best 2007 was related to setting up the Com- July 2008 when the global market turbu- interests of all shareholders in East Capi- pany and company structures in prepara- lence intensified. tal Explorer. tion for our initial public offering in Novem- We must always evaluate buying back Although the Board does not decide ber 2007, clearly 2008 has been spent on our own shares in the context of the invest- on the day-to-day investment activities, further refining and strengthening these ment opportunities that our Investment it does have significant responsibility structures and processes. In April 2008, Manager presents to us. The returns and to ensure that the Investment Policy, on we welcomed Anders Ek as an additional implications of share buy backs should which the Investment Manager bases the independent member and a valuable addi- be weighed against the long-term returns investment activities, suits our objectives; tion to the Board. that we expect these investment oppor- to decide on certain more significant Although we continuously evaluate tunities to generate for our shareholders. investment decisions and, not the least, the work of the Board, we also decided This holds especially true in the extreme to monitor the operations of the Invest- to conduct an external evaluation of the market development we saw during the ment Manager and control that the invest- Board in October 2008. The results, autumn, as the value of a strong cash ment activities are in accordance with the which overall were positive, were pre- position became increasingly clear in a Investment Management Agreement and sented to the Nomination Committee in market where financing is difficult, if not the Investment Policy. Also, the independ- December 2008. Although the Board impossible. ent members of the Board safeguard is working well, there is always room for In mid-March 2009, we decided to uti- thatconflicts of interest with East Capital improvement and we have identified addi- lize the authorization to repurchase shares do not emerge during the course of the tional areas on which to focus in 2009. to signal our confidence in our NAV, our investment activities. As a step in ensuring that we have a well- strong financial position and our business working system for internal control, we concept. It is also a way to create immedi- To what extent can you influence or asked PricewaterhouseCoopers, who are ate value for our shareholders. veto an investment decision? independent from our regular auditors, Except for significant investment deci- to conduct an audit of our internal con- sions (see page 17), we cannot veto any trol (read more about Internal Control on To summarize, despite a tough year 2008, decisions made by the Investment Manag- page 48). we remain confident in the opportunities er within the framework of the Investment in our investment region and our ability to Governance Corporate Policy. This corporate structure and the Two of the members are closely relat- create long-term attractive returns for our investment management agreement have ed to the Investment Manager, how do shareholders. been carefully designed to ensure that you handle conflicts of interest? we create the best returns for our share- We have decided to define Justas Pipinis holders in a cost-efficient manner. East and Kestutis Sasnauskas as dependent Capital manages the investment activities, Board members although they are not, allowing us to draw on the existing experi- according to the definitions relating to ence, track-record and network of one of stock exchange rules or Swedish Code the largest independent investors in this of Corporate Governance, technically Paul Bergqvist, Chairman of the Board

East Capital Explorer AB Annual Report 2008 39 Board of Directors

Paul Bergqvist Anders Ek Lars Emilson Chairman of the Board since 2007. In- Board member since 2008. Independent of Board member since 2007. Independent of dependent of the Company, Company the Company, Company management and the Company, Company management and management and the Company’s major the Company’s major shareholders. the Company’s major shareholders. shareholders. Born 1948. Born 1941. Born 1946.

Education Education Education Engineering and business studies at Bachelor’s degree from Stockholm Univer- Bachelor’s degree from Lund University. Linköping University. sity. Work experience Work experience Work experience 2004–2007 CEO Rexam PLC, 2000– 2000–2006 Deputy CEO of Carlsberg A/S, 2004–2008 Executive vice president and 2004 Group Director Rexam Beverage 1995–2000 CEO Pripps-Ringnes AB, head Strategic and International Banking Global can operations, 1999–2000 Mana- 1992–1995 CEO Procordia Beverage AB, at Swedbank, 2000–2004 CEO of Robur, ging Director PLM AB, 1970–1999 Various 1988–1992 Deputy CEO PLM AB. 1994–2000 Chief Investment Officer and positions within PLM AB’s packaging ope- deputy CEO of SPP (currently named Alec- rations in Sweden and the US. Other board assignments ta), 1991–1994 Senior Portfolio Manager Board member and chairman of Sveriges and member of Group Executive Manage- Other board assignments Bryggerier AB, HTC Sweden AB and AB ment Trygg Hansa, 1985–1991 Executive Chairman of Charter PLC and non-executi- Pieno Zvaigzdes. Board member of Telenor vice president and Chief Investment Officer ve director of Filtrona PLC and Luvata OY. ASA, TrygVesta AS, Svenska Lantmän- of the Swedish National Pension Fund. nen Ek För, AB Svenska Returpack, Björk. Shareholding in East Capital Explorer AB Eklund Group AB and JSC Nova Liniya Other board assignments 1,500 shares. (a portfolio company of the East Capital Board member of Catella KAG, Sparinsti- Bering Ukraine Fund). tutens Pensionskassa and CA Fastigheter AB. Shareholding in East Capital Explorer AB 4,300 shares. Shareholding in East Capital Explorer AB 3,000 shares.

40 East Capital Explorer AB Annual Report 2008 Alexander V. Ikonnikov Justas Pipinis Kestutis Sasnauskas Board member since 2007. Independent of Board member since 2007. Not indepen- Board member since 2007. Not indepen- the Company, Company management and dent with regard to affiliation to the Invest- dent with regard to affiliation to the Invest- the Company’s major shareholders. ment Manager. ment Manager. Born 1971. Born 1973. Born 1973.

Education Education Education PhD in Economics, Moscow State Univer- Bachelor of Science from Stockholm Univer- Studies at Vilnius University, Gotland Uni- sity of Oil and Gas. sity, studies at Vilnius University and Gotland versity and the Stockholm School of Econo- University. mics. Work experience Since 2005 Senior partner and co-founder Work experience Work experience of ZAO Board Solutions, a Russian Partner of East Capital since 2004, CEO of Since 1997 Co-founder and partner of East board and executive search services firm, East Capital Holding AB (since 2005) and Capital, CEO of East Capital Private Equity 2001–2004 Co-founder of the Investor CEO of East Capital International AB (since AB since 2005. Previously responsible for Protection Association in Russia. 2007), 2002–2005 CEO of East Capital Baltic Research at Enskilda Securities. Asset Management AB, 2000 joined East Other board assignments Capital and established the Private Equity Other board assignments Non-executive chairman of the Independent fund East Capital Amber Fund, 1997–2000 Board member and partner of Rytu Invest Directors Association. Director and head Siemens Business Services AB. AB. Board member of the Investment Mana- of the audit committee of Baltika Breweries ger, East Capital PCV Management AB, and independent director in the National Other board assignments East Capital Holding AB, East Capital Inter- Depository Center, Russia. Board member and owner of Stingray Hol- national AB and the East Capital Baltic Real ding AB. Also holds a number of board and Estate Fund. Shareholding in East Capital Explorer AB other assignments within East Capital. 2,000 shares. Shareholding in East Capital Explorer AB Shareholding in East Capital Explorer AB 10,000 shares.

14,100 shares. Governance Corporate

East Capital Explorer AB Annual Report 2008 41 Continued Corporate Governance Report (from page 38) diversification and an appropriate risk level. The Investment Poli- cy may be revised from time to time, as the investing environment The investment activities of East Capital Explorer are performed is changing. Any change in the Investment Policy would require by East Capital PCV Management AB (the “Investment Manag- approval of both the Company and the Investment Manager. The er”), a subsidiary within the East Capital group, within the frame- abstract of the Investment Policy of the Company can be seen work set out by the Investment Management Agreement and the under “How we invest” on page 16. Investment Policy. The main function of the Investment Manager is to handle the Share capital and voting rights day-to-day activities related to investments made by East Capital The Company’s share capital as at 31 December 2008 was Explorer and to source and plan the deployment of the remain- EUR 3,627,016 distributed among 36,270,160 ordinary shares. ing capital in accordance with the intended strategy. Another All shares entitle the holder to one vote per share and carry equal important function is to manage the cash of East Capital Explorer rights to the Company’s profits and assets, as well as equal pending investments. In order to perform these duties, the Invest- rights in terms of dividends. ment Manager utilizes other functions and resources within the East Capital organization. Ownership structure The board of the Investment Manager, consisting of East According to the share register held by Euroclear Sweden AB Capital partners Peter Elam Håkansson, Kestutis Sasnausa- (the Swedish Central Securities Depository & Clearing Organi- kas, Jacob Grapengiesser and Aivaras Abromavicius, meets sation, formerly VPC), as at 31 December 2008 East Capital on a frequent basis in order to discuss East Capital Explorer’s Explorer AB had 9,984 shareholders. The shares held by the investment portfolio and plan for the deployment of the remain- twenty largest shareholders and custodians, based on number ing capital of East Capital Explorer. Recommendations for fund of votes, corresponded to approximately 57.5% of voting rights or direct investments are then presented for consideration of the and total share capital. Approximately 35.1% of the share capital board of East Capital Explorer Investments AB, which holds the was owned by foreign natural or legal entities. The majority of investment portfolio. All investment decisions, except for those foreign-owned shares are nominee-registered, which means that decisions that are specifically the responsibility of the Board of the beneficiary ownersare not officially registered. See page 7 the Company, are made by the board of East Capital Explorer for a list of the 20 largest shareholders in East Capital Explorer Investments AB. AB per 31 December 2008. East Capital Explorer Investments AB is owned by the Com- pany and the Investment Manager. The Company holds all finan- Trading and market capitalisation cial rights, while the Investment Manager controls and manages The East Capital Explorer share was listed on the NASDAQ East Capital Explorer Investments AB. Currently, the CEO of the OMX Nordic Exchange in Stockholm on 9 November 2007. Company, Gert Tiivas and the Board member Justas Pipinis are The Company’s market capitalisation was SEK 1,458m per 31 members of the board of East Capital Explorer Investments AB, December 2008. together with Magnus Lekander, General Counsel of East Capi- tal and appointed by the Investment Manager. Functions of the Board of the Company Although the ordinary investment management activities are Investment Management Agreement assigned to the Investment Manager, the Company’s Board will The Investment Management Agreement sets out the terms and always take decisions in conjunction with the following: (i) invest- conditions upon which the investment activities will be performed ments exceeding 15% of the Company’s net asset value, (ii) cer- by the Investment Manager and stipulates the manner in which tain direct investments, and (iii) any investments that might give the duties and responsibilities of the Investment Manager and rise to a conflict of interest between East Capital and the Com- the Company are allocated between them. The Agreement also pany not contemplated by the Investment Policy. assures the Company preferential access to new Semi-public, The Board of the Company continuously monitor the Invest- Private Equity and Real Estate funds launched by East Capital. ment Policy and evaluates whether it continues to be in the best Under certain circumstances, the Company has the right to ter- interest of the shareholders of the Company. The Board expects minate the Investment Management Agreement, for example if the to initiate changes in the Investment Policy, should the Board Investment Manager does not act in accordance with the Invest- find that an update or revision is needed. The Board also moni- ment Policy or the Investment Management Agreement. tors management performance and decides on remuneration of The Company also has the right, at its total discretion and with- the employees of the Company. out any breach of the Agreement, to give notice to terminate the Another function of the Board is to monitor the operations of the Investment Management Agreement with the approval of a major- Investment Manager, for example by ensuring that the investment ity of at least 75% of the votes cast, as well as shares represented activities are carried out in accordance with the Investment Policy at a general meeting of shareholders of the Company. If the Invest- and the Investment Management Agreement. This task is mainly ment Management Agreement is terminated within five years from executed by the Company’s Audit Committee, which consists of listing on the NASDAQ OMX Exchange, the Investment Manager the Company’s Board members who are independent from East shall be reimbursed for the offering costs related to the listing. Capital and from the executive management of the Company. The Board members also have the right to attend the Board meet- Investment Policy ings of East Capital Explorer Investments AB and have access to The Investment Policy prescribes the types of assets, invest- the Board minutes and all supporting material for the investment ment themes and geographical segments in which investments decisions carried out. The Company also has the right to appoint may be made and stipulates certain limitations in order to assure the auditor for East Capital Explorer Investments AB.

42 East Capital Explorer AB Annual Report 2008 THE ANNUAL GENERAL MEETING be remunerated with SEK 50,000 to the chairman of the Audit The Annual General Meeting of Shareholders (AGM) is the Committee and SEK 30,000 to each of the other members. Fur- Company’s highest decision-making body and is where share- thermore, it was resolved that fees to the auditor be paid accord- holders exercise their influence. The AGM must be held within ing to approved invoices on the basis of a specific offer for such six months from the end of the financial year. All shareholders services. who are registered in the register of shareholders and who notify the Company in time are entitled to take part at the meet-  The Meeting approved the Board’s proposal for guidelines for ing. Shareholders may vote for the full number of shares they remuneration to senior management. own and may be accompanied by a maximum of two assistants. Shareholders who cannot attend may be represented by proxy.  The Meeting authorized the Board to acquire the Company’s The AGM considers, among other things, matters relating to own shares in accordance with the proposed resolution. election of the Board, when applicable the appointment of auditors, dividend distribution, adoption of the income statement and  The Meeting approved the proposal for Nomination Committee. balance sheet, and the discharge from liability of the members of the Board and CEO. Shareholders are entitled to have a mat- NOMINATION COMMITEE ter considered at the meeting provided a legitimate request has The role of the Nomination Committee includes evaluating the been submitted to the Company well in advance to publication of Board and its work prior to the AGM, and to prepare and present the notice of the AGM. proposals to the AGM on issues, such as the Chairman of the The AGM is an important channel in communicating with meeting, members of the Board, Chairman of the Board, as well shareholders. Shareholders are encouraged to participate at the as appointment of auditors, when appropriate. The Nomination AGM and all shareholders receive a printed invitation and notice Committee also proposes remuneration to the members of the to attend the meeting. The full Board and Company management Board, remuneration (if any) for Committee work and fees to be attend the meeting and are available to answer questions from paid to the Company’s auditors, as well as proposing the proc- the shareholders. ess for electing a Nomination Committee prior to the next AGM. All shareholders have had the opportunity to submit proposals to Annual General Meeting 2008 the Nomination Committee. The 2008 AGM was held at 4:00 p.m. on 21 April 2008 at China Teatern in Stockholm. The full documents from the 2008 AGM The work of the Nomination Committee 2008 including notice, documents were presented at the AGM. Full The Nomination Committee for the Annual General Meeting of minutes from the meeting are available on 2008 was comprised of five members, three members each www.eastcapitalexplorer.com. appointed by the three largest shareholders in the Company as The 2008 AGM was attended by 250 persons, including at 31 December 2007, East Capital Explorer’s Chairman of the shareholders, all the members of the Board, all employees as Board and the Investment Manager’s Chairman of the Board: well as a number of invited guests. Ramsay Brufer, Alecta (Chairman); Anders Klein, SEB; Robert Vikström, Handelsbanken (approved by the Stena Sphere); Paul The resolutions passed at the meeting included: Bergqvist, as Chairman of the Board of East Capital Explorer and  The Meeting approved the Board’s proposal that no dividends Peter Elam Håkansson, as Chairman of the Board of the Invest- be distributed in accordance with dividend policy of the Com- ment Manager. pany, and that the profit/loss be carried forward. East Capital Explorer’s Head of Communications/IR, Louise Hedberg, was co-opted to attend the Nomination Committee’s  The Meeting granted the members of the Board and the CEO meetings as secretary. discharge from liability for the reporting period. No fees were paid to the members of the Nomination Com- mittee for their work. The Nomination Committee’s report, which  The Meeting resolved to amend the articles of association so describes the work of the Committee in detail, is available on that the Board of Directors shall consist of 3-6 members with no www.eastcapitalexplorer.com. deputy members, and that an editorial clarification be included in the same section of the articles. The work of the Nomination Committee 2009 In accordance with a resolution by the 2008 AGM, the Nomi-  All current members of the Board were re-elected: Paul nation Committee for the 2009 AGM comprises five members; Bergqvist, Lars Emilson, Alexander Ikonnikov, Kestutis Sasnaus- three members appointed by each of the three largest share- kas and Justas Pipinis. The Meeting also resolved to elect Anders holders in the Company as at 30 September 2008, East Capital

Ek as a new member of the Board. The meeting re-elected Paul Explorer’s Chairman of the Board and the Investment Manager’s Governance Corporate Bergqvist as Chairman of the Board. Chairman of the Board:

 The Meeting resolved that the compensation to the Board of  Ramsay Brufer, Alecta (Chairman) Directors for 2008 remain unchanged as SEK 700,000 to the  Anders Klein, SEB Chairman of the Board of Directors and SEK 300,000 to each  Eddie Dahlberg, Volvo-related Foundations member of the Board of Directors that is not employed in the  Paul Bergqvist, as Chairman of the Board of East Capital East Capital group. Members of the Board that are employed Explorer in the East Capital group have waived remuneration. The meet-  Peter Elam Håkansson, as Chairman of the board of the ing resolved that compensation for work in the Audit Committee Investment Manager

East Capital Explorer AB Annual Report 2008 43 The composition of the Nomination Committee was published Regarding the Board members’ independence in relation to through a press release and posted on the website on 27 Octo- major shareholders, it can be noted that as of 31 December ber 2008. East Capital Explorer’s Head of Communications/IR, 2008 there are no major shareholders of the Company as the Louise Hedberg, was co-opted to the Nomination Committee’s term is defined in the stock exchange rules and the Swedish meetings as secretary. Code of Corporate Governance. No fees were paid to the members of the Nomination Commit- For more information about each Board member please see tee for their work. pages 40–41. Shareholders have been invited to submit their own proposals to the Nomination Committee. The Nomination Committee’s pro- The Board and its work posals prior to the 2009 AGM are specified in the notice of the The work of the Board is governed by the rules of proce- meeting and are also available on www.eastcapitalexplorer.com. dure adopted by the Board. The Chairman of the Board, Paul Bergqvist, directs the work conducted by the Board and main- Annual General Meeting 2009 tains continuous contact with the CEO and the Company’s The 2009 shareholders’ meeting will be held at 4:00 p.m. on 27 other management functions, in order to monitor the Company’s April 2009 at Konserthuset (Grünewaldsalen) in Stockholm. For operations. The Board has also prepared and approved a Char- more information please visit: www.eastcapitalexplorer.com. ter for the Audit Committee, a work instruction for the CEO as well as a number of policy documents. Given the special nature and aims of the Company, the work BOARD OF DIRECTORS of the Board mainly involves the control and monitoring of investment activities handled by East Capital Explorer Investments AB Composition of the Board and the Investment Manager. According to the articles of association of the Company, the Chairman of the Investment Manager, Peter Elam Håkansson, Board shall consist of three (3) to six (6) members without the Company’s CEO, Gert Tiivas, CFO Pia Tell Svensson and deputies. Further, the Investment Manager always has the right Head of Communications/IR, Louise Hedberg also participate to appoint a Board member. Board members are elected for a in the meetings to report on their respective areas. The Board one-year term. The 2008 AGM re-elected the following Board calendar and Board meetings are coordinated by Head of Com- members to serve until the 2009 shareholders’ meeting: Paul munications/IR, Louise Hedberg. Magnus Lekander, General Bergqvist (Chairman), Alexander V. Ikonnikov, Lars Emilson, Jus- Counsel at East Capital, is the Board’s secretary and keeps the tas Pipinis and Kestutis Sasnauskas and also elected Anders Ek minutes. Other representatives from the Investment Manager as a new Board member. are invited, from time to time, to participate in Board meetings to make presentations on particular investment proposals or other Independence of the Board matters. Under applicable regulations, Paul Bergqvist, Anders Ek, Lars The Board holds at least seven ordinary Board meetings per Emilson and Alexander V. Ikonnikov are regarded as independ- year. Additional meetings may be held to discuss and decide on ent in relation to the Company. The independent members of the investment proposals. One meeting per year is typically held in Board have been proposed based on their significant experience conjunction with an East Capital Investor Summit. The Investor from international management and business, specifically East- Summits are investor conferences which East Capital organ- ern Europe and Russia, as well as their board work in various ises in different parts of our investment region. Participation in listed companies. an East Capital summit provides the members of the Board with Justas Pipinis and Kestutis Sasnauskas are not defined as new insights into the investment region and an update on current independent in relation to the Company as they are affiliated to financial and political events, and always include company visits. East Capital that, due to the Investment Management Agreement and other relationships, must be regarded as having extensive business ties with the Company and affiliated enterprises.

The composition of the Board Shareholdings per Name Position Citizenship Dependence 31 Dec 2008 Elected Audit Committee Paul Bergqvist Chairman Swedish No 4,300 shares 2007 Yes Anders Ek Board member Swedish No 3,000 shares 2008 Yes Lars Emilson Board member Swedish No 1,500 shares 2007 Yes Alexander Ikonnikov Board member Russian No 2,000 shares 2007 Yes Justas Pipinis Board member Swedish Yes 14,100 shares 2007 No Kestutis Sasnauskas Board member Lithuanian Yes 10,000 shares 2007 No

44 East Capital Explorer AB Annual Report 2008 Board meetings and main discussions Board was carried out through an external consultant with broad During 2008, a total of 13 Board meetings were held. Examples experience of board evaluations. The evaluation included both a of the main discussions held during the meetings were: comprehensive questionnaire comprising a range of questions about the work of the Board, as well as individual interviews with Meeting Main discussion each member. The results were also evaluated against an aver- 1/2008 Approval of the year-end report 2007 age benchmark of board evaluation processes completed by the 2/2008 Approval of the Annual Report 2007 consultant in other listed companies. 3/2008 Approval of the Board’s proposals to the Annual The results of the evaluation in 2008 were, overall, positive General Meeting 2008 and remuneration to Exe- and above the applied benchmark. As a result of this evaluation, cutive Management the Board has also identified certain areas in which the work pro- 4/2008 Discussion on investment plan and investor acti- cedures of the Board will be further improved during 2009. vities 5/2008 Approval of the Rules of procedure of the Board AUDIT COMMITEE of Directors, election of Audit Committee The Audit Committee is appointed annually by the Board, pri- 6/2008 Approval of the Interim Report 1 January– marily to serve in an advisory function to the Board with respect 31 March 2008. Participation in East Capital to financial reporting, valuation and auditing matters. Given East Investor Summit in Vilnius, Lithuania Capital Explorer’s investment structure, the Audit Committee has 7/2008 Discussion on investment opportunities and extended responsibilities, compared to many other companies, share buy-backs and also monitors the economic relationship with East Capital 8/2008 Approval of the Interim Report 1 January– Explorer Investments and its investments, as well as the Com- 30 June 2008 pany’s cooperation and contractual relationship with the Invest- 9/2008 Telephone meeting to discuss current market ment Manager. The Charter of the Audit Committee governs the development work of the Committee. The work of the Committee is reported to 10/2008 Discussion on investment proposal the Board on a regular basis. 11/2008 Telephone meeting to approve investment pro- The Audit Committee shall consist of at least three members posal appointed by the Board from among the independent members 12/2008 Approval of the Interim Report 1 January– of the Board. The Audit Committee comprises Paul Bergqvist 30 September 2008. Presentation of the results (Chairman), Anders Ek, Alexander V. Ikonnikov and Lars Emil- of the Board evaluation son. 13/2008 Review of budget 2008 and approval of budget The Audit Committee may invite, as it sees fit, representatives 2009. Approval of Code of Conduct and Princip- from the Company, East Capital Explorer Investments or the les for Responsible Investment Investment Manager as non-member attendees and may appoint appropriate legal counsel, audit expertise and independent valuation expertise for consultation in the performance of its duties. Board meeting attendance Carl Lindgren, the Company’s authorized auditor representing Board KPMG, participates in all meetings at which financial reports are meetings approved, in order to present his findings to the Audit Committee Name Position (13 during 2008) prior to approval of these reports in the Board. Paul Bergqvist Chairman 13/13 The Audit Committee regularly reports its conclusions and Anders Ek Board member 8/131 decisions in conjunction with the meetings of the Board. Lars Emilson Board member 13/13 Alexander Ikonnikov Board member 13/13 Audit Committee meetings and main discussions Justas Pipinis Board member 11/132 During 2008, a total of 5 Audit Committee meetings were held. Examples of the main discussions held during the meetings Kestutis Sasnauskas Board member 12/132 were: 1 Anders Ek participated in all but one meeting after being elected. 2 Justas Pipinis was absent from the Board meeting 12/2008 and Justas Pipi- Meeting Main discussion nis and Kestutis Sasnauskas refrained from participating in the Board meeting 01/2008 Discussion on the year-end report 2007 and investment 11/2008 due to risk of conflict of interest. policy 02/2008 Discussion on the Annual Report 2007 03/2008 Discussion on Interim Report 1 January-31 March 2008 In addition, Gert Tiivas, in the capacity of Board member of East 04/2008 Review of compliance with Investment Management Capital Explorer Investments AB, participated at 12 meetings for Agreement, investment policy, cash management policy, Governance Corporate East Capital Explorer Investments AB (of which 1 were per cap- service agreement and information policy. Discussion on sulam) during 2008. Paul Bergqvist was also present at 8 meet- Interim Report 1 January - 30 June 2008 ings, as a non-member attendee. 05/2008 Discussion on Interim Report 1 January-30 September 2008 Evaluation of the Board The work of the Board is continuously evaluated. The evaluation is used to develop the work and processes in the Board, and as a basis for the Nomination Committee’s evaluation of the composition of the Board. In October 2008, an evaluation of the

East Capital Explorer AB Annual Report 2008 45 Audit Committee meeting attendance The CEO can receive a maximum variable salary corresponding to 50% of his fixed salary. The CEO has an individual premium- Audit Committee meetings based pension plan, pursuant to which the Company pays premi- Name Position (5 during 2008) ums corresponding to 10% of his fixed salary up to 10 Swedish Paul Bergqvist Chairman 5/5 income base amounts and premiums corresponding to 20% of Anders Ek Board member 3/51 his fixed salary on the portion of his fixed salary exceeding 10 Lars Emilson Board member 3/52 Swedish income base amounts. Alexander Ikonnikov Board member 4/53 1 Anders Ek participated in all but one meeting after being elected Other management functions 2 Lars Emilson was absent from the Audit Committee meetings 03/08 and 04/08 Other management functions include the CFO and Head of 3 Alexander Ikonnikov was absent from the Audit Committee meeting 03/08 Communications/IR. The CFO is responsible for the Company’s financial statements, internal control and the cash management function. The Head of Communications/IR is responsible for Directors’ fees external and internal communication, as well as investor relations On 21 April 2008, the Annual General Meeting resolved that the and similar matters. Chairman of the Board will receive annual compensation of SEK 700,000 for the period until the 2008 AGM. Each member of the Share-related incentive programme Board, other than the Chairman, will receive annual compensa- East Capital Explorer does not have a share-related incentive tion of SEK 300,000 for the same period. Board members Jus- programme. tas Pipinis and Kestutis Sasnauskas waived their directors’ fees. Remuneration for work in the Audit Committee amounts to SEK 50,000 for the Chairman of the Audit Committee and SEK AUDIT 30,000 per year to other members of that Committee. External auditors Remuneration Committee The extraordinary general shareholders’ meeting on 25 May 2007 In light of the Company’s limited number of employees, the Board elected registered auditing company KPMG as auditors for East has concluded that no Remuneration Committee should be Capital Explorer AB for a four-year term until the 2011 AGM, established. The duties that would have been assigned to such with authorised auditor Carl Lindgren as auditor in charge. Committee are instead performed by the Board as a whole. Compensation to auditors CEO The Company’s auditors received compensation for audits and The CEO, Gert Tiivas, is responsible for the day-to-day admin- other requisite reviews, as well as for advisory services occa- istration of East Capital Explorer in line with the instructions sioned by observations made in the course of such reviews. from the Board, other guidelines and policies. Together with the During financial year 2008 the total compensation paid to the Chairman of the Board, the CEO prepares the agenda for Board auditors was SEK 863,000 (corresponding to EUR 83,000), all meetings and prepares the requisite materials and information relating to auditing services. to allow for decision-making at Board meetings. In addition, the CEO ensures that the Board continually receives information Communication with the Company’s auditors on East Capital Explorer’s development and market information The Audit Committee maintains regular contact with the audi- from the Investment Manager in order to be able to make valid tors. In addition, the auditors participate in the Audit Commit- decisions. tee meetings at which the interim reports and full year report are The Board has approved the CEO’s significant assignments addressed. The auditors report at that time on their observations outside the Company and regards these assignments as com- from the audit and assessment of the Company’s internal con- patible with the position of CEO of East Capital Explorer. For trols. more information about the CEO, see next page.

Remuneration to the Chief Executive Officer Auditors: KPMG AB Auditor in charge: Carl Lindgren

Pension and Born 1958 SEK Fixed salary Variable salary insurance cost Authorized public accountant at KPMG 2008 1,009,200 0 205,500 AB. Chairman of the Board of KPMG AB. 20091 1,024,800 Discretionary 254,400 Auditor in charge for East Capital Explo- rer since 2007. 1 Based on the CEO’s salary in January 2009. Other auditing assignments: Intrum Justi- During 2008 a variable salary of SEK 160,000 has been paid tia AB, Investor AB, Modern Times Group to the CEO. This variable remuneration is related to the financial MTG AB and Nordea. Carl Lindgren is also auditor in charge for the year of 2007. East Capital Group. Remuneration to the CEO consists of fixed salary, variable salary and pension and insurance benefits. The Board determi- Shareholding in East Capital Explorer AB: 0 shares nes, at its own discretion, according to certain key performance indicators, whether the CEO should be paid any variable salary.

46 East Capital Explorer AB Annual Report 2008 Management

CEO Other management functions

Gert Tiivas Louise Hedberg Pia Tell Svensson CEO since September 2007 Head of Communications/IR since August CFO since July 2007 Born 1973 2007 Born 1970 Born 1974

Education Education Education Bachelor of Arts from Bentley College and a Master of Science in Economics and Busi- Bachelor of Economics and Business Master of International Affairs from George ness from the Stockholm School of Eco- Administration from the School of Econom- Washington University. nomics. ics at the University of Gothenburg.

Work experience Work experience Work experience 2006–2007 Head of East Capital’s Tallinn 2002–2007 Head of Investor Relations CFO of East Capital since 2005 and office, 2004–2006 President of Growth Dometic Holding AB, 1998–2002 Commu- retained as CFO in East Capital Explorer Markets for OMX Group, 1998 – 2004 CEO nications consultant JKL Group AB. since July 2007 pursuant to the Service of the Tallinn Stock Exchange. Agreement with East Capital, 2005 Region- Shareholding in East Capital Explorer AB al Finance Manager, Nordics VERITAS Other board assignments 2,700 shares. Software AB, 1993–2005 Various financial Board member in East Capital Baltic Prop- positions within the IT sector. erty Fund AB and East Capital Real Estate AS. Board member in East Capital Power Shareholding in East Capital Explorer AB Utilities Fund AB, East Capital Explorer 2,000 shares. Investments AB and AS Baltika.

Shareholding in East Capital Explorer AB 9,000 shares. Corporate Governance Corporate

East Capital Explorer AB Annual Report 2008 47 Internal control

This description of the internal control is presented by the Board of East Capital Explorer in accordance with the Swedish Companies Act and the Swedish Code of Corporate Govern- ance and describes the manner in which internal control regarding the financial reporting is organized.

The internal control within East Capital Explorer is designed in Control activities order to manage the risks within the financial reporting proces- East Capital Explorer primarily undertakes monitoring and con- ses, but also to ensure an efficient and reliable accounting of trols to ensure that the investment activities are executed in buy and sell transactions of securities, and of the valuation of the accordance with the investment policy and the Investment Man- securities holdings, and that the information is efficiently and cor- agement Agreement established with the Investment Manager. rectly communicated to the market. East Capital Explorer has, In addition to the Company’s accounting and reporting manu- during 2008, established an internal audit function. Öhrlings al, and the information policy, the Company’s Board has the right PricewaterhouseCoopers is responsible for the execution of the to attend East Capital Explorer Investments AB’s Board meet- internal audit. ings and to review the minutes of the Board meetings. Internal control is usually described according to the frame- Furthermore, the Company may request that the Investment work developed by the Committee of Sponsoring Organizations Manager make presentations to the Company’s Board regarding of the Treadway Commission (COSO). According to this com- the investment portfolio in order to assist the Board to monitor mittee’s definition, internal control is comprised of the follow- the Investment Manager’s and East Capital Explorer Investments ing components: control environment, risk assessment, control AB’s compliance with the Investment Management Agreement. activities, information and communication and monitoring. Furthermore, currently both the Company’s CEO, Gert Tiivas, and the East Capital Explorer Board member, Justas Pipinis, are Control environment board members of East Capital Explorer Investments AB. The By control environment is meant the overall structure of the Com- majority of this monitoring work is performed by the Audit Com- pany ensuring sound internal control as regards financial report- mittee and the executive management of the Company. ing. The Board is ultimately responsible for the financial report- East Capital Explorer works continuously with the elimination ing. Reflecting the specific nature of the Company’s operations, and reduction of significant risks impacting the internal con- one important function of the Board is to monitor the investment trol regarding financial reporting. Examples of control activities activities carried out by East Capital Explorer Investments AB implemented in order to handle these risks are: and East Capital PCV Management AB. The Company’s accounting and reporting manual as well as  Active participation in the work of the Board of East Capital its Information Policy, which are also appendices to the Invest- Explorer Investments AB. ment Management Agreement with the Investment Manager, contain detailed provisions regarding how financial and other  On-going discussions and contacts with key individuals with- information in relation to East Capital Explorer Investment’s port- in East Capital. folio shall be treated and provided to the Company and stipulate, amongst other things, that the Company shall fulfill its obliga-  On-going review of documentation for decisions and formalia tions pursuant to applicable law, regulations and stock exchange in conjunction with the investment activities. regulations.  On-going review of internal methods and processes in order Risk assessment to ensure correct reporting of East Capital Explorer’s indicative The company management is responsible for the internal control net asset value and portfolio. required in order to manage the significant risks in the ongoing operations. Here is included the identification and assessment of Information and communication possible risks in the portfolio reporting and the financial report- East Capital Explorer has produced governance documents ing from East Capital Explorer Investments AB and the Invest- aimed at ensuring the quality of the internal control regarding ment Manager, including the reliability of the monthly reporting financial reporting. of indicative net asset value of East Capital Explorer. The com- The Information Policy describes the manner in which East pany management is responsible for designing a control system Capital is to communicate financial and other information to the to prevent and identify, assess and mitigate these risks. The market in accordance with the regulations of the stock market. company management reports regularly to the Board regarding Furthermore, there are policies and instructions for, among other these issues. things, investing activities, short-term investments, including deposits and cash, accounting and financial reporting.

48 East Capital Explorer AB Annual Report 2008 Monitoring The monitoring of the internal control of financial reporting is undertaken by the Board, the Audit Committee, CEO and management. The monitoring of the efficiency of the internal control is performed at each Board meeting during which the financial position of the Company is reviewed. The Audit Committee meets regularly and addresses and discusses accounting issues, the forms of monthly reporting, the internal audit and reviews the investment decisions made by East Capital Explorer Investments. The CEO and management monitor, on an ongoing basis, compliance with the policies, instructions and the Investment Manage- ment Agreement in order to ensure adherence to these. The internal audit is an auditing function independent of the board and has as its purpose to audit, on an ongoing basis, the operations within the Company. The work of the internal audit in 2008 was based on a risk analysis performed by the management of East Capital Explorer AB and representatives from Inter- nal Audit. During the year internal audit has audited a number of areas identified in the risk analysis. Those areas included in the audit plan for 2008 included those processes relating to investing activities, short-term investments, including deposits and cash, asset valuation, financial and other reporting to the market, and conflict of interest issues. The results of the audit are reported to the Audit Committee. Corporate Governance Corporate

The Bayterek Tower in Astana, Kazakhstan is a famous landmark and symbolizes the transfer of the capital from Alma-Aty to Astana in 1997. The 97 meter tall tower represents a mythological tree of life with a golden egg containing the secrets of human desires and happiness.

East Capital Explorer AB Annual Report 2008 49 Managing our risks

East Capital Explorer’s business involves different types of risk. In addition to the risks that we take in our investments with the intent to create value for our shareholders, there are also a number of business risks and financial risks with possible impact on our business. Risk management deals with risks and opportunities affecting value creation or value preserva- tion. Managing risks is an important part of achieving our objectives as an investment company. Upon launching East Capital Explorer in November 2007, we made significant efforts in designing our structure to ensure our ability to do so. Our main business risks and how we manage them in our day-to-day business are outlined below. Our financial risks are presented in Note 16 on page 76.

POLITICAL RISKS by, also more volatile and more vulnerable to external shocks, Political systems are generally less stable in emerging markets as experienced during the autumn 2008 and the first quarter than in developed economies and the legal systems are often of 2009. This is common to all the countries in our investment less mature. This may imply certain specific investment and own- region and not just associated with exposure to one specific ership risks. For example, amendments to the regulatory frame- company or investment in a fund. work for the financial markets including changes on the protec- Country risks also include instability in financial, legal and poli- tion of minority shareholders’ rights, could adversely impact our tical systems and other country specific aspects, such as quality business. Political risks also include the capacity of a country’s of corporate governance, reliability of settlement and clearing leadership to govern, and its ability to decide on and implement systems, lack of appropriate custody services, level of financial reforms which are well-needed for the transition phase the whole reporting and general availability to other reliable corporate infor- region is going through. In the aftermath of the credit crisis all the mation. If any of these country specific aspects should not deve- countries of our investment universe face various challenges and lop as anticipated in any of the countries in our investment region, not all of them have the same readiness to tackle those. we are at risk of being less successful in our investments.

Managing these risks: Managing these risks:  Political risks vary between countries and sectors, and our  Our access to East Capital’s investment teams, with local access to the local presence, experience, know-how and to the presence and both personal and professional experience of liv- network our Investment Manager East Capital has established ing and working in our investment region, provides East Capi- during more than 10 years of operations, implies that we are able tal Explorer with the capability to analyze, integrate and, to the to integrate a well-grounded analysis of the political risks in the extent possible, mitigate or even avoid certain country specific investment decisions and in the management of the portfolio in a risks. Through the knowledge and experience of the advisory long-term perspective. committees associated with East Capital, the investment team has access to sophisticated analysis and expertise in order to  Our access to East Capital’s network in the region, and their better evaluate any country specific political or macro-economic relations with other foreign investors that are active in these risk. countries, is also valuable when jointly applied measures are made in order to make regulatory progress on issues which are  Our investment policy assumes that the vast majority of the important to us as foreign investors. For example, promotion of assets are invested in East Capital funds, which in turn are diver- good corporate governance, independent regulatory regimes sified into 5 – 100+ holdings, depending on the strategy of the and authorities and anti-corruption measures, to limit the political fund. No single fund investment made may exceed 40 percent interventions and assure the integrity in local business life. of East Capital Explorer’s total net asset value at the time of the investment, and no direct investment made by East Capital  East Capital avoids association with any political group and Explorer may exceed 15 percent of the total net asset value at strives to keep neutral in its investment activities, thus reducing the time of the investment. This effectively diversifies our portfo- the likelihood of being a direct target of political intervention. lio across both sectors and the different geographic areas within our investment region. COUNTRY RISKS Investing in emerging markets may generally mean a higher level  Both East Capital Explorer and East Capital each have a of risk in the business environment than when investing in more Code of Conduct which clearly stipulate that corruption will not developed countries. These markets are less mature and, there- be tolerated in any manner or form. East Capital has, through its

50 East Capital Explorer AB Annual Report 2008 long term presence in the region, established a network of con- through investments in East Capital’s semi-public equity funds tacts and relationships which contribute to stay clear of coun- and private equity funds, effectively diversifying our portfolio terparties, projects and situations in which corruption and other across approximately 400 companies in our investment region inappropriate business practices might be known. on 31 December 2008, and thereby limiting the specific risk of any one company. INVESTMENT STRATEGY RISK Our business plan and objectives are dependent on the avail-  Our Investment Policy ensures that the focus is kept on the ability of interesting investments. This includes timing the market agreed countries and sectors, and that the mode for gaining to enter, and exit, at the most beneficial moment. There is a risk investment exposure is in agreement with our view on risk-return. that we are neither efficient in choosing or developing our invest- It is the responsibility of our Board to review and ensure that our ments, nor successful in timing the market conditions at the most Investment Policy suits our objectives. profitable moment.  Our access to the experienced investment teams at East Cap- Managing this risk: ital provides us with a structure to make well-grounded invest-  Our access to the experienced investment teams at East Cap- ment decisions and to effectively follow-up on the companies to ital provides us with a structure to make well-grounded invest- which we have investment exposure. ment decisions and to effectively follow-up on the companies to which we have investment exposure.  When managing the unlisted portfolio companies to which we are exposed through our fund investments, our Investment Man-  The members of our Board have been selected on the basis of ager aligns interest with both the local management, as well as their respective experience of doing business in our investment with other major shareholders, in order to set a common agenda region and their own merits relevant to the Board composition, for the investment period and preferred exit strategy. One impor- as a whole. This provides the Board with the right background to tant aspect in managing investments includes introducing and evaluate the investment activities of the Investment Manager, and following up on improvements in corporate governance issues also contributes to the continuous discussions with the Invest- which we, as investors, firmly believe help to strengthen the ment Manager on the investment opportunities in our region. operations of any company.

 The independent members of the Board also continuously OPERATIONAL RISK review the Investment Policy to asses whether revisions may Well-structured and relevant internal administrative processes be justified as the investment environment changes. Any possi- and systems are important in any corporate structure to minimise ble changes will be addressed by the Board, together with the the operational risks related to the business operations. Lack of Investment Manager in order to make the investment strategy internal control, inadequate administrative systems and process- most suitable over time. es, infrastructure or technology failures, risk of theft or fraud or risks that East Capital Explorer’s or East Capital’s reputation in  The Investment Manager continuously reports on the latest the marketplace is damaged could lead to unexpected economic developments in the investment region and follows up on the losses or loss in confidence in us. As almost all operative func- current pipeline of investment proposals as a standing item at all tions are in-sourced from East Capital, East Capital Explorer is Board meetings. This provides the Board with updated informa- highly dependent on the successful ongoing operations of East tion on which to base its evaluation of the Investment Manager’s Capital. activities and the suitability of the Investment Policy. Managing this risk: COMPANY SPECIFIC RISK  Operational risks are managed on the basis of our structure Our success depends on our ability to provide our sharehold- for internal control, including adequate routines and instructions, ers with a portfolio of interesting and profitable investments. This a clearly defined division of responsibility, IT-based support and also includes being able to manage our investments effectively reporting systems with relevant authorizations, our internal struc- Governance Corporate during our ownership and to create progress on investor friendly ture for information and reporting, as well as both information issues, such as corporate governance. There is a risk that certain and physical security. companies, from time to time, may be adversely affected by internal and external factors and that they will, thereby, have a nega-  Through East Capital, we also have access to risk manage- tive impact on the value of our investments. ment functions adapted to the investment activities and operations of East Capital, which should also reduce the overall opera- Managing this risk: tive risks related to our business.  Diversification is key to managing company specific risk. Our preferred route to gaining investment exposure is, therefore,  Through a service agreement with East Capital we are able to

East Capital Explorer AB Annual Report 2008 51 cost-efficiently source general office and administrative resourc- Policy and monitors the Investment Manager’s compliance with es from East Capital including office premises, reception, HR, the Investment Policy and our Investment Management Agree- IT and legal services. The costs for the service agreement are ment. In practice, this means reviewing all investment proposals continuously evaluated by the Board and are estimated to be and decisions made on East Capital Explorer’s behalf. significantly more cost-efficient than if we were to source these services on our own.  Our independent Board members have important duties in this regard in order to safeguard the interests of our sharehold-  As a part of our ongoing monitoring of the Investment Man- ers, as they resolve conflicts of interest (which are not already ager, when needed, we also engage external advisors to audit contemplated by the Investment Policy), for example, in relation certain functions or processes of East Capital, in order to identify to direct investments in which there is no other East Capital enti- and address any risks related to the operative functions that are ty involved in the investment, or when assets are acquired from administrated by East Capital. any other East Capital fund.

RELATED PARTY RISK  In order to ensure full transparency in the day-to-day invest- With East Capital as our Investment Manager, we have ensured ment activities and to enable the Audit Committee to fulfil these our shareholders access to one of the most capable and mer- responsibilities, all members of the Board also receive materials, ited investment teams active in the region. We rely on the team’s investment proposals and invitations to participate in the meet- capacity to manage our investment activities rather than having ings and discussions of East Capital Explorer Investments AB. our own in-house investment teams. This could imply a risk that Our CEO is also a member of the Board of East Capital Explorer the investments undertaken are not in accordance with the best Investments AB. interest of the Company, or could imply a breach of limits and authority, unfair valuations or unauthorised risk exposure.

Managing this risk:  Considering our close relationship with East Capital, we have paid specific attention to ensuring the best interests of our shareholders. This includes a detailed Investment Management Agree- Example of East Capital Explorer’s decision making ment between our two companies that effectively stipulates the process in a direct investment manner in which the investment activities should be undertaken, and assures that conflicts of interest between ourselves and In October 2008, East Capital Explorer was offered the East Capital can be appropriately handled. opportunity to join East Capital as an investor in the Russian fashion retailer, OAO Melon Fashion Group, where East  In particular, in order to avoid any concerns related to the mer- Capital has been an investor since 2002. This transaction its of a direct investment presented by East Capital where no can be used to describe East Capital Explorer’s decision other East Capital fund or other co-investors simultaneously par- making process when offered direct investments by our ticipate, such direct investment is within the exclusive decision Investment Manager. making powers of our Board. This way, the investment can be The transaction was structured in two steps where East evaluated on its own merits by the members of the Board who Capital Explorer first acquired 2,421 shares from 26 direct are independent from East Capital. investors in MFG. The shares were sold to East Capital Explorer through MFG Intressenter AB, a wholly owned  Similarily, investments may not be made in any new funds subsidiary of East Capital Holding AB which is the company launched by East Capital with terms which materially adversely that also holds East Capital’s own shares in MFG. Follow- deviate from the terms of any prior fund managed by East Capi- ing the acquisition of these shares, East Capital Explorer tal without the consent of our Board. This prevents East Capital acquired an additional 2,575 new shares in the share issue from introducing new terms which could be unfavourable to us. that was completed in November 2008. Our total investment in MFG amounted to EUR 10m, comprising 4,996  Managing this risk also means avoiding investment situations shares. in which the fairness or suitability of a transaction, or its valua- The shares were valued at market price based on com- tion, could be questioned. For this reason, our Investment Policy pany information and market comparables. To verify the clearly stipulates that we shall only invest in East Capital’s new valuation, the Board of East Capital Explorer asked for an private equity funds, to avoid valuation issues or a discussion independent fairness opinion from PricewaterhouseCoop- concerning the terms or timing at which we invest. In existing ers. In the discussion and decision to invest that followed semi-public equity funds, we only invest in newly issued shares, in East Capital Explorer’s Board, Justas Pipinis and Kes- providing new capital for new investments in the funds, thereby tutis Sasnauskas, both partners in East Capital, refrained avoiding a situation in which East Capital Explorer could be seen from participating. Following the share issue, East Capital as buyer of last resort. Explorer and the East Capital Group hold respectively 16% and 11.6% of the shares in MFG. East Capital Explorer and  The Audit Committee of East Capital Explorer, comprising all East Capital will together hold 2 out of 9 seats on MFG’s four independent Board members, has extended responsibilities board, following the AGM in MFG in May 2009. compared to many other companies’ audit committees. The Audit Committee is responsible for initiating review of our Investment

52 East Capital Explorer AB Annual Report 2008 Corporate responsibility

Investments are an important contributor to growth and innovation in Eastern Europe but with investments come also influence and responsibility. We believe that a responsible and respectful approach to doing business is vital to the long-term success of any company.

Our view on corporate responsibility With corporate governance policies and We believe that corporate responsibility financial reporting in place, we hope that (CR) means acknowledging a company’s more and more companies in Eastern obligations when it comes to environmen- Europe, also in a time of sharp economic tal, social and governance issues. For slowdown, will recognize the importance East Capital Explorer, this is related to our of environmental and social issues by direct actions as a company, but also to allotting time and resources to address our responsibility when it comes to the these areas in their operations. As a sig- cooperation with our Investment Manager nificant investor, we trust that our engage- and our portfolio companies in Eastern ment in these issues can contribute to this Europe. development. As an investment company, our objective is to achieve long-term capital appre- MANAGING CR ciation for our shareholders by investing East Capital Explorer is a relatively new in parts of the Eastern European mar- company and our first priority in terms of kets that are hard-to-reach. While doing CR has been to define our guidelines and this, we strive to maintain a respectful principles. This process has resulted in The hydrogeneration company RusHydro (a portfolio approach and we expect our Investment two important documents defining how company in the East Capital Power Utilities Fund) produces clean, renewable energy. Read more about Manager to do the same. East Capital Explorer addresses environ- RusHydro on page 33. An important part of CR is related to a mental, social and governance issues. company’s environmental impact. Whilst During 2008, our Investment Manager the largest portion of our overall environ- also launched two similar policies that nities related to environmental, social and mental impact is indirect – resulting pri- mirror our policies. governance challenges. marily from our investment activities – we In late 2008, our Code of Business acknowledge that our day-to-day busi- Code of Business Conduct Conduct and Principles of Responsible ness operations also have a direct, but Our Code of Business Conduct serves Investment were approved by the Board limited, impact on the environment. We as the ultimate common denominator as of Directors. The next step in our CR strive to limit this impact to enable a more regards principles of conduct and guid- process will be to, in cooperation with our efficient use of resources within our oper- ance for East Capital Explorer’s employ- Investment Manager, structure priorities, ations and to aim to reduce consumption ees and board members. The Code’s core the definition of targets and further devel- of materials and promote recycling and principle is respect, which in our view is op our plans to achieve and report on our the greater use of recycled materials. inseparable from responsibility and high stated goals. ethical standards. The Code agrees with CR in our investment region the ten internationally accepted principles Eastern Europe is still lagging behind of the United Nations Global Compact in Western markets in corporate responsi- the areas of human rights, labour, environ- bility issues, but the signs that we see are ment and anti-corruption. encouraging. The countries in our investment region have developed quickly and Principles of Responsible Investment Governance Corporate during recent years we have seen gen- In the Principles of Responsible Invest- eral progress in, for example, the area of ment we state our specific expectations corporate governance. More and more towards our Investment Manager. We companies are run on the basis of clear expect our Investment Manager to base The policies can be found on our website, governance principles, with a focus on investment decisions on an in-depth anal- www.eastcapitalexplorer.com. independent boards and improved finan- ysis of factors that may impact the future cial reporting. This has been an important return of sectors and individual stocks. For more information on the principles of and obvious step for many companies in The analysis should include the financial the United Nations Global Compact: their efforts to attract investors. outlook, as well as the risks and opportu- www.unglobalcompact.org

East Capital Explorer AB Annual Report 2008 53 Fees

East Capital Explorer’s investment structure has been designed to ensure cost-efficient management of the Company’s investment portfolio for attractive long-term returns for the shareholders. Fees are paid only on the underlying fund level at the same terms as other fund investors. East Capital Explorer does not pay any fees to East Capital for their service in managing the investment portfolio. Fee structures vary between the different funds, with the main terms presented below. Total fund fees paid during 2008 amounted to EUR 3.6m.

Management fees Performance fees Total fees paid Annual Catch- Profit paid 2008 paid 2008 during 2008 Investment Subscription Fee Management Fee Performance Fee Hurdle Up share Redemption Fees (EUR thousands) (EUR thousands) (EUR thousands) Fee for managing East Capital Explorer’s N/A N/A N/A N/A N/A N/A investment portfolio East Capital Bering Russia Fund 0% (Ordinarily 5%) 2% on NAV 20% above a high watermark, Payable to Fund: 10% during the first year of ownership of the 450.2 258.7 708.9 paid quarterly shares to be redeemed, 7.5% during the second year, 5% during the third year and 2.5% during the fourth year East Capital Bering Ukraine Fund 0% (Ordinarily 5%) 2% on NAV 20% above a high watermark, Payable to Fund: Investor’s first year 20%, 370.1 - 370.1 paid quarterly second year 15%, third year 10%, fourth year 5% East Capital Bering Balkan Fund 0% (Ordinarily 5%) 2% on NAV 20% above a high watermark, Payable to Fund: Investor’s first year 20%, 365.3 - 365.3 paid quarterly second year 15%, third year 10%, fourth year 5% East Capital Bering Central Asia Fund 0% (Ordinarily 5%) 2% on NAV 20% above a high watermark, Payable to Fund: Investor’s first year 20%, 304.8 - 304.8 paid quarterly second year 15%, third year 10%, fourth year 5% East Capital Bering New Europe Fund 0% (Ordinarily 5%) 2% on NAV 20% above a high watermark, Payable to Fund: Investor’s first year 20%, 115.0 - 115.0 paid quarterly second year 15%, third year 10%, fourth year 5% East Capital Power Utilities Fund N/A 2% on NAV1 15% 7% 50/50 95/5 N/A (no redemption possible, 1,545.1 - 1,545.1 capital returned upon fund termination) East Capital Russian Property Fund 0% 1% on GAV2 N/A 10% 50/50 80/20 N/A (no redemption possible, - - - capital returned upon fund termination) Direct investments N/A 2% on NAV1 20% 8% 0/100 N/A N/A (capital returned upon exit of investment) 37.4 - 37.4

East Capital (Lux) Eastern European Fund 0% (Ordinarily up to 5%) 2% (accrued daily) N/A Up to 1% (on the net asset value of the shares being redeemed) 171.8 171.8 (EUR) Cash management N/A N/A N/A N/A N/A N/A

Committed capital N/A N/A N/A N/A N/A N/A

Total 3,359.7 258.7 3,618.4

FEE GLOSSARY Clawback = Upon termination of the fund, if East Capital has received profit share Allocation target = Level of net proceeds of the fund whereafter the net proceeds distribution in excess of 20% of the fund’s net profits from all portfolio invest- are paid according to set profit sharing arrangement. This level is typically set to ments, East Capital will return the excess amount to the fund. This can for exam- 80–20 meaning that 80% of the net proceeds are paid to investors and 20% are ple occur if a portfolio investment is sold at a loss at the end of the fund term, paid to East Capital. and profit share has been paid out to East Capital in prior divestments of the fund. Catch-up = Allocation of the net proceeds of the fund, once hurdle has been GAV = The gross asset value (GAV) of a fund at a certain point in time. reached. May be set to 50/50 meaning that 50% of the net proceeds are paid to High Watermark = Level of NAV above which performance fee is paid. investors and 50% to East Capital up to a given allocation target of the total net Hurdle = Net return on fund or investment, calculated on a cumulative annual basis, proceeds of the fund. Purpose is to incentivize the manager to create good returns to be paid to investors before catch-up and profit share/performance fee can be (above hurdle). paid to East Capital.

54 East Capital Explorer AB Annual Report 2008 Example fee structure in East Capital Bering Funds Example fee structure in East Capital Private Equity Funds

Third threshold Return New high watermark on investment Second threshold NAV New high watermark East Investors Capital

First threshold 20% of the perf. New high watermark 80% East Investors Capital 20% 20% of the perf. Allocation target 16.8% 50%50% East 80/20 Investors Capital 20% of the perf. Hurdle 10% 80/20 100% 100/0 0 0%

Q1 Q2 Q3 Year 1 Q1 Q2 Q3 Year 2 Catch-up Profit share Performance fee with high watermark. A performance fee of 20 percent is paid to Profit distribution waterfall with 10 percent hurdle rate, 50/50 catch-up and 80/20 East Capital quarterly, when the NAV exceeds the previous highest watermark. In profit share arrangement. In the example above, investors receive the full return the example above, performance fees of 20 percent of the performance above the on an investment upon exit up to a 10 percent hurdle. After the hurdle, there is a last high watermark are paid in Q1 and Q3 during the first year and in Q3 in the sec- catch-up in which investors and East Capital each receive 50 percent of the return ond year. Performance fees for any performance above the high watermark during a on the investment until the allocation target of 80 percent of the return to investors given quarter are not locked in. and 20 percent of the return to East Capital, has been reached (in this case at a With regards to the performance of the funds since East Capital Explorer’s 16.8 percent return on investment). Thereafter, all excess returns are allocated 80 investment, the NAV of the funds on 31 December 2008 was significantly below percent to investors and 20 percent to East Capital. A so called claw back protects their respective high watermarks. investors against over-distribution of profits to East Capital.

Committed capital N/A N/A N/A N/A N/A N/A

Total 3,359.7 258.7 3,618.4 Corporate Governance Corporate Management fee = Fee paid to Investment Manager. Calculated monthly and sub- of the returns generated above this and the remaining 80% is distributed among tracted in the monthly net asset value calculation of each fund. investors. NAV = Net asset value. The value of net assets, i e total assets less net debt. An Redemption fee = Fee paid to the fund (not to East Capital) to compensate the fund indicative NAV for East Capital Explorer is calculated on a monthly basis and is pub- for redeeming capital which may lead to the fund divesting assets to meet redemp- lished five working days after the end of the month. tion. The redemption fee compensates the other fund investors for the possible loss Performance fee = Fee paid to encourage East Capital to create better returns for of returns that the fund makes from divesting the investment. the fund investors. A high watermark ensures that only performance above level of Subscription fee = Fee paid upon investment in a fund, amounting to a certain per- investment or the latest previous “highest value” is remunerated. cent of invested capital. East Capital Explorer has been waived all subscription fees. Profit share = Arrangement where future proceeds are divided according to pre- agreed level. Typically set to 80–20 meaning that after hurdle has been reached and 1 Based on audited annual accounts at the end of the preceding year. full catch-up has been paid, East Capital is entitled to a 20% preferred profit share 2 Based on the audited annual accounts at the end of the year.

East Capital Explorer AB Annual Report 2008 55 In Krasnaya Polyana, preparations are well underway for the 2014 Winter Olympic Games in Sochi. The Olympics are seen as a strategic investment in state- of-the art infrastructure and public services and as an opportunity to inspire to higher ecological standards across Russia.

56 East Capital Explorer AB Annual Report 2008 East Capital Explorer AB financial year 1 January – 31 December 2008

Contents

Administration Report 58

Financial statements 60

Notes to the financial statements 65

Consolidated key figures 78

Audit Report 80

East Capital Explorer AB Annual Report 2008 57 Financial Statements Financial Administration Report

The Board of Directors of East Capital Explorer AB (“the Com- East Capital Explorer invested EUR 10m in East Capital Bering pany”), corporate registration number 556693-7404, hereby New Europe Fund in May 2008. submits the consolidated financial statements for the period 1 In June 2008, East Capital Explorer made a commitment to January – 31 December 2008 and the annual report for the Par- invest a total of EUR 40m in East Capital Russian Property Fund, ent Company for the financial year 1 January – 31 December whereof EUR 39.1m still has not been drawn down for invest- 2008. Comparable figures of 2007 comprises approximately six ments. East Capital Explorer made a direct investment in MFG months. (OAO Melon Fashion Group) in October 2008, amounting to EUR 10m and in November 2008 an additional EUR 10m was Operations invested in East Capital Bering Balkan Fund. East Capital Explorer AB is a Swedish company which business Net loss for the Group was EUR -151.1m, which corresponds idea is to offer all types of investors access to unique invest- to earnings per share of EUR -3.56. The main profit or loss ments in Eastern Europe. The listing on NASDAQ OMX Nordic account items include EUR -152.3m in unrealized changes in Exchange Stockholm also entails advantages such as liquidity the value of investments, EUR -3.3m in realized change in value and transparency, which is new for our markets and our type of of investments, EUR 9.5m in financial income from short-term investments. interest-bearing investments, EUR -3.6m in operating expenses The Group consists of the Parent Company, East Capital and EUR -2.3m in income taxes. Explorer AB and the subsidiaries, East Capital Explorer Invest- The Parent Company’s net loss was EUR -127.4m, of which ments AB, East Capital Explorer Investments (Cyprus) Ltd, East- EUR -126.5m refers to write down of shares in group compa- Capital Power Utilities Fund AB and Consibilink Ltd. East Capi- nies. These shares have been valued to the lower of fair value tal Explorer Investments AB manage the Company’s investment and acquisition value. Operating expenses amounted to EUR activities in accordance with the Investment Policy and manage -1.4m. No investment activities are carried out within the Parent the Company’s investment portfolio. East Capital Explorer Invest- Company. ments AB has a controlling stake in East Capital Power Utilities Fund AB, which means that this holding is consolidated. In the Net asset value and share price future East Capital Power Utilities Fund AB may be opened to Net asset value on 31 December 2008 was EUR 265m (EUR additional investors, which could change the subsidiary status. 7.31 per share). Consibilink Ltd manage the East Capital Power Utilities Fund On 31 December 2008, short-term liquid investments, cash AB’s investments. and cash equivalents amounted to EUR 4.85 per share. The Company’s presentation currency is the euro. The closing price per share on 30 December, the last trading day of the year, was SEK 40.20 (corresponding to EUR 3.69). Share information East Capital Explorer AB’s share price therefore decreased The total number of outstanding shares at 31 December 2008 59.8% during the period, while the OMXSPI decreased 42%. By was 36,270,160. No new shares were issued during the report- comparison, the RTS Index decreased 66.9%, the RTS 2 Index ing period and the average number of shares between 1 January decreased 75.1% and the MSCI EM Europe Index decreased 2008 and 31 December 2008 was therefore 36,270,160. All 61.7% during the same period. shares entitle the holder to one vote per share and carry equal rights to the Company’s profits and assets, as well as equal Key events after the end of the financial year rights in terms of dividends. There are no direct or indirect share- Net asset value holders holding more than 10 percent of the total shares. On 31 January 2009, East Capital Explorer’s indicative net asset- value amounted to EUR 7.19 per share, compared with EUR Board of Directors 7.31 on 31 December 2008. The closing price per share on 31 The Board shall consist of three to six directors without deputies. January 2009 was SEK 45.40 (corresponding to EUR 4.28)1. Board members are elected annually at the annual general meet- On 28 February 2009, the indicative net asset value amoun- ing for the time until the next annual general meeting is held. East ted to EUR 7.13 per share while the closing price per share on Capital PCV Management AB, corporate registration number the same date was SEK 40.00 (corresponding to EUR 3.50)2. 556729-6941, has the right to appoint one Board member for the same period of time, for as long as the Investment Manage- Investment in East Capital Special Opportunities Fund ment Agreement to which the Company is a party, (described In mid-March 2009, East Capital Explorer decided to invest in §13 of the articles of association), is in force. Resolutions to EUR 35m (corresponding to approximately SEK 395m) in the amend such articles are only valid if supported by shareholders new East Capital Special Opportunities Fund. The Fund targets with at least 75% of the votes cast and of the shares represented investment opportunities that due to market or owner specific at the meeting of shareholders. The complete articles of associa- reasons can be acquired at low valuations. The Fund is mandat- tion can be found on www.eastcapitalexplorer.com. ed to invest in Russia and the rest of Eastern Europe.

Key events during the financial year Utilization of authorization to repurchase own shares On 31 December 2008, East Capital Explorer had investments On 12 March 2009, East Capital Explorer announced that the totaling EUR 265m in various Semi-public Equity funds, Private Equity funds, Direct investments and Short-term Investments. 1 EUR=10.60 SEK on 31 January 2009. Source: Reuters 2 EUR=11.42 SEK on 27 February 2009. Source: Reuters

58 East Capital Explorer AB Annual Report 2008 Board in East Capital Explorer had decided to utilize the authori- income base amounts. In the event the Company terminates the zation to repurchase the Company’s own shares. The authori- CEO’s employment, the Company is required to observe a six- zation was approved by the 2008 Annual General Meeting for month notice period. In addition, the CEO is entitled to a sever- the purpose of giving the Board wider freedom of acting in the ance payment corresponding to six months’ salary. work with the Company’s capital structure and thus creating Information about salaries and remunerations paid, other com- more value for the shareholders. Shares can be purchased up to pensation and social charges for the Board and CEO as well as and including 9 April 2009, observing blackout periods before other employees can be seen in Note 4 on page 70. reports and all other applicable rules. At the time of the decision, East Capital Explorer owned no Corporate Governance and the work of the Board own shares and the authorization from the 2008 Annual Gene- For information about how the Company is governed and control- ral Meeting encompasses acquisition of so many shares that the led, such as through the Board and committees, and for informa- Company’s holding of own shares after the purchase amounts tion on the Board’s internal control, please refer to the Corporate to a maximum of one-tenth of all the shares in the Company. The Governance section on page 38. latest data on the Company’s repurchased shares is available on the Company’s website. Shareholders’ meeting and dividend East Capital Explorer AB’s annual shareholders’ meeting will be held on 27 April 2009 in Stockholm. Material risks and uncertainties The Board intends to recommend to the shareholders’ meet- East Capital Explorer has an investment and finance policy that ing that no dividend be paid. Our dividend policy reflects our atti- has the purpose of providing guidelines for managing and con- tude that continually reinvesting capital in accordance with our trolling the effects of the risks inherent in the investments. Investment Policy optimally promotes our strategy of building a Many risks are also associated with opportunities. The goal strong investment company and generating long-term value for is to eliminate those risks that are not associated with oppor- our shareholders. tunities (e.g. inadequate procedures). One material risk in East Capital Explorer’s business is the commercial risk associated Expectations for future performance with exposure to certain industries, geographic regions or indi- East Capital Explorer’s original target was to be fully invested 18 vidual holdings. The Group’s finance policy for management of months after its first day of trading on the NASDAQ OMX Nordic financial risk has been prepared by the Board and is a framework Exchange. In conjunction with the interim report for the reporting of guidelines and regulations in the form of risk mandates and period 1 January – 30 June, East Capital Explorer communicated limits for financial activities. The Parent Company’s finance func- that the Company’s first and foremost target is to make invest- tion is responsible for central management of the Group’s finan- ments that will generate attractive long-term returns for its share- cial transactions and risks. holders and that market conditions will have an impact of the Operational risk is defined as the risk of loss resulting from speed of investments and whether or not the Company is fully inadequate internal processes or systems, or from external invested in May 2009. As market conditions remain challenging, events. Operational risks occur throughout the business and are the Company has decided not to set a new target date for being managed by constantly improving the management of system- fully invested. The main investment focus continues to be East related issues, administrative processes, information security Capital’s Semi-public Equity funds and Private Equity funds. and legal matters. Moreover, the Company monitors obligations East Capital Explorer has also the possibility to make selected arising from external regulations and laws, agreement-related direct investments in specific companies. The Company deems undertakings and the Company’s internal rules. the supply of conceivable investments in underlying funds to For more information, please see Note 16 Financial risks and continue to be large. financing policies for the Group’s material risks and uncertainties and pages 50-52 in the unaudited part of the annual report Proposed appropriation of profit for a more detailed description of business risks. The following funds are at the disposal of the annual general meeting: Personnel and remuneration guidelines On 31 December 2008, the Group had four employees, three of Retained earnings 387,652,039 whom are women. Other non-restricted reserves 1,167,289 In accordance with current guidelines, the Board proposes Profit for the year -127,421,649 the annual general meeting 2009 the following with regard to Total in EUR 261,397,679 remuneration of senior executives, in this case the CEO, to: Remuneration to the CEO consists of fixed salary, variable salary The Board recommends that the profits be distributed as fol- and pension and insurance benefits. The Board decides at its lows: own discretion according to certain key performance indicators whether the CEO should be paid any variable salary. The CEO To be carried forward 261,397,679 can receive a maximum variable salary corresponding to 50% of Total in EUR 261,397,679 his fixed salary. The CEO has an individual premium-based pension plan, pursuant to which the Company pays premiums cor- For further information about the Company’s financial position responding to 10% of his fixed salary up to 10 Swedish income and performance, please see the following income statements, base amounts and premiums corresponding to 20% of his fixed balance sheets and cash flow statements. salary on the portion of his fixed salary that exceeds 10 Swedish

East Capital Explorer AB Annual Report 2008 59 Financial Statements Financial Income Statement – Group

EUR thousands Note 1 Jan – 31 Dec 2008 19 Jun – 31 Dec 2007 Result from financial assets at fair value through profit or loss -152,342 3,466 Realized losses from financial assets through profit or loss -3,334 - Total operating income 2 -155,676 3,466 Other operating expenses 3 -2,967 -782 Staff expenses 4 -612 -223 Operating profit/loss -159,255 2,461 Financial income 6 10,438 1,794 Financial expense 6 -22 -35 Profit/loss after financial items -148,838 4,220 Income tax 7 -2,287 -255 NET PROFIT/LOSS FOR THE PERIOD -151,124 3,965

Profit/loss distribution: Shareholders of the Parent Company -129,236 3,298 Minority interest -21,888 667 -151,124 3,965 Earnings per share, EUR 8 -3.56 0.09 - shareholders of the Parent Company No dilution effects

60 East Capital Explorer AB Annual Report 2008 Balance Sheet – Group

EUR thousands Note 31 Dec 2008 31 Dec 2007 Assets Financial non-current assets Shares and participations in investing activities 10,15 95,092 109,969 Deferred tax assets 7 - 97 Total non-current assets 95,092 110,066 Current receivables Other short-term receivables 15 20 43,941 Accrued income and prepaid expenses 11 2,617 677 Total current receivables 2,637 44,618 Short-term investments 15 - 17,903 Cash and cash equivalents 15 Short-term investments comprising deposits 175,190 198,700 Cash 8,453 62,001 Total current assets 186,280 323,222 Total assets 281,372 433,288

Shareholders’ equity 12 Share capital 3,627 3,627 Other contributed capital 387,652 387,652 Reserves -316 -316 Retained earnings including profit for the year -125,938 3,298 Equity attributable to shareholders of the Parent Company 265,025 394,261 Minority interest 10,425 32,313 Total shareholders’ equity 275,450 426,574

Liabilities Deferred tax liabilities 7 589 70 Total long-term liabilities 589 70 Tax liabilities 1,953 339 Other liabilities 13,15 2,482 5,585 Accrued expenses and prepaid income 14 898 720 Total current liabilities 5,333 6,644 Total liabilities 5,922 6,714 Total equity and liabilities 281,372 433,288

PLEDGED ASSETS AND CONTINGENT LIABILITIES 10 Pledged assets Contingent liabilities

East Capital Explorer AB Annual Report 2008 61 Financial Statements Financial Changes in equity – Group

Retained earn- Total equity Other contrib- ings incl. profit shareholders in EUR thousands Share capital uted capital Reserves for the year Parent Company Minority Total equity Opening equity 1 July 2007 11 - - 11 11 New share issue 6 July 2007 44 - - 44 44 Redemption of shares 9 Nov 2007 -55 - - -55 -55 New share issue 9 Nov 2007 3,380 361,628 - - 365,008 365,008 New share issue 11 Dec 2007 247 26,024 - 26,271 26,271 Contribution from minority - 31,761 31,761 Exchange rate difference - - -316 -316 -115 -431 Net profit for the year - - 3,298 3,298 667 3,965 Opening equity 1 Jan 2008 3,627 387,652 -316 3,298 394,261 32,313 426,574 Net profit/loss for the period - - - -129,236 -129,236 -21,888 -151,124 Per 31 Dec 2008 3,627 387,652 -316 -125,938 265,025 10,425 275,450

Cash Flow Statement – Group

EUR thousands 1 Jan – 31 Dec 2008 19 Jun – 31 Dec 2007 Operating activities Operating profit/loss -159,255 2,461 Adjusted for unrealised change in value 152,342 -3,435 Realized profit from disposals 3,334 - Interest received 7,626 1,254 Interest paid -22 -35 Tax paid -57 57 Cash flow from current operations before changes in working capital 3,968 302

Cash flow from changes in working capital Increase (-)/decrease (+) in other current receivables -38 -136 Increase (+)/decrease (-) in other current payables -2,913 6,305 Cash flow from operating activities 1,017 6,471

Investing activities Investment in shares and participations -130,866 -168,810 Sale of shares and participations 52,124 - Cash flow from investing activities -78,742 -168,810

Financing activities New share issue - 55 Redemption of shares - -55 New share issue incl over-allotment option - 391,279 Contributed minority interest - 31,761 Cash flow from financing activities - 423,040

Cash flow for the period -77,725 260,701 Cash and cash equivalents at beginning of the year1 260,701 - Exchange rate differences in cash and cash equivalents 667 - Cash and cash equivalents at end of the period 183,643 260,701

1 Cash equivalents comprise deposits and cash. Short-term investments have been classified as cash and cash equivalents based on the following assumptions: • They are subject to an insignificant risk of changes in value • They are readily convertible to cash • They have a maturity of three months or less at balance sheet date

62 East Capital Explorer AB Annual Report 2008 Income statement – Parent Company

Note 1 Jan – 31 Dec 2008 1 July – 31 Dec 2007 EUR thousands Other operating expenses 3 -770 -219 Staff expenses 4 -612 -223 Operating profit/loss -1,382 -442 Financial income 6 36 665 Financial expense 6 -126,4681 - Profit/loss after financial items -127,813 223 Income tax 7 392 -63 NET PROFIT/LOSS FOR THE PERIOD -127,422 160

1 Financial expense includes write-down of shares in group companies.

Balance Sheet – Parent Company

EUR thousands Note 31 Dec 2008 31 Dec 2007 Assets Financial non-current assets Participations in group companies 9 263,764 390,174 Total non-current assets 263,764 390,174 Current receivables Other current receivables 1,399 - Accrued income and prepaid expenses 11 23 136 Total current receivables 1,422 136

Cash and cash equivalents Cash 286 1,441 Total current assets 1,708 1,577 Total assets 265,472 391,751

Shareholders’ equity 12 Restricted equity Share capital 3,627 3,627 Total restricted equity 3,627 3,627 Non-restricted equity Share premium reserve 387,652 387,652 Retained earnings 1,168 - Profit for the year -127,422 160 Total non-restricted equity 261,398 387,812 Total shareholders’ equity 265,025 391,439

Liabilities Tax liabilities 63 63 Other liabilities 13,15 128 60 Accrued expenses and prepaid income 14 256 189 Total current liabilities 447 312 Total liabilities 447 312 Total equity and liabilities 265,472 391,751

PLEDGED ASSETS AND CONTINGENT LIABILITIES Pledged assets - - Contingent liabilities - -

East Capital Explorer AB Annual Report 2008 63 Financial Statements Financial Changes in Equity – Parent Company

Restricted equity Non-restricted equity Retained earnings incl. EUR thousands Share capital Share premium reserve profit for the year Total equity Opening equity 1 July 2006 11 - - 11 New share issue 6 July 2007 44 - - 44 Redemption of shares 9 Nov 2007 -55 - - -55 New share issue 9 Nov 2007 3,380 361,628 - 365,008 New share issue 11 Dec 2007 247 26,024 - 26,271 Profit for the year - - 160 160 Opening equity 1 Jan 2008 3,627 387,652 160 391,439 Profit for the year - - -127,422 -127,422 Group contribution received - - 1,399 1,399 Tax effect on Group contribution - - -391 -391 Closing equity 31 Dec 2008 3,627 387,652 -126,254 265,025

Cash flow statement – Parent Company

EUR thousands 1 Jan – 31 Dec 2008 1 Jul 2006 – 31 Dec 2007 Operating activities Operating profit/loss -1,382 -442 Interest received 36 665 Tax paid 335 - Cash flow from current operations before changes in working capital -1,011 223

Cash flow from changes in working capital Increase (-)/decrease (+) in other current receivables -1,286 -136 Increase (+)/decrease (-) in other current payables 134 249 Cash flow from operating activities -2,163 336

Investing activities Acquisition of subsidiaries - -390,174 Cash flow from investing activities - -390,174

Financing activities New share issue - 55 Redemption of shares - -55 Group contribution received 1,008 - New share issue incl over-allotment option - 391,279 Cash flow from financing activities 1,008 391,279

Cash flow for the period -1,155 1,441

Cash and cash equivalents at beginning of the year1 1,441 - Cash and cash equivalents at end of the period 286 1,441 1 Cash equivalents comprise deposits and cash. Short-term investments have been classified as cash and cash equivalents based on the following assumptions: • They are subject to an insignificant risk of changes in value • They are readily convertible to cash • They have a maturity of three months or less at balance sheet date

64 East Capital Explorer AB Annual Report 2008 Notes to the financial statements

NOTE 1 ACCOUNTING PRINCIPLES based on price quotes from active markets. In cases where the market for a financial instrument cannot be seen as active, such Compliance with standards and legislation assets will be measured using market information as much as The consolidated accounts have been prepared in accordance possible and company-specific information as little as possible. with the International Financial Reporting Standards (“IFRS”) Whether a market for a specific financial instrument is consid- issued by the International Accounting Standards Board ered active is largely a matter of professional judgement. (“IASB”) with the interpretive statements from the International A judgement has been made to consolidate East Capital Financial Reporting Interpretations Committee (“IFRIC”), as Explorer Investments AB despite the fact that the share of votes approved by the European Commission for application within the is less than 50%. This judgement was based on the fact that European Union. Furthermore, the Swedish Financial Report- East Capital Explorer AB has all economic rights to East Capital ing Board recommendations RFR 1.1 and 2.2, Supplementary Explorer Investments AB. The majority of the proceeds from the Accounting Rules for Groups and Accounting for Legal Entities, share issue have been transferred to East Capital Investments have been applied. AB through conditional shareholders’ contributions since all The Parent Company applies the same accounting principles investing activities take place in this subsidiary. Another judge- as the East Capital Explorer Group except in the instances pre- ment was made that the holdings in East Capital Power Utilities sented below in the section “Parent Company’s accounting prin- Fund AB and Consibilink Ltd should be consolidated. Through ciples.” its ability to terminate the shareholder agreement and by doing The annual report and the consolidated financial statements so place the subsidiaries in liquidation, the company can exer- were approved for issue by the Board on 18 March 2009. The cise a controlling influence over the party which is the formal income statements and balance sheet of the Parent Company holder of voting rights at the annual meeting of shareholders, and and the Group will be submitted to the shareholders’ meeting for therefore in effect is the party that exercises substantial control adoption on 27 April 2009. over the subsidiaries.

Measurement basis for preparing the Parent Company and Key sources of uncertainty in the estimates Group’s financial reports The sources of uncertainty in the estimates below refer to those Assets and liabilities are recognised at historical cost, except for that entail significant risk of substantial adjustments to reported shares and participations in investing activities and short-term assets or liabilities for the next financial year. investments, which are recognised at fair value through profit or In those cases where investments are not traded on a mar- loss. ket seen as an active market and fair value is not set against the background of actual bid quote, but by means of valuation mod- Functional currency and presentation currency els (see below financial instruments), there is uncertainty that the The Parent Company’s functional currency is the euro (EUR), holding will be assigned fair value. The Group applies its models which is also the presentation currency for the Parent Company consistently between the periods, but the calculation of fair value and the Group. This means that the financial statements are pre- is characterised by uncertainty. Based on controls and reliability sented in EUR. All amounts, unless otherwise stated, are round- procedures, the Group considers the fair values recognised in ed off to the nearest thousand. the balance sheet to be carefully calculated and balanced and reflect the underlying economic values. Estimates and assumptions in the financial statements Preparing financial statements in accordance with IFRS requires Significant accounting principles management to make estimates and assumptions that affect The accounting principles presented below have been consist- the application of the accounting principles and the reported ently applied to all periods presented in the Group’s financial amounts for assets, liabilities, revenue and expenses. Actual statements, unless otherwise stated below. Furthermore, the outcomes may differ from these estimates and assumptions, and Group’s accounting policies have been consistently applied by the latter are reviewed regularly. Changes in estimates are rec- group companies. ognised in the period in which they arise if the change affects that period alone or, alternatively, in the period in which they arise New IFRSs and interpretations not yet adopted and during future periods if the change affects both the period in A number of new standards, amendments to standards and question and future periods. interpretations are effective as of the 2009 financial year, and Management has discussed with the Audit Committee the have not been applied in preparing these consolidated financial developments, choices and information regarding the Group’s statements. The effects of the new standards on financial report- most important accounting principles and estimates, as well as ing have not been evaluated. the application of these principles and estimates. Classification, etc. Significant judgements in the application of the Group’s Noncurrent assets and noncurrent liabilities consist predomi- accounting principles nantly of amounts expected to be used or paid more than 12 Some of the significant accounting judgements used in applica- months after the balance sheet date. Current assets and current tion of the Group’s accounting policies are described below. liabilities consist predominantly of amounts expected to be used The measurement of financial assets at fair value will mainly be or paid within 12 months of the balance sheet date.

East Capital Explorer AB Annual Report 2008 65 Financial Statements Financial Segment Reporting Income An operating segment is a component of an entity that engages Income consists primarily of realised and unrealised value chang- in business activities from which it may earn revenues and incur es regarding securities and of dividends. Revenue is recognised expenses whose operating results are regularly reviewed and for in the income statement when it is likely that the future economic which discrete financial information is available. The Group has benefits will accrue to the company, and when these benefits the following four operating segments: investments in Semi-pub- can be calculated in a reliable manner. Income is reported at the lic Equity Funds, Private Equity Funds, Direct Investments as well fair value of the amount expected to be received. as Short-term Investments. Per 31 December 2008, East Capi- For balance sheet items included at both the beginning and tal Explorer had invested in Semi-public Equity Funds, Private end of the period, changes in value comprise the difference in Equity Funds, Direct Investments and Short-term Investments. the values at these times. For balance sheet items realised during Segment information is presented in accordance with IFRS 8 the period, changes in value comprise the difference between only for the Group. the payment received and the value at the beginning of the period. For balance sheet items acquired during the period, changes in value comprise the difference between the value at the end of CONSOLIDATED ACCOUNTS the period and the acquisition cost. Income from dividends is recognised when the right to receive Subsidiary the dividends can be determined. Subsidiaries are companies under the controlling influence of East Capital Explorer AB. Controlling influence means the direct Expenses or indirect right to govern the financial and operating policies of Operating expenses refer to costs of an administrative nature, an entity so as to obtain financial benefit. In assessing whether such as staff costs, notary fees and bank fees. Costs for operat- the controlling influence exists, potential shares conveying voting leases are recognised in the income statement on a straight- ing rights, and which can be converted or utilised without delay, line basis over the term of the lease. will be taken into consideration. Subsidiaries are accounted for using the purchase method. Financial income and expenses In accordance with this method, an acquisition is treated as a Interest income and interest expenses on financial instruments transaction in which the Group indirectly acquires the subsidi- are recognised in the income statement in the period to which ary’s assets and assumes its liabilities and contingent liabilities. the amounts refer. Financial income consists of interest income The consolidated cost is determined by an analysis at the time from bank balances, receivables, as well as interest-bearing of the business combination. In such an analysis, the cost of the securities and exchange rate differences. Financial expenses business combination is established, as are the fair values of rec- consist of interest expenses on borrowings and other interest- ognised identifiable assets, liabilities and contingent liabilities. bearing liabilities and exchange rate differences. Exchange rate The difference between the cost of the shares of the subsidiary, gains and losses are reported net. Moreover, fair value chang- including transaction costs directly attributable to the acquisi- es in short-term investments classified as financial instruments tion, and the fair value of acquired assets, assumed liabilities and measured at fair value through profit or loss (fair value option) are contingent liabilities constitute, if the difference is positive, con- reported as financial income or expense. solidated goodwill. When the difference is negative it is recog- Interest income on receivables and interest expenses on lia- nised directly in the income statement. bilities are calculated applying the effective interest method. The The financial statements of subsidiaries are consolidated from effective interest is the interest required to be applied in order the date of the acquisition until the date when control ceases. that the current value of all estimated future receipts and pay- One of the companies in the Group, Consibilink Ltd, has chan- ments during the expected fixed-interest term is equal to the ged their functional currency from USD to EUR and therefore no reported value of the receivable or liability. currency translation differences in shareholders’ equity arised in Interest income includes the allocated amount of transac- 2008. tion costs and any discounts, premiums and other differences between the original value of the receivable and the amount to Transactions eliminated on consolidation be received upon maturity. Intra-group balances and any unrealised income and expenses Interest expenses include the allocated amount of issue or gains and losses arising from intra-group transactions, are expenses and similar direct transaction costs for loans raised. eliminated in preparing the consolidated financial statements. Taxes Foreign currency transactions Income tax comprises current and deferred tax. Income tax is Transactions in currencies other than euro are translated into reported in the income statement, except when the underlying the functional currency at the exchange rate prevailing on the transaction is reported directly against equity. In such cases, transaction date. The functional currency is the currency in the associated tax effects are reported in equity. primary economic environment in which the companies operate. Current tax is tax to be paid or received during the current Monetary assets and liabilities denominated in foreign currencies year, using the tax rates that have been enacted or substantively are translated to the functional currency at the closing rate of enacted by the balance sheet date, and adjustments of current exchange. Exchange rate differences arising on currency transla- taxes attributable to previous periods. tions are recognised net as either financial income or financial Deferred tax is calculated according to the balance sheet expense in the income statement. method on the basis of temporary differences arising between the reported and tax values of assets and liabilities, applying the

66 East Capital Explorer AB Annual Report 2008 tax rates which have been enacted or announced as per the bal- Financial assets at fair value through profit or loss ance sheet date. Temporary differences are not considered in Shares and participations in investing activities and short-term goodwill arising on consolidation or in differences attributable to investments are recognised in accordance with IAS 39 and the subsidiaries and associated companies which are not expected “Fair value option” at fair value including any change in value in to be taxed within the foreseeable future. Deferred tax assets profit or loss. The Group uses the “fair value option” because it attributable to deductible temporary differences and loss carry- bases follow-up of its holdings on fair value. In accordance with forwards are recognised only to the extent it is likely that they will IAS 28.1, equity-related investments where the Group has a sig- be utilised and will result in lower tax payments in the future. The nificant influence are also recognised according to IAS 39 at fair value of deferred tax assets is reduced when it is no longer con- value, with fair value changes recognised in profit or loss (“fair sidered likely that they can be utilised. Deferred tax assets and value option”). Fair value is determined as follows: deferred income tax liabilities in the same country are reported net. Listed holdings on active markets Financial instruments measured at fair value in the balance sheet Financial Instruments are measured, at fair value based on bid quotes received on Financial Instruments recognised in the balance sheet include active markets. short-term investments and shares and participations in invest- Bid quotes are deemed representative if criteria such as bid ing activities, cash and cash equivalents and other short-term and ask spread is less than 1%, only bid quotes are observed or receivables on the asset side and accounts payable and other last traded price is below the bid quote are met. If this is not the current liabilities on the liability side. case, the following hierarchy is used for valuation: 1. Last traded price Recognition and derecognition 2. Mid price A financial asset or liability is recognised in the balance sheet 3. Last available reliable market information (LARMI) when the Company becomes party to the terms and conditions A financial instrument is regarded as listed on an active mar- of the instrument. Acquisitions and sales of financial assets are ket if quoted prices are readily and regularly available from an recorded on the transaction date, which is the date on which the exchange, dealer, broker, industry group, pricing service or company becomes obligated to acquire or sell the asset. Bor- regulatory agency, and those prices represent actual and regu- rowings are recognised on the date on which the transaction is larly occurring market transactions on an arm’s length basis. Fair completed, the settlement date. value is defined in terms of a price agreed by a willing buyer and Accounts receivable are recognised in the balance sheet a willing seller in an arm’s length transaction. when an invoice is sent. Liabilities are recognised when the counterparty has fulfilled its undertaking and a contractual pay- Listed holdings on non-active markets ment obligation exists, regardless of whether or not an invoice If the conditions for an active market are not met the market is has been received. Accounts payable are recognised when the seen as non-active. Listed holdings on a non-active market will invoice has been received. be measured according to IPEVC Guidelines as all private equity A financial asset (or part thereof) is removed from the balance (unlisted) holdings described below. sheet when the rights in the agreement are realised or expire, or when the company has transferred substantially all of the risks Unlisted holdings and holdings where market data is not reli- and benefits associated with ownership. A financial liability (or able part of thereof) is removed from the balance sheet when the obli- All private equity holdings (“unlisted”) shall be initially measured gation specified in the agreement is discharged or in any other at their acquisition price and shall be measured with the follow- manner extinguished. A financial asset and financial liability are ing methodologies, in order of priority depending on availability offset and recognised in the balance sheet in a net amount only and relevance: when there is legal right to offset and when it is intended to settle the item with a net amount or to simultaneously realise the asset 1. The Price of Recent Investment as set out in the IPEVC Guide- and settle the liability. lines.

Classification and measurement 2. The value determined by a independent broker, analyst or other Financial instruments are initially recognised at an acquisition cost knowledgeable party, which has become known to the Valuation equivalent to the fair value of the instrument, plus, in the case of Committee, after it was concluded by the Valuation Committee receivables and liabilities valued at accrued acquisition cost, the that (i) there is sufficient documentation available to support the addition of transaction costs. Financial instruments are classified valuation, (ii) such valuation is compliant with valuation method- upon first recognition based on the purpose for which the instru- ologies set out in the IPEVC Guidelines, and that (iii) the value ment was acquired. The classification determines how the financial can be validated by at least one additional independent broker, instrument is valued after first recognition, as described below. analyst or other knowledgeable party.

Loans and receivables 3. Any other valuation methodology set out in the IPEVC Guide- Loans, receivables and short-term investments comprising depos- lines if a unanimous Valuation Committee considers that it clearly its in the balance sheet consist of immediately available balances and indisputably provides a better estimate of the fair value. at banks and equivalent institutions as well as other accounts receivable. Loans and receivables are recognised at amortised 4. As set out in the IPEVC Guidelines, in situations where Fair cost. Value cannot be reliably measured the Valuation Committee

East Capital Explorer AB Annual Report 2008 67 Financial Statements Financial may conclude that the Fair Value at the previous reporting date Employee remuneration remains the best estimate of Fair Value. The Valuation Commit- Obligations related to contributions to defined contribution plans tee is required to consider whether events or changes in circum- are expensed in the income statement as they arise. stances indicate that impairment may have occurred. Contingent liabilities 5. The Valuation Committee may, when it may consider it required, A contingent liability is recognised when there is a possible obli- or in accordance with the instructions of the Board of directors gation relating to past events and whose existence is confirmed of the fund in question, ask an independent valuer to perform a only by one or more uncertain future events or when there is an valuation of any investment or other holding based on the princi- obligation that is not recognised as a liability or provision as it is ples set out in this policy and the IPEVC Guidelines. not probable that an outflow of resources will be required.

Other holdings Accounting principles of the Parent Company Redeemable funds are measured based on official NAV, as soon East Capital Explorer AB applies the same accounting principles as such is published. as the Group except in the instances specified below. The variances arising between East Capital Explorer AB and the Group’s Other financial liabilities principles result from limitations in the possibility of applying This category includes loans and other financial liabilities, such IFRS in East Capital Explorer AB due to the Swedish Annual as accounts payable. Liabilities are valued at amortised cost. Accounts Act (1995:1554). Classification of the Group’s financial assets and liabilities East Capital Explorer AB prepares its annual report in accord- and their carrying amounts can be seen in Note 15. Recognition ance with the Swedish Annual Accounts Act and the Swedish of financial income and expenses is also addressed under the Financial Reporting Board recommendations RFR 2.1, Account- principle financial income and expenses above. ing for Legal Entities, as well as the pronouncements of the Swed- ish Financial Reporting Board for listed companies. Application Impairment of financial assets of RFR 2.1 (former RR 32:06) stipulates that, in its preparation The carrying values of the Group’s assets, excluding financial of the annual report for the legal entity, East Capital Explorer AB assets reported at fair value with changes in value reported in the apply all of the IFRS and interpretive statements approved by income statement in accordance with IAS 39, are tested each the European Union to the extent possible within the framework balance sheet date for indications of impairment. of the Swedish Annual Accounts Act and with consideration for On each reporting date, the Company evaluates whether there the relationship between reporting and taxation. The recommen- is objective evidence that a financial asset or pool of assets is dation states which exceptions and additions to IFRS are to be impaired. Objective evidence comprises observable conditions made. that occurred and that have a negative impact on the possibility The accounting principles specified below for the Parent Com- of recovering the cost of the asset. pany have been consistently applied to all periods presented in The recoverable amount of assets in the category loans and the financial statements, unless otherwise specified. receivables, which are recognised at amortised cost, is determined as the present value of future cash flows discounted at the Subsidiary effective rate at initial recognition of the asset. Assets with short The Parent Company reports shares in subsidiaries according maturities are not discounted. An impairment loss is recognised to the cost method. Dividends received are recorded as revenue as an expense in the income statement. only on condition that these derive from profits arising after the Impairment losses of loans and receivables that are reported at acquisition date. Dividends in excess of these profits are regard- amortised cost are reversed if a later increase in the recoverable ed as a repayment of the investment and reduce the carrying amount can objectively be attributed to an event that occurred amount of the company’s interest. after the impairment loss was made. Shareholders’ contributions Earnings per share In accordance with the pronouncement from the Swedish Finan- Earnings per share are calculated by dividing the profit or loss cial Reporting Board, shareholders’ contributions are recog- in the Group attributable to ordinary shareholders of the Parent nised directly against equity at the recipient and capitalised in Company by the weighted average number of ordinary shares shares and participations at the donor to the extent write-downs outstanding during the year. When calculating diluted earn- are not required. ings per share, earnings and the average number of shares are adjusted to take account of the dilutive effects of potential ordinary shares. There were no dilutive effects during the reported periods.

68 East Capital Explorer AB Annual Report 2008 NOTE 2 SEGMENT REPORTING

East Capital Explorer has chosen to classify the segments based on the nature of its investments. The Group’s operating segments consist of Semi-public Equity Funds, Direct investments, Private Equity Funds as well as Short-term Investments. Per 31 December 2008, East Capital Explorer had invested in Semi-public Equity Funds, Direct investments, Private Equity Funds and Short-term Investments. Segment results, assets and liabilities include items directly attributable to the segment as well as those that can be allocated on a reasonable basis.

Group Semi-public Direct Private Equity Short-term Other & Total Equity Funds Investments Funds Investments unallocated consolidated 1 Jan – 31 Dec 1 Jan – 31 Dec 1 Jan – 31 Dec 1 Jan – 31 Dec 1 Jan – 31 Dec 1 Jan – 31 Dec EUR thousands 2008 2008 2008 2008 2008 2008 Result from financial assets at fair value -139,911 - -342 - -12,089 -152,342 through profit or loss Realized losses on financial assets through -3,334 - - - - -3,334 profit of loss Other expenses - - - - -3,579 -3,579 Operating profit/loss -143,245 - -342 - -15,668 -159,255

Financial income - - - 9,502 937 10,438 Financial expense - - - -22 - -22 Profit/loss after financial items -143,245 - -342 9,480 -14,731 -148,838 Income tax for the period - - - - -2,287 -2,287 Net profit/loss for the period -143,245 - -342 9,480 -17,018 -151,124

Assets 73,383 9,941 513 189,457 8,078 281,372 Liabilities - - - - 5,922 5,922

Group Semi-public Short-term Equity Funds Investments Unallocated Total consolidated EUR thousands 2007 2007 2007 2007 Unrealised changes in value 3,813 -347 - 3,466 Other expenses - - -1,005 -1,005 Operating profit/loss 3,813 -347 -1,005 2,461

Financial income - 1,794 - 1,794 Financial expense - -35 - -35 Profit/loss after financial items 3,813 1,412 -1,005 4,220 Tax expense for the year - - -255 -255 Net profit for the year 3,965

Assets 109,969 278,604 44,715 433,288 Liabilities - - 6,714 6,714

The above tables provide information about allocating revenues to segments for the group. Expenses are not allocated to segments, since a majority of these expenses can not be attributed to one certain segment.

East Capital Explorer AB Annual Report 2008 69 Financial Statements Financial NOTE 3 OTHER OPERATING EXPENSES Remuneration to senior executives and other terms of employment Group Parent Company Guidelines for salary and other remuneration to the Compa- EUR thousands 2008 2007 2008 2007 ny’s CEO will be resolved on a yearly basis at the sharehold- Management fee and ers’ meeting, based on proposals by the Board. Remuneration carried interest in to the CEO consists of fixed salary, variable salary and pension consolidated subsidiary 1,989 542 - - and insurance benefits. The Board decides at its own discretion Communication 223 2 223 2 whether the CEO should be paid variable salary. The CEO can Internal services1 164 67 164 67 receive a maximum variable salary corresponding to 50% of his Rent2 33 9 33 9 fixed salary. The CEO has an individual premium-based pension plan, pursuant to which the Company pays premiums cor- Audit assignments3 128 58 106 53 responding to 10% of his fixed salary up to 10 Swedish income Travel 50 15 50 15 base amounts and premiums corresponding to 20% of his fixed Other external costs 380 89 194 73 salary on the portion of his fixed salary that exceeds 10 Swedish Total 2,967 782 770 219 income base amounts. In the event the Company terminates the 1 Internal services are included in the service agreement with East Capital Interna- CEO’s employment, the Company is required to observe a six- tional AB. Comprise all services except rent charges. See note 17. month notice period. In addition, the CEO is entitled to a sever- 2 Rent is included in the service agreement with East Capital International AB. See note 17. ance payment corresponding to six months’ salary. In the event 3 Audit assignment refers to auditing of the annual report, the accounting records- the CEO terminates his employment, he is required to observe a and the administration of the Board of directors and the CEO, other tasks incum- six-month notice period. If the CEO terminates his employment, bent on the Company’s independent auditor, and advice or other assistance prompted by observations from such audits or the performance of other such he is not entitled to any severance payment. tasks. This is the total fee for all audit related assignments including fees for PWC internal control. Remuneration and other benefits, Parent Company 2008 2007 NOTE 4 EMPLOYEES, STAFF EXPENSES AND EXECUTIVE Fixed Board Fixed Board MANAGEMENT COMPENSATION EUR thousands salary fee Total salary fee Total Group Parent Company Paul Bergqvist, - 70 70 - 37 37 Chairman EUR thousands 2008 2007 2008 2007 Anders Ek, - 21 21 - - - Wages, salaries and 262 101 262 101 Board member1 remuneration Lars Emilson, - 31 31 - 16 16 Directors’ fees 152 69 152 69 Board member Social charges 198 53 198 53 Alexander V. Ikonnikov, - 31 31 - 16 16 of which pensions 67 - 67 - Board member Total 612 223 612 223 Justas Pipinis, ------On 31 December 2008, the Group had four (three) employees, three (two) of Board member whom are women. Kestutis Sasnauskas, ------Board member Gert Tiivas, 105 - 105 34 - 34 Salaries and other remunerations CEO Group Parent Company Total 105 152 257 34 69 103 EUR thousands 2008 2007 2008 2007 Board and CEO 303 103 303 103 Board members Justas Pipinis and Kestutis Sasnauskas waived their Other employees, 111 67 111 67 directors’ fees. 1 average 2.2 people Anders Ek was appointed a director of the Board on 21 April 2008. Total 414 170 414 170

NOTE 5 FEES AND EXPENSES FOR AUDITORS Executive management compensation Group Parent Company Remuneration to the Board EUR thousands 2008 2007 2008 2007 On 21 April 2008, the Company’s shareholders’ meeting resolved KPMG that the Chairman of the Board will receive annual compensation Audit assignments 83 58 61 53 of SEK 700,000 for the period until the next shareholders’ meet- Other assignments 26 - 26 - ing. Other Board members will receive SEK 300,000 per person in compensation for the time until the next shareholders’ meeting. Total 109 58 87 53 Renumeration for Audit Committee is SEK 50,000 to the chairman of the Audit Committee and SEK 30,000 to each director in Audit assignment refers to auditing of the annual report, the the Committee. accounting records and the administration of the board of directors and the CEO, other tasks incumbent on the company’s independent auditor, and advice or other assistance prompted by observations from such audits or the performance of other such tasks. All other work constitutes other assignments.

70 East Capital Explorer AB Annual Report 2008 NOTE 6 FINANCIAL INCOME AND EXPENSE

Group Parent Company EUR thousands 2008 2007 2008 2007 Interest income on financial assets measured at fair value 11 2 11 2 (fair value option) Interest income on financial assets not measured at fair value 10,427 1,792 25 663 Total financial income1 10,438 1,794 36 665

Financial expense - - -126,4102 Interest expense on financial liabilities measured at amortised cost -22 -7 - - Exchange rate difference - -28 -58 - Total financial expense -22 -35 -126,468 - 1 Financial income includes FX gains. 2 Financial expense includes write-down of shares in group companies.

NOTE 7 TAXES

Recognised in the income statement Group Parent Company EUR thousands 2008 2007 2008 2007 Current tax expense (-) Tax expense for the period -1,671 -282 392 -63 Deferred tax income (+) Deferred tax for temporary differences -616 27 - - Total recognised tax expense -2,287 -255 392 -63

Reconciliation of effective tax Group Parent Company EUR thousands 2008 (%) 2008 2007 (%) 2007 2008 (%) 2008 2007 (%) 2007 Profit after financial items -148,838 4,221 -127,813 223 Tax as per applicable tax rate for the Parent Com- 28.0 41,675 28.0 -1,182 28.0 35,788 28.0 -63 pany Difference in tax rate in foreign operations 0.6 -846 - - - Tax effect of non-taxable income - 25.3 1,068 - - Tax effect of non-taxable expense 28.7 -42,656 - 27.7 -35,396 - Increase in loss carryforward without equivalent 0.3 -464 3.3 -141 - - capitalisation of deferred tax Effect of changed tax rate 0 4 - - - Recognised effective tax 1.5 -2,287 6.0 -255 -0.3 392 28.0 -63

Recognised in the balance sheet Recognised deferred tax assets and liabilities

Deferred tax assets and tax liabilities relate to the following: Group Deferred tax asset Deferred tax liability Net Net EUR thousands 2008 2008 2008 2007 Financial non-current assets - - - 97 Tax allocation reserve - -589 -589 -70 Total - -589 -589 27

East Capital Explorer AB Annual Report 2008 71 Financial Statements Financial NOTE 8 EARNINGS PER SHARE Specification of the Parent Company’s direct holdings of participations in subsidiaries Earnings per share 31 Dec 31 Dec EUR 2008 2007 2008 2007 Earnings per share, basic and diluted -3.56 0.09 Subsidiary / Corporate regist- No. of Carrying Carrying ration number / Domicile shares amount amount The origin of the numerator and denominator used in the above East Capital Explorer 3,410 263,764 390,174 calculations of earnings per share is shown below. Investments AB /556693-7370/ Stockholm Earnings per share, basic and diluted Total 263,764 390,174 Profit for the year attributable to the holders of ordinary shares in the Parent Company East Capital Explorer AB owns all preference shares in the sub- EUR thousands 2008 2007 sidiary. The percentage of votes is 4.3%. Profit/loss attributable to the holders of ordi- -129,236 3,298 nary shares in the Parent Company.

Weighted average number of 2008 2007 outstanding ordinary shares 1 Jan – 31 9 Nov – 31 In thousands of shares Dec Dec Total number of outstanding shares, 36,270 1 1 January New share issue 6 July 2007 549 Share redemption 9 Nov 2007 -550 New share issue 9 Nov 2007 33,795 New share issue 11 Dec 2007 2,475 Total number of outstanding shares, 36,270 36,270 31 December Weighted average number of ordinary 36,270 35,033 shares, basic and diluted

NOTE 9 GROUP COMPANIES

Holdings in subsidiaries Share of Subsidiary’s Equity in % domicile, country 2008 2007 East Capital Explorer Stockholm, Sweden 100 100 Investments AB East Capital Explorer Nicosia, Cyprus 100 - Investments (Cyprus) Ltd East Capital Power Utilities Stockholm, Sweden 73 73 Fund AB Consibilink Limited Nicosia, Cyprus 100 100

Parent Company EUR thousands Acquisition 31 Dec 2008 31 Dec 2007 At 1 January 390,174 - Acquisitions - 390,174 Write downs -126,410 - At 31 December 263,764 390,174

72 East Capital Explorer AB Annual Report 2008 NOTE 10 SHARES AND PARTICIPATIONS

Group EUR thousands 2008 2007 Acquisition At 1 January 106,156 - Reclassification of the holding East Capital (Lux) Eastern European Fund (EUR) 18,250 -

Acquisitions 175,020 106,156 Disposals -52,471 - At 31 December 246,955 106,156

Change in fair value through profit or loss At 1 January 3,813 - Fair value change through profit or loss -152,342 3,813 Realized losses through profit or loss -3,334 - At 31 December -151,863 3,813

Carrying amount 31 December 95,092 109,969

The Group has the following holdings: Holdings 2008 Number of shares/Units Cost Losses Carrying amount East Capital Bering Russia Fund 537,844 23,590 -16,213 7,377 East Capital Bering Ukraine Fund 1,212,296 24,411 -16,781 7,630 East Capital Bering Balkan Fund 4,538,686 34,938 -17,307 17,631 East Capital Bering Central Asia Fund 2,486,454 19,528 -12,139 7,389 East Capital Bering New Europe Fund 1,560,000 9,997 -3,155 6,842 East Capital Power Utilities Fund RusHydro 401,447,850 18,900 -13,176 5,724 OGK-4 221,005,495 2,638 -443 2,195 MRSK Tsentra 223,033,866 7,470 -5,366 2,104 OGK-6 287,268,642 3,594 -1,648 1,946 Other 74,170 -54,184 19,986

MFG (OAO Melon Fashion Group) 4,996 9,941 - 9,941

East Capital (Lux) Eastern European Fund (EUR) 182,500 18,250 -12,436 5,814

East Capital Russian Property Fund 400 855 -342 513 Total 248,282 -153,190 95,092

Holdings 2007 Number of shares/Units Cost Gains/losses Carrying amount East Capital Bering Balkan Fund 2,089,038 24,938 746 25,684 East Capital Bering Russia Fund 538,027 23,590 391 23,981 East Capital Power Utilities Fund Bashkir Energo 6,400,000 8,917 295 9,212 RAO EES 9,960,000 8,767 -68 8,699 Zhigulevskaya GES 20,500,000 6,959 1,392 8,351 Other 32,985 1,057 34,042 Total 106,156 3,813 109,969

All shares and participations are classified as financial assets carried at fair value through profit or loss in the sub-category held for trading.

Contingent liabilities East Capital Explorer made a commitment to invest EUR 39.1m in the East Capital Russian Property Fund. The investment will be made as the Fund calls for the capital, which takes place when the Fund has identified an investment object.

East Capital Explorer AB Annual Report 2008 73 Financial Statements Financial NOTE 11 PREPAID EXPENSES AND ACCRUED INCOME after any provisions to reserves and after payment of any dividends. This consists of profit/loss for the year and total non-re- Group Parent Company stricted equity, which is the amount available for distribution to 31 Dec 31 Dec 31 Dec 31 Dec the shareholders. EUR thousands 2008 2007 2008 2007 Accrued income 2,460 657 - 116 Capital management Prepaid expenses 157 20 23 20 Capital is defined as total capital excluding minority interests, which amounts to EUR 265m. Per 31 December EUR 89.7m Total 2,617 677 23 136 was invested and additional investments of EUR 39.1m had been announced but not drawn down yet. In total these investments amounted to EUR 128.8m, corresponding to 49 percent NOTE 12 SHAREHOLDERS’ EQUITY of the total portfolio. The remaining 51 percent comprised cash and deposits. Investment activities will continue in accordance Share capital and share premium with the investment strategy. The main investment focus contin- Ordinary shares ues to be East Capital’s Private Equity- and Semi-public Equity 2008 2007 funds. The objective is to offer investors long-term capital appre- Issued at January 1 36,270 1 ciation of the NAV. The risk of short-term fluctuations in capital New share issue 6 July 2007 549 appreciation is deemed to be high due to the high risk with which Share redemption 9 Nov 2007 -550 the markets in which the Company invests are encumbered. The New share issue 9 Nov 2007 33,795 return of the NAV for the period 1 January to 31 December 2008 is -32.8%. New share issue 11 Dec 2007 2,475 As stated in the dividend policy, the Company will not pay any Issued at 31 December 36,270 36,270 dividends as long as it deems that continuous reinvestment of capital in accordance with the Investment Policy will best allow Holders of common shares are entitled to dividends. The size the Company to build a strong investment base and generate and timing is to be proposed and approved at the annual general long-term value for the shareholders. meeting each year. Additionally each share grants the right to The future liquidity will depend primarily on (i) the timing and one vote at the shareholders’ meeting and all shares carry the sales of investments, (ii) the Company’s management of available same right to the company’s remaining net assets. cash, (iii) cash distributions from existing investments, (iv) capital contributions that are received in connection with the issuance of additional equity and (v) the issuance of indebtedness, if any. Shareholders’ equity in the Group The Company may enter into a line of credit facility with one or more lenders for the purpose of obtaining an additional source Other contributed capital of liquidity to fund short-term liquidity needs and for investments. Pertains to shareholders’ equity contributions. The share premi- The Company does not anticipate drawing on a line of credit until um paid in conjunction with new issues is included here. the Company has invested a significant portion of its capital. The aggregate amount drawn by the Company under any line Reserves – translation reserve of credit facility may not exceed an amount equal to 30% of the The translation reserve consists of all exchange differences aris- Company’s net asset value, excluding the debt and net asset ing on translation of the financial statements of foreign opera- value attributable to direct investments in real estate. tions prepared in a currency other than that used by the Group. There are no externally imposed capital requirements on any The Parent Company and the Group prepare their financial of the companies in the Group. reports in euro.

Retained earnings including profit for the year Retained earnings including profit/loss for the year include profits earned in the Parent Company and its subsidiaries.

Non-restricted equity – Parent Company

Share premium reserve When new shares are issued at a premium, meaning that the price to be paid for a share is higher than the previous quota value of the share, an amount corresponding to the amount received in excess of the share’s quota value is transferred to the share premium reserve.

Retained earnings Retained earnings comprise retained profit from previous years

74 East Capital Explorer AB Annual Report 2008 NOTE 13 OTHER LIABILITIES

Group Parent Company EUR thousands 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007 Other current liabilities Accounts payable 155 4 87 3 Purchase of shares – shares delivered but cash not paid 2,253 5,571 - - Other 74 10 41 57 Total 2,482 5,585 128 60

NOTE 14 ACCRUED EXPENSES AND PREPAID INCOME

Group Parent Company EUR thousands 31 Dec 2008 31 Dec 2007 31 Dec 2008 31 Dec 2007 Prepaid income - 11 - - Vacation pay 21 12 21 12 Management fee 606 155 - - Carried interest - 365 - - Other accrued expenses 271 177 235 177 Total 898 720 256 189

NOTE 15 FINANCIAL ASSETS AND LIABILITIES

Fair value Financial assets at Group 2008 fair value through Loans and Other Total carrying EUR thousands profit or loss receivables liabilities amount Fair value Shares and participation in investing activities 95,092 - - 95,092 95,092 Other receivables - 20 - 20 20 Short-term investments comprising deposits - 175,190 - 175,190 175,190 Cash - 8,453 - 8,453 8,453 Total 95,092 183,663 - 278,755 278,755 Other liabilities - - 2,482 2,482 2,482 Total - - 2,482 2,482 2,482

Financial assets at Group 2007 fair value through Loans and Other Total carrying EUR thousands profit or loss receivables liabilities amount Fair value Shares and participation in investing activities 109,969 - - 109,969 109,969 Other receivables - 43,941 - 43,941 43,941 Short-term investments 17,903 - - 17,903 17,903 Short-term investments comprising deposits - 198,700 - 198,700 198,700 Cash - 62,001 - 62,001 62,001 Total 127,872 304,642 - 432,514 432,514 Other liabilities - - 5,585 5,585 5,585 Total - - 5,585 5,585 5,585

2008 2007 Parent Company Total carrying Other Total carrying EUR thousands Other liabilities amount Fair value liabilities amount Fair value Other liabilities 128 128 128 60 60 60 Total 128 128 128 60 60 60

East Capital Explorer AB Annual Report 2008 75 Financial Statements Financial Calculation of fair value related derivatives in emerging markets. Factors that affect this The following summarises the main methods and assumptions price risk are: used to determine the fair value of the Group’s financial instru- • Investments in emerging markets ments. • Country-specific risks • Investments in the power utilities sector Financial instruments measured at fair value through profit or • Investments in the financial sector loss • Investments in the retail and consumer goods sector For a description of the method used to measure financial instru- • Investments in the real estate sector ments recognised at fair value through profit or loss, see Note 1 on page 65. When the Group realises an investment and is seeking an alternative investment in which to re-invest the capital realised, Financial instruments not measured at fair value through profit suitable investment opportunities may not always be available. or loss It may take a significant amount of time to re-invest the capital. For accounts receivable and accounts payable, the carrying Although the Group has adopted a policy of active manage- amount is deemed to reflect fair value since the remaining matu- ment of cash and liquid investments portfolio to enhance returns, rity is generally short. such management may form time to time generate returns that are substantially lower than the returns that the company antici- pates receiving from investments in any East Capital Funds or NOTE 16 FINANCIAL RISKS AND FINANCING POLICIES any direct investments.

The Group is exposed to various types of financial risks through Concentration risk its business activities. The Company and the subsidiaries are not classified as invest- The term “financial risks” refers to fluctuations in the Compa- ment funds in accordance with the Swedish Investment Funds ny’s earnings and cash flow as a result of changes in exchange Act (lag 2004:46 om investeringsfonder) nor are they subject rates, interest rates, refinancing and credit risks. The Group’s to the supervision of Finansinspektionen, the Swedish Financial finance policy for the management of financial risk has been pre- Supervisory Authority. Therefore the Group is not required to pared by the Board and is a framework of guidelines and regula- comply with the investment restrictions and requirements for risk tions in the form of risk mandates and limits for financial activities. diversification applicable for investment funds. Apart from the The Parent Company’s finance function is responsible for central fact that no investment in any single East Capital Fund may rep- management of the Group’s financial transactions and risks. For resent more than 40% of East Capital Explorer’s net asset value a more detailed description of business risks, please see pages at the time of the investment, that no single direct investment 50–52 in the unaudited part of the annual report. may exceed 15% of East Capital Explorer’s net asset value at the time of the investment and that total direct investments in real Market risk estate may not exceed 30% of East Capital Explorer’s net asset Market risk is the risk that the value of a financial instrument will value, East Capital Explorer’s investment policy only contains fluctuate due to changes in market prices. There are three types limited diversification requirements for the portfolio. In addition, of market risks: currency risk, interest rate risk and other price East Capital Explorer’s investment policy does not impose any risks. Equity price risk and currency risk are the most important limitations on the terms of the funds through which the Company market risks in the Group’s business activities. may invest, including with respect to fund size, affiliation with The Group’s exposure to market risk generally consists of the East Capital, geographic focus or other diversification, invest- risk of the value of its investments being affected by the mar- ment parameters or industry focus. In the event that the portfolio kets in which such investments are located. The Group invests in is concentrated on relatively few investments, adverse perform- enterprises based in Russia and the other CIS countries, the Bal- ance by even one of those investments could have a material kans, the Baltic States, Central Asia and Central Europe. Invest- adverse effect on East Capital Explorer. ing in companies based in these emerging markets involves market risks and certain other considerations, such as political risks, Interest rate risk that are not typically associated with investments in companies Interest rate risk is the risk that the fair value or cash flows of a established in other parts of Europe. financial instrument will fluctuate due to changes in market rates. The Group limits risk by following an investment policy that Interest rate risk arises for the Group’s business activities when provides guidelines based on the following factors: cash from new issues is received before final investment takes • Industry place. During this period, the cash from the issue is invested on a • Geography short-term basis. Changes in the level of interest rates can affect • Financial instruments the rate of return on the Group’s cash and cash equivalents. • Reinvestments Changes in the level of interest rates can also affect, among • Hedging other things: (i) the cost and availability of debt financing and hence the Group’s ability to achieve attractive rates of return on Equity price risk its investments, and (ii) the debt financing capability of compa- Equity price risk is the risk that the fair value or cash flows of nies whose capital structures have a significant degree of lever- a financial instrument will fluctuate due to changes in market age in which the Group has invested either through fund invest- prices. Equity price risk is a key risk in the business activities, ments or direct investments. which consist of investing in various forms of equities and equity-

76 East Capital Explorer AB Annual Report 2008 The neutral position regarding the interest rate risk for the short- in Swedish Treasury bonds without ratings are also accepted. term investment portfolio has been estimated to be an average As of the closing day, the company does not have any deriva- fixed interest term of three months. tive agreements or interest-bearing securities. The Group does not hold any derivatives as of the closing day. Sensitivity analysis The table below indicates the effect of the most important fac- Foreign exchange risk tors on East Capital Explorer’s results. Currency risk is the risk that the value of the assets will fluctuate due to changes in exchange rates. 2008 2007 The Group’s exposure to exchange rates mainly arises through investments in East Capital’s funds which are primarily denomi- Effect on Effect on operating operating nated in euro (EUR) and US dollars (USD). However, a majority Change, profit, EUR Change, profit, EUR of the underlying investments may be denominated in currencies Factors % thousands % thousands other than the euro, primarily the local currencies in the target Currency +/- 5 4,063 +/- 5 10,875 region. Changes in rates of exchange may have an adverse effect EUR/USD on the value, price or income of the Group’s investments. Interest +/- 5 475 +/- 5 476 Currency hedging may be carried out to provide protection Equity price +/- 5 4,755 +/- 5 6,394 against the impact of fluctuating exchange rates on the Group’s (investments) performance and financial position. Spot, forward or option transactions may be used as part of the currency hedging strategy. Hedging transactions entail costs and may result in losses. NOTE 17 RELATED PARTIES The East Capital Funds in which the Group has invested do not use currency hedging. Related party relationships The primary strategy in the financial policy is not to hedge for- East Capital Explorer AB has a related party relationship with its eign exchange risk in the underlying investments. In the future, subsidiaries, see Note 9, and with other companies in East Capi- however, the company may hedge any dividends and operating tal, see below. expenses, since these will mainly be denominated in Swedish kronor (SEK). License agreements The consolidated income statement includes exchange differ- The Company and East Capital Explorer Investments AB have ences of EUR 881,000 (EUR 28,000) in net financial items. a licensing agreement with East Capital Explorer Licensing AB, pursuant to which East Capital Explorer Licensing AB has grant- Liquidity risk ed a non-exclusive, royalty-free license to use the trade name Liquidity risk is the risk that an entity will encounter difficulty in and trademark “East Capital Explorer.” meeting obligations associated with financial liabilities. Liquidity risk refers to the risk that a financial instrument can- Management agreement not be divested without considerable extra costs, and to the risk East Capital PCV Management AB (the “Investment Manager”), that liquidity will not be available to meet payment commitments. a subsidiary of East Capital Holding AB, that implements invest- Liquidity risk is always considered with respect to investments. ments according to the investment policy and provides invest- The Group’s investments in illiquid markets mean that liquidity ment management services pursuant to the Investment Man- risk is present with respect to the ability to quickly divest hold- agement Agreement. The company has an Investment Manage- ings, but this is calculated and offset by the assessed potential ment Agreement with the Investment Manager and East Capital for returns. Because of the Group’s high equity ratio the risk of Explorer Investments AB. suspension of payments is deemed low. In accordance with the financial policy, liquidity risk will be Service agreement minimised through continual evaluation of exposure in the portfo- The company has a service agreement with East Capital Interna- lio with respect to investments in illiquid markets, taking liquidity tional AB, a service company in East Capital, pursuant to which risks into account. the company buys certain administrative and other services and sublets premises. During the year the Group purchased services Credit risk for EUR 197,000 (EUR 76,000) and the Parent Company for Credit risk is the risk that one party to a financial instrument will EUR 197,000 (EUR 76,000). fail to discharge an obligation and cause the other party to incur a financial loss. Employees East Capital Explorer’s exposure to credit risk is mainly through Two employees in the Group also have a contractual relationship the investment of excess liquidity in interest-bearing securities. with East Capital International AB where they perform certain Credit risk also arises as a result of derivatives with positive mar- tasks and duties. ket values. The CEO is a Board member of the following: East Capital The financial policy regulates counterparty exposure to mini- Baltic Property Fund AB, East Capital Real Estate AS, East Cap- mise credit risk. According to this policy, credit risk is limited by ital Power Utilities Fund AB, East Capital Explorer Investments only granting credit to counterparties with strong credit ratings, AB and AS Baltika. based on Standard & Poor’s, Nordic Rating and Moody’s Rating. Investments in deposits in larger Swedish banks and investments

East Capital Explorer AB Annual Report 2008 77 Financial Statements Financial Transactions with key management personnel and associ- overriding principle of which is that East Capital will treat its cli- ated companies ents fairly and will at all times act in accordance with its position The Company’s management, Board members and their close as investment manager of the various East Capital funds. The relatives and associated companies control 9.8% (9.5%) of vot- policy sets out a strategy and provides measures which will ena- ing rights in the company. For information about remuneration of ble the Manager’s team to actively identify, monitor and address senior executives please refer to Note 4 on page 70. any conflicts of interest that may arise in connection with the allocation of investment opportunities. Potential conflicts of interest The Investment Management Agreement entered into between Other the Company and the Manager contains provisions and pro- During 2008, East Capital Explorer Investments AB acquired cedures to address potential conflicts of interest between the 2,421 shares in OAO Melon Fashion Group from 26 direct Company and East Capital. Any conflict of interest which is not investors in MFG through MFG Intressenter AB, a wholly owned contemplated by the investment policy agreed between the subsidiary of East Capital Holding AB. An additional 2,575 Company and the Manager from time to time, shall be referred shares were acquired in a new share issue that was completed to the Board of the Company for resolution. Such conflicts during November 2008. Following the share issue, East Capital include for example any (i) investments in any East Capital fund Explorer and the East Capital Group hold respectively 16% and on terms which are materially adverse compared to existing East 11.6% of the shares in MFG. The shares were valued at market Capital funds or any fund of similar type (it being understood price and verified through a fairness opinion issued by Pricewa- that any increase with respect to fees and carried interest shall terhouseCoopers. Total acquisition value was EUR 10m. For be deemed as “materially adverse”); and (ii) any co-investments more information on the transaction, see page 52. made on terms which adversely deviate from the terms on which other co-investors make their investments. There are also other terms in the agreement designed to assure that fees payable by NOTE 18 INFORMATION ABOUT THE PARENT COMPANY the Company are always on market terms. The Investment Man- agement Agreement further provides that direct investments East Capital Explorer AB is a registered Swedish limited liability offered by the Manager with no co-investment by any other East company domiciled in Stockholm. The Parent Company’s shares Capital fund or by East Capital itself, shall be referred to the are registered on the NASDAQ OMX Nordic Exchange Stock- Board of the Company for resolution. In any such matter referred holm. The address to corporate headquarters is Kungsgatan 30, to the Board, the Board members affiliated with East Capital will Box 7214, 103 88 Stockholm, Sweden. The consolidated finan- not take part, in accordance with the rules of conflict of interest cial statements for 2008 include the Parent Company and its under the Companies Act. subsidiaries, together comprising the Group. In addition, East Capital has in place a policy for managing conflicts of interests in relation to its investment business, the

Consolidated key figures

1 Jan – 31 Dec 19 Jun – 31 Dec 1 Jan – 31 Dec 19 Jun – 31 Dec 2008 2007 Key figures/share 2008 2007 Equity ratio 97.9% 98.5% Earnings, EUR -3.56 0.09 Net asset value, EURt 265,025 394,261 NAV, SEK1 79.53 102.61 Change in NAV -32.8% 0.7% NAV, EUR 7.31 10.87 Market capitalisation, SEKm 1,458 3,627 Share price, SEK 40.20 100 Market capitalisation, EURt1 134,013 383,810 Share price, EUR1 3.69 10.58 Number of employees 4 3

1 Some currency translations are made for informational purposes. 1 EUR = SEK 10.88 on 31 December 2008 and SEK 9.44 on 31 December 2007. Source: Reuters.

78 East Capital Explorer AB Annual Report 2008 The Board and the CEO assure that the annual report and the consolidated accounts have been prepared in accordance with generally accepted accounting principles in Sweden and the international financial reporting standards referred to in Regulation (EC) no. 1606/2002 of the European Parliament and of the council of 19 July 2002 on the application of international accounting standards. The annual report and the consolidated accounts give a true and fair view of the financial position and results of the Parent Company and the Group. The statutory Administration Report of the Parent Company and the Group provides a fair review of the development of the Parent Company’s and the Group’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.

Stockholm, 18 March 2009

Paul Bergqvist Gert Tiivas Chairman of the Board Chief Executive Officer

Anders Ek Lars Emilson Board member Board member

Alexander V. Ikonnikov Justas Pipinis Board member Board member

Kestutis Sasnauskas Board member

Our Auditors’ Report was submitted on 18 March 2009

KPMG AB

Carl Lindgren Authorised Public Accountant

The annual report and consolidated annual report, as indicated above, have been approved by the Board for publication on 18 March 2009. The income statements and balance sheet of the Parent Company and the Group will be submitted to the shareholders’ meeting for adoption on 27 April 2009.

East Capital Explorer AB Annual Report 2008 79 Financial Statements Financial Audit Report To the annual meeting of the shareholders of East Capital Explorer AB (publ) Corporate identity number 556693-7404

We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the managing director of East Capital Explorer AB (publ) for the year 2008. The annual accounts and the consolidated accounts of the company are included in the printed version of this document on pages 57-79. The board of directors and the managing director are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director and significant estimates made by the board of directors and the managing director when preparing the annual accounts and the consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below.

The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company’s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the group’s financial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts.

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the statutory administration report and that the members of the board of directors and the managing director be discharged from liability for the financial year.

Stockholm 18 March 2009

KPMG AB

Carl Lindgren Authorised Public Accountant

80 East Capital Explorer AB Annual Report 2008 Definitions See pages 54–55 for definitions related to fees.

Alpha Private Equity KASE Index The result of active asset management Unlisted companies, meaning companies Main index of the Kazakhstan stock measured in generated return in excess of which shares are not listed on a stock exchange. a relevant benchmark index. exchange or other market place. MSCI EM Europe Index Commitment Public Equity Includes Russian, Polish, Hungarian, An investor’s pledge to investing a speci- Companies listed on a stock exchange or Czech and Turkish equities. fied sum of money in a private equity fund market place. over a specified period of time. OMXSPI Semi-public Equity Includes all shares listed on NASDAQ Draw-down Companies that, despite being listed on OMX Nordic Exchange Stockholm. When a private equity fund has decided on a stock exchange or market place, have an investment for the fund, it will approach shares with very limited trading volumes, PFTS Index its investors for part payment of the money and therefore are inaccessible for most Includes equities traded on the largest the investors have already pledged to the investors. Trading is done on the so called marketplace in Ukraine. fund. A draw-down is the actual act of second and third tier markets. transferring the money to the investment RTS Index target. Sharpe-ratio Includes the 50 largest companies Risk-adjusted measurement used to traded on the Russian Trading System IPEVC (formerly EVCA) compare how well the return of an invest- (RTS). International Private Equity and Venture ment compensates the investor for the risk Capital. A member-based, non-profit trade taken. The higher the Sharpe ratio, the bet- RTS 2 Index association that represents the interests of ter the investments historical risk-adjusted Includes 78 companies on the RTS that the private equity and venture capital indu- performance. have limited trading volumes. stry. Has published guidelines for valuation of unlisted companies that is widely used Short-term investments RTSeu Index as an industry standard. Investments that have the potential Sector index that includes 14 electric uti- to generate attractive returns while lity equities listed on RTS. Market capitalisation remaining available for future invest- Total number of outstanding shares ments. Please note that the benchmark indices times price per share. are provided solely as reference to evaluate fund performance. Although the provi- Net asset value (NAV) ded indices may be regarded as the most Corresponds to the value of East Capital suitable available benchmarks for the dif- Explorer’s net assets, i e total assets less ferent funds in which we invest, these indi- net debt. An indicative NAV is calculated ces are not fully comparable benchmarks on a monthly basis and is published five as the sector and country weighting in working days after the end of the month. these indices currently are significantly different from the weighting in the respective funds.

Production: East Capital Explorer. Graphic Design: Fredrik Folkesson, East Capital. Photos: Viktor Brott (23, 25, 39-41, 47), Stig-Göran Nilsson (31, 34) Peter Elam Håkansson (18), Anatoliy Otchkovskiy (14, 35), Shutterstock and portfolio companies. Translation and editing: PricewaterhouseCoopers Language Services. Print & Preprint: Alfa Print AB East Capital Explorer AB Annual Report 2008

B E R A P L O R T A L E X E A S T C A P I

Kungsgatan 30, Box 7214 SE-103 88 Stockholm, Sweden Tel: +46 8 505 97 700 Coroporate identity no: 556693-7404 www.eastcapitalexplorer.com