Baring Vostok Investments PCC Limited
Annual Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 (Registration number 38808)
DRAFT 27/04/2017 16:50 Contents
Management and Administration………………………………………………………………………………………………………………………………………….2
Chairman's Statement……………………………………………………………………………………………………………………………………………………………………3
Investment Portfolio……………………………………………………………………………………………………………………………………………………… 4
Report of the Manager…………………………………………………………………………………………………………………………………………………………………………………………………5
Directors' Report………………………………………………………………………………………………………………………………………………………………………………16
Independent Auditor's Report……………………………………………………………………………………………………………………………………… 21
Consolidated Statement of Comprehensive Income……………………………………………………………………………………………………………………………………………………………………………26
Consolidated Statement of Financial Position……………………………………………………………………………………………………………………………………………………………………………..27
Consolidated Statement of Changes in Equity…………………………………………………………………………………………………………………………………………………………………..28
Consolidated Statement of Cash Flows……………………………………………………………………………………………………………………………………..……………..29
Consolidated Notes to the Financial Statements……………………………………………………………………………………………………………………………………………………………………………..30
Baring Vostok Investments PCC Limited 1 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Management and Administration
DIRECTORS: Andrey Costyashkin (appointed on 1 June 2016) Christopher Legge (resigned on 27 April 2016) J. Dudley Fishburn, Chairman Peter Touzeau Richard Crowder Simon Faure
REGISTERED OFFICE: 1 Royal Plaza Royal Avenue St Peter Port Guernsey GY1 2HL
MANAGER: Baring Vostok Investment Managers Limited 1 Royal Plaza Royal Avenue St Peter Port Guernsey GY1 2HL
SECRETARY AND ADMINISTRATOR: Ipes (Guernsey) Limited 1 Royal Plaza Royal Avenue St Peter Port Guernsey GY1 2HL
INDEPENDENT AUDITORS: PricewaterhouseCoopers CI LLP Royal Bank Place 1 Glategny Esplanade St Peter Port Guernsey GY1 4ND
Baring Vostok Investments PCC Limited 2 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Chairman's Statement
Dear Shareholders,
Your company remains extremely well positioned within Russia. We have our eye on a number of new private equity investments. Competition for these from other foreign investors is limited and there are good opportunities to invest in well-researched and strategic companies. We are also concentrating our resources on our many existing investments that have the potential for considerable capital growth. Our Manager always plans on exiting these investments at the best possible time.
A summary of the top 10 private equity holdings is reported on pages 11 to 15.
After a difficult 2015, Russia's economy stabilised in 2016 as the oil price and the Rouble became less volatile and GDP recovered modestly. Baring Vostok Investments PCC Limited has a strong portfolio which should create increased valuations in USD in the years ahead.
I would like to thank our shareholders, our advisors and all our stakeholders for their continued support.
J. Dudley Fishburn Chairman Date: 27 April 2017
Baring Vostok Investments PCC Limited 3 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Investment Portfolio As at 31 December 2016
31 Dec 16 31 Dec 16 31 Dec 15 31 Dec 15 Cost Fair Value Cost Fair Value USD USD USD USD
Core Private equity investments 78,416,266 59,030,203 85,377,007 45,001,672 Bonds and fixed income investments 4,220,217 4,294,732 1,994,280 2,016,840 Listed equity 18,576,823 16,567,662 19,666,264 9,939,137
Total Core 101,213,306 79,892,597 107,037,551 56,957,649
Cell Listed equity - BVPEF Yandex Interest - - 8,504,509 3,656,380
Total Cell - - 8,504,509 3,656,380
Total Company 101,213,306 79,892,597 115,542,060 60,614,029
The USD:RUB and USD:KZT rates applied to the cost of the underlying investments are the prevailing rates at the date of purchase. The USD:RUB rate applied to the revaluation of the underlying investments as at 31 December 2016 was 60.66 (31 December 2015: 72.88) and the USD:KZT rate was 333.29 (31 December 2015: 339.47).
Baring Vostok Investments PCC Limited 4 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Baring Vostok Investments PCC Limited
Manager’s Report
Portfolios The Core: As of 31 December 2016, Baring Vostok Investments PCC Limited’s (“The Company” or “BVIL”) Core Net Asset Value (“NAV Core”) per Share was $3.08, an increase of 27% compared to the December 31, 2015 NAV per Share of $2.43.
After several portfolio divestments between 2014 and 2016, the Core had accrued cash of approximately $3.2 million available for distribution to shareholders. In May and June 2016, BVIL distributed these proceeds via a share buy-back, by which the Core acquired 1,624,500 shares at an average price of $1.95, or an approximate discount of 20% to the Core’s NAV as of March 31, 2016. These shares are currently held in treasury.
As at 31 December 2016, approximately 68% of the Core’s assets were invested directly and indirectly in underlying private equity portfolio companies, 24% were invested in a range of public equities and fixed income instruments, and 7% were held in cash and cash equivalents. The Core’s targeted allocation of exposure to private equity assets remains 75%-80%.
CORE PE PE Total valuation $'mln Share of net assets NET ASSETS (31 December 2016) Portfolio Investments Portfolio Investments % Top Ten Private Equity Holdings Country Sector Ozon* Russia E-Commerce 8.4 9.6% Center for Financial Technologies* Russia Software 6.8 7.7% EMC* Russia Healthcare 3.4 3.8% Etalon+ Russia Residential Homebuilding 3.1 3.6% Kaspi Bank* Kazakhstan Retail Banking 3.1 3.5% Tinkoff Bank+ Russia Online Retail Banking 3.0 3.4% Avito* Russia Online Classifieds 2.9 3.3% Nostrum Oil & Gas+ Kazakhstan Oil & Gas E&P 2.4 2.8% Viasat Russia, CEE Media 2.2 2.5% Gett Russia, Israel, UK, US Internet, online marketplace n.d. n.d. Other PE Holdings n.d. n.d. Total PE Holdings 59.9 68.0% Cash and Cash Equivalents 5.7 6.5% Listed Equity Securities+ 15.7 17.8% Bonds and Fixed Income Investments 4.3 4.9% Net Current Receivables 2.5 1.7% Net Assets 88.1 98.9% *Private companies valued at Q4 2016 valuations, adjusted by the spot rate as of December 31, 2016 (Rouble/$ for Ozon, CFT, EMC, Avito; KZT/$ for Kaspi Bank) +Public companies valued at December 31, 2016 closing market price n.d. - not disclosed Competition for new investments in Russia and the region continues to be limited, as few private equity funds have substantial capital available to invest, the IPO market for Russian companies remains largely closed, and most of the traditional Russian competitors have liquidity constraints and/or are distracted by urgent problems with existing investee companies.
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Baring Vostok Investments PCC Limited
For the calendar year 2016, the Core’s co-investment percentage of new private equity deals alongside Baring Vostok Private Equity Fund V (“Fund V”) was equal to 3% of each new investment. We saw attractive opportunities among rapidly-growing internet marketplaces, and in more traditional sectors such as retail and consumer services. New investments included:
• BlaBlaCar, a leading global online community-based ride-sharing company, operating in 22 countries across the EU, Russia, Ukraine, India, Turkey, Brazil, and Mexico; • Busfor, the leading platform for selling intercity bus tickets online in Russia and Ukraine; • Familia, Russia’s leading off-price apparel retailer; • Solopharm, a pharmaceutical manufacturer focusing on generic liquid drugs, benefiting from the overall trend in Russia of import substitution and a specific focus on becoming self- sufficient in pharmaceuticals; • Vkusvill, a fast-growing food retailer in Moscow with a focus on fresh products. In 2016, BVIL also made several follow-on investments into its existing portfolio companies alongside Fund V to finance additional development and to opportunistically buy-out other shareholders. Follow-ons included investments in Carprice, Profi, Orient Express Bank and Tigers Realm Coal.
As of 31 December 2016, the Core had exposure to 35 underlying portfolio companies. Nearly all of the Core portfolio companies operate in domestic, consumer-focused sectors such as internet services, media, retail services, or financial services. Despite economic headwinds in recent years, growth rates in these sectors in Russia have remained consistently strong due to similar secular drivers which are occurring in most countries globally. In addition, most are the leading players in their sectors and have superior customer value propositions compared to their competition, enabling them to grow much faster than their market segments overall. Avito, Carprice, Familia, Gett, Ivi, Profi, Tinkoff Bank, Viasat, and Vkusvill all generated record results in 2016, and we believe still have a long runway to continue to grow rapidly before their respective markets reach saturation.
In contrast, most Russian and regional companies in cyclical sectors (such as financial services, advertising, and residential development) suffered in 2015 due to a drop in demand, a spike in interest rates, and the operational leverage inherent in their business models. However, by 2016 there were clear signs of a cyclical bottom being reached, with the weakest companies closing operations and the strongest players gaining market share. The Fund has relatively low exposure to cyclical sectors, but where it does, its portfolio companies took advantage of the downturn to implement fundamental operational improvements and aggressively launch new products, showing a sharp drop in profitability in 2015 but rebounding solidly in 2016. Kaspi is emerging from its sector downturn in fundamentally better shape than it was previously, and has strong long-term growth prospects. Orient Express Bank returned to profitability in 2016 after a comprehensive operational restructuring, and should be poised for better results in the future.
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Baring Vostok Investments PCC Limited
The portfolio companies are well capitalized overall, with only eleven of the thirty (excluding 5 financial services companies) having any net debt, positioning them well to withstand market volatility, but also to move forward with expansion plans as several of their more heavily indebted competitors are distracted by balance sheet issues.
The portfolio is diversified between the financial services, oil and gas, consumer products, telecommunications and media sectors.
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Baring Vostok Investments PCC Limited
For underlying (non-listed) portfolio companies with local functional and reporting currencies (e.g. Roubles, Tenge), the investments are valued in that currency, translating this valuation into USD at the respective Central Bank’s spot rate as at 31 December 2016.
- Publicly-listed companies are valued at their respective closing traded prices as at 31 December 2016. - Non-listed companies are valued based on an analysis of comparable publicly listed companies, with discounts or premiums applied where appropriate, or based on 3rd party transactions closed in the last 12 months.
The Cell: In April 2016, the final portion of the Cell’s underlying investment holding in Yandex was sold. As of 31 December 2016, BVIL’s Cell Net Asset Value (“NAV Cell”) per share was $70.0. In July 2016, the Company distributed $4.8 million to shareholders in the form of dividends. The BVIL Cell will be liquidated following the final distribution of the remaining cash (approximately $134,000 as of 31 December 2016). The intention to de-list the Cell was publicly announced by Board of Directors on 10 February 2017.
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Baring Vostok Investments PCC Limited
Russia Economic Update
After a severe economic downturn in 2014-2015 driven by the twin impacts of falling oil prices and economic sanctions, Russia’s economy stabilized and turned moderately positive in the second half of 2016, with GDP roughly flat in real terms for the year overall. Most economic indicators have been gradually improving throughout 2016, with inflation falling to a post-Soviet era low of 5.4%, interest rates declining below 10% (compared to more than 20% at the peak in late 2014), and unemployment stable at roughly 5.5%. Source: CBR, State Statistics Service
Debt repayments by corporates and banks peaked in 2014-2015, and now most banks have surplus liquidity which they are looking to lend again to the real economy. The currency devaluation has been key to Russia’s economic self-sustainability, since the country’s large natural trade surplus, relatively low dependence on imports and low external debt make it a net beneficiary from a weaker currency. A weaker Rouble has also helped preserve Russia’s federal budget solvency, with only a moderate deficit (2.3% of GDP) even in 2015 when the Source: CBR economy was in a steep recession.
Most of the Company’s portfolio companies have demonstrated sustainably rapid Rouble revenue growth throughout the recent difficult economic period, but currency volatility undermined portfolio valuations in US Dollar terms. Since the Rouble is highly correlated to the oil price on the downside, the most important macro-economic factor needed for Baring Vostok funds has been for the oil price to eventually reach a bottom and the Rouble to stabilize.
Source: Thomson Reuters
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Baring Vostok Investments PCC Limited
Last year’s OPEC agreement, in which the world’s leading oil exporters agreed to voluntary cuts in oil production, was perceived by the market as affirmation that oil prices in the $30s can’t be sustained by most producers. There are still downside risks for the global oil price, including the sustainability of the OPEC agreement on cuts (already under question in the first quarter of 2017), rising short-term production from US shale producers and weak growth in global oil demand, but also upside risks due to sharply lower investment in new field exploration and development. Overall, a narrower band of expectations for future oil prices bodes well for Baring Vostok funds, as greater Rouble stability should allow our companies’ exceptional local-currency revenue growth to again translate into steady growth in US Dollar valuations.
Economic sanctions against Russia from the USA and EU continue to impact foreign direct investment, not mainly as a result of directly sanctioned activities but from “self-sanctioning”, whereby potential strategic investment is postponed or cancelled due to perceived risks of further sanctions escalation or other uncertainty related to geopolitical tensions. After falling sharply in 2015 to only $4.8 billion, foreign direct investment (FDI)1 recovered noticeably in 2016 to $25 billion, yet still remains 2x below pre-crisis levels. This is one reason why Russia’s GDP growth outlook remains subdued compared to previous years.
Hopes for a quick change in the US approach to sanctions following Donald Trump’s election as US President have already proven to be overly optimistic, as we expected. But sanctions are already “priced in” to Russian asset valuations and the economy has adjusted to reduced FDI. With an exceptional portfolio of market-leading companies and reduced currency volatility due to oil market stabilization, we can generate our target returns based mainly on earnings growth and continued recovery in domestic liquidity and M&A activity. Partial sanctions relief remains likely eventually, but is an unpredictable upside scenario which isn’t part of our base case return expectations.
Kazakhstan Economic Update
Like Russia, Kazakhstan’s economy is also exposed to movements in global commodity prices. In 2016, the effects of oil and metal price volatility in previous years led to a slowing in GDP growth, as it declined to 1%, versus 1.2% in 2015 and 4.1% in 2014. After an abrupt and destabilizing devaluation of the country’s currency in 2015 – which was held fixed for domestic political reasons despite a drop in oil prices and a similar weakening in the Rouble – the Tenge was allowed to float in Q3 2016, and as a result, currency volatility had moderated considerably. Similar to Russia, the weaker currency helps most of the country’s exporters to enjoy strong profit margins despite the low commodity price environment.
A strong fiscal balance and the stabilization of the Tenge have led to a similar stabilization in inflation (down to 8.5% in 2016 from 13.5% in 2015) and interest rates. Industrial production is showing signs of picking up and several large oil fields (Kashagan, Tengiz) are coming online or bringing additional production online, which, due to the low operating costs, are expected to positively impact economic growth overall and the country’s budget. In general, Kazakhstan’s overall macro fundamentals (low debt, high savings, competitive exports, healthy demographics) position the country well to resume a solid growth trajectory in the medium-term.
1 Source: State Statistics Service, CBR, Sberbank CIB Investment Research
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Baring Vostok Investments PCC Limited
Top 10 Private Equity Holdings Overview
Ozon Industry: E-Commerce BVIL Cost Basis: $ 6.7 million Location: Russia BVIL FMV: $ 8.4 million Baring Vostok Fund: Ozon L.P. BVIL NAV (%): 9.6% Status: Unrealized Valuation Basis: Comparables
Company Description: Founded in 1998 and headquartered in Moscow, Ozon Group is one of Russia’s largest and most recognized e-commerce and online travel companies. The company is comprised of two core businsses: Ozon.ru and Ozon Travel. Ozon.ru benefits from a fully integrated logistics platform with its own courier services that provdies customers with quick delivery in its core cites of operation. Ozon Travel is one of the country’s largest online travel agencies. Led by a highly experienced management team, Ozon today employs over 3,000 people.
Initial Investment Rationale (2000): “Analysts estimate that Russia’s e-commerce market should grow at a 35% CAGR through 2015, as it increases its share of overall retail sales penetration from 1.9% today to 4.5% in 2015.”
Key Recent Developments: In 2016, Ozon’s core e-commerce business, Ozon.ru, saw revenue growth of 20%, with an acceleration in the second half of the year, with strong support from its FMCG categories (Moms & Kids, Sports, Home Décor, Health & Beauty). The company continues to see an increase in the number of orders month-to-month and positive dynamics on the contribution margin level. It has also successfully launched two regional warehouses, in Kazan and Ekaterinburg, and expects to continue its regional expansion in 2017.
Center for Financial Technologies Industry: Financial Services BVIL Cost Basis: $ 10.1 million Location: Novosibirsk, Russia BVIL FMV: $ 6.8 million Baring Vostok Fund: Fund III BVIL NAV (%): 7.7% Status: Unrealized Current Valuation Basis: Comparables
Company Description: CFT is a diversified technological provider for the financial services sector in Russia and CIS, specializing in banking software and payment processing. The Company is Russia’s leader in core banking software and in money transfers, and it holds strong positions in other segments, such as prepaid cards.
Initial Investment Rationale (2006): “High growth potential in the underpenetrated Russian processing and banking software market. High cash flow generative core business and significant synergies between processing and software businesses. Potentially attractive acquisition target for international payment processing or payment management companies.”
Key Recent Developments: In 2016, CFT retained leading positions in Russia in both its banking software and money transfer business segments. The company’s banking software platform is now installed in 42 out of the top 100 Russian banks and its market share of money transfers between Russia and the CIS reached 70% in 4Q2016.
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Baring Vostok Investments PCC Limited
EMC Industry: Health Care BVIL Cost Basis: $ 2.4 million Location: Moscow, Russia BVIL FMV: $ 3.4 million Baring Vostok Fund: Fund IV BVIL NAV (%): 3.8% Status: Unrealized Current Valuation Basis: Comparables
Company Description: EMC is a leading hospital operator in Moscow, with a focus on the premium segment of the market, and well developed competencies both in outpatient and inpatient segments. It currently operates 4 hospitals, a children’s clinic, and other health care specialty facilities.
Initial Investment Rationale (2012): “EMC aims to build on its leading position in the premium segment in Moscow by expanding its capacities and opening additional multipurpose clinics/hospitals, building up the ‘competency centres’ and expanding its service offering to include tertiary medical centres (such as perinatal, oncology, etc.) and penetrating the upper middle price segment.”
Key Recent Developments: In 2016, EMC showed strong growth, with revenues increasing 26% y-o-y and EBITDA nearly doubling on the back of increased ramp-up of its Shepkina hospital (launched in 2013). The company has further plans for expansion and is also considering a number of strategic opportunities for future growth.
Etalon Industry: Residential Homebuilder BVIL Cost Basis: $ 2.5 million Location: Russia BVIL FMV: $ 3.1 million Baring Vostok Fund: Fund IV BVIL NAV (%): 3.6% Status: Partially Realized Current Valuation Basis: LSE
Company Description: A leading, vertically integrated, private residential homebuilder in St Petersburg and the Moscow Metropolitan Area.
Initial Investment Rationale (2008): “Expected strong demand for good quality residential housing due to a supply deficit in Russia. Excellent management team with solid reputation and 20-year track record.”
Key Recent Developments: In 2016, customer activity increased due to overall economic stabilization, RUB appreciation and the continued downward trend in interest rates. For the full year, new contract sales (RUB) increased by 35% y-o-y and cash collections (the key driver of future revenues and profit) increased by 54%. As interest rates in Russia continue to decline, the share of Etalon’s customers using mortgage financing has increased from 15% to 23% year-on-year, supporting demand.
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Baring Vostok Investments PCC Limited
Kaspi Bank Industry: Financial Services BVIL Cost Basis: $ 3.9 million Location: Kazakhstan BVIL FMV: $ 3.1 million Baring Vostok Fund: Fund III BVIL NAV (%): 3.5% Status: Unrealized Current Valuation Basis: Comparables
Company Description: Kaspi Bank is one of Kazakhstan’s leading retail banks and is the #1 player in consumer loans, car loans, distribution network, and payments (including the leading platform for online payments, Kaspi.kz). Kaspi is building an ecosystem which helps sellers to sell and buyers to buy various products and services.
Initial Investment Rationale (2006): “The Bank is a strong platform on which to build one of the largest retail banks in Kazakhstan. Demand for banking services in Kazakhstan, especially retail services and consumer finance, is expanding rapidly due to a growing middle class and increasing levels of liquidity in the economy.”
Key Recent Developments: Kaspi is one of Kazakhstan’s leading retail banks and its #1 player in consumer loans, car loans, POS retail loans, and payments. In 2016, Kaspi remained profitable despite severe macro headwinds and significant currency volatility. Over the previous year, Kaspi conservatively reduced its lending activity via tighter credit risk policies and a reduction in average ticket size, while holding a large liquidity position due to currency volatility. At the same time, Kaspi took advantage of the downturn to launch several innovative non-banking products and services. Kaspi is now the country’s largest online payments platform, operates Kaspi Shop, the largest online marketplace for electronics goods, and launched Kaspi Red, an innovative installment loan product offered in partnership with a wide range of retailers.
Tinkoff Bank Industry: Financial Services BVIL Remaining Cost Basis: $ 0.9 million Location: Russia BVIL FMV: $ 3.0 million Baring Vostok Fund: Fund IV BVIL NAV (%): 3.4% Status: Partially realized Current Valuation Basis: LSE
Company Description: TCS is a leading branchless mono-line credit card bank in Russia, focused on direct channel (internet and direct mail). Today, it is expanding into an online financial supermarket, offering a number of services and products for retail customers.
Initial Investment Rationale (2012): “Tinkoff Credit Systems has successfully proven its ability to grow loan portfolio and attract deposits via internet and other remote channels. Bank is led by a strong management team, enjoying active involvement from a successful entrepreneur – Oleg Tinkov. Credit card lending remains fast growing and underpenetrated segment in Russian consumer finance allowing sufficient growth for entrepreneurial player like TCS. “
Key Recent Developments: Tinkoff Bank reported strong 2016 results, with net interest income up 34% y- o-y to RUB 34.0 billion, and net income increasing substantially from RUB 1.9 billion in 2015 to 11.0 billion. This resulted in a return on equity (RoE) of 43%, as Tinkoff was able to leverage its flexible business model and best-in-class risk management to benefit disproportionately from an overall cyclical improvement in asset quality across the market.
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Baring Vostok Investments PCC Limited
Avito Industry: Online Classifieds BVIL Cost Basis: $ 0.6 million Location: Russia BVIL FMV: $ 2.9 million Baring Vostok Fund: Fund IV BVIL NAV (%): 3.3% Status: Partially realized Current Valuation Basis: Comparables
Company Description: Avito is Russia’s number 1 online classifieds website, with leading positions in attractive verticals such as real estate and automobiles.
Initial Investment Rationale (2011): “Increasing penetration of internet and broadband, coupled with secular shift from print to online classifieds should lead to rapid growth in segment over next 5 years. Business model has been successfully tested abroad and there are several examples of clear market leaders demonstrating extremely high levels of profitability.”
Key Recent Developments: Avito.ru is the leading online classifieds site in Russia and #8 website in the country overall, with more than 35 mn monthly unique visitors. It also holds leading positions in the Auto and Real Estate verticals. Page views reached 92 billion in 9m16 compared to 75 billion in 9m15. In 2016, the company’s revenues increased by approximately 75%, with a solid 54% EBITDA margin. Avito is building on its successful implementation of listing fees across different categories and regions, and continues to develop its mobile offerings.
Nostrum Oil & Gas (Zhaikmunai) Industry: Oil & Gas BVIL Cost Basis: $ 4.9 million Location: Kazakhstan BVIL FMV: $ 2.4 million Baring Vostok Fund: Fund IV BVIL NAV (%): 2.8% Status: Unrealized Current Valuation Basis: LSE
Company Description: Nostrum Oil & Gas (formerly Zhaikmunai) is an exploration and production company which is developing the Chinarevskoye field in Kazakhstan, a mainly gas and condensate field with more than 500 million barrels of oil equivalent (BOE) reserves.
Initial Investment Rationale (2009): “Once the field’s Gas Treatment Unit is brought online, production is expected to increase from 7,500 barrels per day (bopd) to over 25,000 bopd. The field is at a stage and size that should make it an excellent prospect for a strategic sale, although the listing of its operating subsidiary on LSE gives an alternative liquidity path if the Fund chooses to exit before a strategic sale.”
Key Recent Developments: In 2016, Nostrum averaged production of 40,351 barrels of oil equivalent per day (boepd). Revenue for full-year reached $348 million, down 21% y-o-y. In December 2015, the company entered in to a new 2-year hedge on 15,000 boepd, guaranteeing the company an effective price on its 2016 and 2017 oil production at $49.16 per barrel. Oil and condensate represent approximately 40% of Nostrum’s total production.
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Baring Vostok Investments PCC Limited
Viasat Industry: Media BVIL Cost Basis: $ 1.2 million Location: Russia BVIL FMV: $ 2.2 million Baring Vostok Fund: Fund V BVIL NAV (%): 2.5% Status: Unrealized Current Valuation Basis: Comparables
Company Description: Viasat is the number one Pay-TV broadcasting group in Russia with 62 million pay subscriptions.
Initial Investment Rationale (2010): “Viasat specializes in the production and distribution of various Pay TV channels in Russia (60% of revenues) and CEE (40% of revenues). The company operated as a separate, self- sufficient business segment of MTG and it is the number one Pay-TV broadcasting group in Russia with 62 million pay subscriptions. Its main products include the TV1000 and Viasat channels and its offerings include the top two cable TV channels in Russia by number of viewers (TV1000 Russkoe Kino and TV1000). Though the growth rate of cable TV is expected to slow over the next 5-10 years, the continued increase in overall cable TV penetration in Russia coupled with the company's strong position in the market is expected to support Viasat’s strong cash flow generation and healthy economics.”
Key Recent Developments: In 2016, the Russian Pay-TV market grew by 10% y-o-y in Rouble terms and by 4% in real terms (number of subscribers). The number of subscribers for Viasat Russia grew in-line with the market. For the full year, the company reported double-digit revenue growth in USD and a healthy EBIT margin, on the back of cost savings initiatives.
Gett Industry: Online marketplace BVIL Cost Basis: Not disclosed Location: Israel, Russia, US, UK BVIL FMV: Not disclosed Baring Vostok Fund: Fund V BVIL NAV (%): Not disclosed Status: Unrealized Current Valuation Basis: 3rd Party valuation with discount applied
Company Description: Gett is one of the leading global players in on-demand transportation market operating in four countries, including Israel, Russia, UK and US with Russia having the potential to become the biggest market for the company.
Initial Investment Rationale (2014): “The global taxi industry is undergoing a structural shift with both supply and demand migrating from street hail and phone service to two-sided mobile marketplaces. Gett’s success to date, strong management and founders, and technological sophistication position it well to take advantage of this trend. In addition, the company is one of a few global players with a comprehensive solution for corporate clients. The company has very attractive unit economics in both B2C and B2B segments which should enable Gett to achieve strong profitability margins characteristic of the marketplace business model.”
Key Recent Developments: In 2016, Gett increased its number of rides by over 150%, with its gross profit growing by over 70% y-o-y. Competition remains high in the sector, and while the environment in each market of operation differs, Gett is well positioned as a platform for further future growth. In Q2 of 2016, the company closed a $300 million equity round from Volkswagen, valuing the company at $1.2 billion. Later in Q4 of 2016 Gett has also raised additional $100 million of venture debt form Sberbank. This gives the company substantial financial resources to grow its existing territories – both organically and potentially via acquisition – and expand into new regions.
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Directors' Report
The Directors present their Annual Report and Audited Consolidated Financial Statements of Baring Vostok Investments PCC Limited (the "Company") for the year ended 31 December 2016. History The Company was incorporated in Guernsey, Channel Islands on 5 October 2001. On 17 July 2013, at an Extraordinary General Meeting, the requisite majority of the shareholders of the Company gave consent for the conversion of the Company to a protected cell company ("PCC") and on the same day it changed its name from Baring Vostok Investments Limited to Baring Vostok Investments PCC Limited. Upon conversion the Company established a "Cell" which held, through its investment in Baring Vostok Investments Holdings Limited ("BVIHL"), the Company’s interest in Yandex via Baring Vostok Private Equity Fund L.P.3 and did not make any new investments. The remainder of the Company’s existing and any new investments are held in the "Core", directly or indirectly through BVIHL.
The Company raised USD 32 million of new capital (the "Placing"), by issuing additional Core Shares at a Placing Price of USD 3,681 per Share, representing a 2 per cent premium to the net asset value ("NAV") attributed to each Core Share as at the Calculation Date of 10 June 2013 (with the premium used to cover the expenses of the Placing and to ensure that the Placing was non-dilutive to such NAV). On 18 July 2013, the Company’s Cell Shares and Core Shares commenced trading on Channel Islands Securities Exchange ("CISE") which was rebranded in March 2017 as The International Stock Exchange ("TISE"). Baring Vostok Private Equity Fund L.P.3 during the year sold all its remaining shares in Yandex, went into run-off mode and expected to be divested in an orderly fashion by the end of 2017. After receiving the final distributions from Baring Vostok Private Equity Fund L.P.3, the Company will distribute the final dividends to Cell shareholders and cancel the Cell Shares. As the main purpose of the Cell Shares was to hold the Company’s interest in Yandex via Baring Vostok Private Equity Fund L.P.3, the Company provided on 10 February 2017 its intention to cancel the listing of the Cell Shares from TISE which occurred within 20 days after the announcement. Activities The principal activity of the Company pre-conversion was to carry on business as a closed ended investment company and it was admitted to the official list of the TISE on 29 October 2001. Post-conversion, the Core principally aims to invest, directly or indirectly, in a portfolio of primarily middle-market companies in Russia and other countries of the former Soviet Union and principally in shares of unlisted companies that are generally illiquid and difficult for investors outside of the Region to access. The Core may invest directly as a co-investor alongside funds managed by Baring Vostok or indirectly through such funds. The Cell held the Company’s interest in Yandex via Baring Vostok Private Equity Fund, L.P.3 through BVIHL and did not make any new investments.
The Company is exposed to direct and indirect financial risks as a result of its own investments, which include investments in other investment funds. These investment funds have direct exposure to the Russian economy and currency. Significant financial risks are detailed in note 10 of the consolidated financial statements.
Directors' Shareholdings The Directors of the Company are as set out on page 2. As at reporting date Directors' shareholdings in the Company's Core is detailed in the table below. There were no share acquisitions in 2016 by Directors (2015: nil).
Member of the No. of Shares Date Acquired No. of Shares Post Board Acquired stock split effective 13 January 2016 Andrey Costyashkin 1,020 17 July 2013 1,020,000 Richard Crowder 40 21 January 2014 40,000 Peter Touzeau 20 31 January 2014 20,000
Baring Vostok Investments PCC Limited 16 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Directors' Report
Directors' Responsibilities The Directors are required by The Companies (Guernsey) Law, 2008 (''Companies Law'') as amended to prepare Financial Statements for each financial period which give a true and fair view of the state of affairs of the Company as at the end of the financial period and the profit or loss of the Company for that period. In preparing these Annual Financial Statements the Directors are required to: ■ select suitable accounting policies and then apply them consistently; ■ make judgements and estimates that are reasonable and prudent; ■ state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and ■ prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors confirm that they have complied with the above requirements when preparing the Financial Statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the Financial Statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
So far as the Directors are aware, there is no relevant audit information of which the Company’s auditor is unaware. The Directors have taken all steps they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 249 of The Companies (Guernsey) Law, 2008.
Directors' Biographies
Andrey Costyashkin (appointed on 1 June 2016)
Andrey has been with Baring Vostok since 1999. Prior to taking leadership of the Fund Manager team, Andrey worked for 16 years in the Investment Advisor team and coordinated the search for and evaluation of new projects, and ensured that all operations were compliant to Baring Private Equity International standards. As a Partner and Chief operational officer, he co- ordinated Companies’ operations and acted as compliance officer. Prior to that he was in charge of co-ordination of the investment process for Baring Vostok and led diligence efforts and deal ideas structuring. He was also responsible for: the screening of incoming projects and opportunities; Baring Vostok’s proactive deal sourcing activities/top-down screening of target industries; and for monitoring of OTC portfolio.
Andrey Costyashkin has over 25 years of private equity experience in Russia and other CIS countries. Before joining Baring Andrey worked for 7 years in Alfa Bank/ Alfa Capital. He led proactive deal search and due-diligence process for private equity investment as a Head of the Research Department. He was responsible for establishment and co-ordinating Alfa-Capital’s Research team in Russia, the Ukraine and Kazakhstan, provided strategic macro-economic research for and investigated and led due diligence on approximately 20 acquisitions for Alfa-Capital Holdings both in Russia and in CIS countries.
He was a Member of the investment committee and Board of Directors of Alfa Capital. Andrey has a PhD in Economics from the Moscow Institute of Transport Engineers, where he also lectured for six years.
Andrey’s primary responsibility is management of the Baring Vostok Private Equity Funds portfolios, overseeing the operation of the Baring Vostok Funds including liaising with Target and Portfolio Companies, Investment Committees, the Funds’ Administrators, Auditors, Bankers, Lawyers and the Investment Advisor. Andrey is also a Director of a number of holding companies in Guernsey and Cyprus. Andrey is in charge of business development, evaluation of the investment opportunities, control over investment process and day to day management of the Baring Vostok Private Equity Funds portfolios. Andrey is a director of Baring Vostok Fund Manager (3, 4, 5, BV Ozon, BVIL), and Non-executive director in listed BVIL PCC. Andrey is a resident of Guernsey.
Baring Vostok Investments PCC Limited 17 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Directors' Report
Christopher Legge (resigned on 27 April 2016)
Christopher currently holds a number of non-executive directorships in the financial services sector including several which are UK listed where he also chairs the Audit Committee. Having joined Ernst & Young in Guernsey as an audit manager in 1983, he was appointed a partner in 1986 and managing partner in 1998. From 1990 to 1998, he was head of Audit and Accountancy and was responsible for the audits of a number of banking, insurance, investment fund, property fund and other financial services clients. He was appointed managing partner for the Channel Islands region in 2000 until retiring in 2003.
John Dudley Fishburn (Chairman) Dudley has a career as a businessman with strong links to the not-for-profit world, particularly universities on both sides of the Atlantic. He was a journalist and Conservative politician, having been Executive Editor of the Economist and Member of Parliament of the United Kingdom for Kensington.
He is the Chairman of Bluecube Technology Solutions Ltd, and Mulvaney Capital Management Ltd. He is on the board of GFI Group Ltd. In the recent past, Mr Fishburn has served terms on many Boards including: HSBC Bank Plc, Beazley Group Plc, Saatchi and Saatchi Plc and Philip Morris International Inc.
Peter Touzeau
Peter has been employed in the Guernsey Financial Services industry for over 20 years. The first 12 years he served as an account manager and accountant to a number of Captive Insurance companies on behalf of Sedgwick Management Services (Guernsey) Limited and later following the sale of Sedgwick Group Plc on behalf of Marsh & McLennan Companies Inc.
In October 2001 he joined Ipes (Guernsey) Limited ("Ipes") as an Assistant Director, with a remit to build up a new team to administer existing and new Private Equity Funds. The portfolio of Funds include both Russian and European clients. He is a Director of the General Partner to four active Baring Vostok Funds, all of which are currently domiciled in Guernsey, and is employed by and a Director of Baring Vostok Manager Holding Limited.
Richard Crowder
Richard holds a range of non-executive directorships and consultancy appointments. Having worked as an Investment Manager with Ivory & Sime in Edinburgh and as a Head of Investment Research with W.I. Carr in the Far East, he undertook a wide range of responsibilities for Schroders in London and the Far East, culminating in the role of Director of J Henry Schroder Wagg & Co Ltd and Managing Director for Schroders’ Singapore associate merchant bank. Having then worked as Chairman of Smith New Court International Agency and Director of Smith New Court Plc, Mr Crowder was the founding Managing Director of Schroders’ Channel Islands subsidiary from 1991 until he became a non-executive Director in 2000. He is resident in Guernsey.
Simon Faure Simon has been an Investment Director at PPM Managers for over nine years focused on private equity investments in Europe and Emerging Markets. Prior to PPM Managers, he spent two years at Insight Investment Ltd and four years at AIG Global Investments Ltd., where he was focused on private equity investments. He is a member of several advisory boards of private equity funds and a current member of the BVCA Limited Partner Committee.
Directors' Meeting Attendance
For each director, the tables below set out the number of scheduled Board and Audit Committee meetings they were entitled to attend during the period ended 31 December 2016 and the number of such meetings attended by each director.
A formal regime of quarterly Board and Committee meetings have now replaced the previous ad-hoc schedule.
Scheduled Board Held Attended Meetings
Andrey Costyashkin 4 2 Christopher Legge 4 1 J. Dudley Fishburn 4 3 Peter Touzeau 4 4 Richard Crowder 4 4 Simon Faure 4 2
Baring Vostok Investments PCC Limited 18 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Directors' Report
Audit Committee Held Attended Meetings
J. Dudley Fishburn 3 3 Julian Timms * 3 2 Christopher Legge ** 3 1 Richard Crowder 3 3
* On 10 October 2016 Julian Timms was appointed as a member of Audit Committee.
** Christopher Legge was the Chairman of the Audit Committee until his resignation on 27 April 2016. During the period a further 12 ad hoc Board/Investment Committee meetings were held to deal with matters substantially of an administrative nature and these were attended by those directors available and outside the UK at the time. Besides attending the quarterly and ad hoc Board meetings, the Directors also attended Investment Committee meetings and Company visits on an individual basis during the year. Substantial Interests The following shareholders have more than a 10% shareholding in the Core:
Shareholder interest (%) Calvey Family Trust 45.20% Prudential Assurance Company Ltd 16.20% Independent Auditors The auditors, PricewaterhouseCoopers CI LLP, have indicated their willingness to continue in office. A resolution to re-appoint PricewaterhouseCoopers Cl LLP as auditors will be proposed at the next Annual General Meeting. Corporate Governance Assurance Statement On 30 September 2011, the Guernsey Financial Service Commission (the "Commission") issued the Finance Sector Code of Corporate Governance ("FSC"). The Code comprises Principles and Guidance, and provides a formal expression of good corporate practice against which shareholders, boards and the Commission can better assess the governance exercised over companies in Guernsey’s finance sector.
The Directors have considered the effectiveness of the corporate governance practices of the Company in respect of the FSC and The International Stock Exchange Authority Limited ("TISEA") (previously known as Channel Island Securities Exchange Authority Limited ("CISEA")) continuing obligations, in the context of the nature, scale and complexity of the Company, and are satisfied that the Company complies with the FSC Code and all other corporate governance obligations which apply to Guernsey registered companies admitted to listing on the official list of the TISEA and to trading on the TISE. Performance Evaluation
The Board understands the importance of evaluating its performance and to consider the tenure and independence of each Director. The Directors undertook an evaluation of the Board, Chairman and Manager for the year ending 2016 and were content that the Board and Manager continue to act to a high standard, with no issues being raised. Next evaluation is to be held by the end of 2017. Share Buy Backs Directors renewed the Company's Share Buy Back authority during the annual general meeting held on 28 May 2015. The Company was authorised to make market acquisitions of its own US Dollar Core Shares which may be cancelled or held as treasury shares, as detailed in note 9. Audit Committee
The Company has established an Audit Committee. The principal duties of the Audit Committee are to consider the appointment of external auditors, to discuss results and cost effectiveness of the audit and the independence and objectivity of the auditor, to review the external auditors' letter of engagement, management letter, Annual Consolidated Financial Statements and any Interim Reports and to analyse the key procedures adopted by the Company's service providers. The Audit Committee comprises of J Dudley Fishburn and Richard Crowder, all of whom are independent non-executive directors. The Company's Audit Committee meets formally at least twice a year. Mr Richard Crowder is the Chairman of the Audit Committee.
Baring Vostok Investments PCC Limited 19 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BARING VOSTOK INVESTMENTS PCC LIMITED
Report on the audit of the consolidated financial statements ______Our opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of Baring Vostok Investments PCC Limited (the “PCC”)as at 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance with United Kingdom Accounting Standards, including FRS 102 and have been properly prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008. ______What we have audited The PCC’s consolidated financial statements comprise: ● the consolidated statement of financial position as at 31 December 2016; ● the consolidated statement of comprehensive income for the year then ended; ● the consolidated statement of changes in equity for the year then ended; ● the consolidated statement of cash flows for the year then ended; and ● the notes to the consolidated financial statements, which include a summary of significant accounting policies. ______Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. ______Independence We are independent of the PCC in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code. ______Our audit approach Overview The consolidated financial statements comprise the core and the cell. We determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the PCC, the accounting processes and controls, and the industry in which the PCC operates. ______Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall PCC materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
21 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BARING VOSTOK INVESTMENT PCC LIMITED (CONTINUED)
Overall PCC materiality Overall materiality: £1,900,000
How we determined it 2.25% of Net Assets
Rationale for the materiality benchmark Materiality has been based on the Net Assets per the statement of financial position as at 31 December 2016. This benchmark is seen as a key metric for users of the financial statements.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $95,000, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. ______Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter How our audit addressed the Key audit matter
Valuation of private equity investments Consistent with ISA 315, we obtained an understanding of The principal activity of the PCC is to carry on business as managements attitude towards the financial reporting process as a closed ended investment entity. As such, the most well as evaluating the control environment for any deficiencies in significant balance in the PCC’s financial statements is the valuation process. The assessment of the valuation process Investments. Baring Vostok Capital Partners Limited and our understanding of the complexities involved in the (“Investment Adviser”) provide legal and consulting valuation of the private equity investments led us to tailor our services to the PCC, which includes assisting in the procedures as described below. valuation of the private equity investments. Baring Vostok Investment Managers Limited (“Manager”) is designated as The private equity investments are initially valued by the the Investment Manager of the PCC. Investment Adviser to Baring Vostok Investment Managers Limited, acting as Investment Manager to BVIL. We held The PCC holds investments in bonds and fixed income meetings with the Investment Adviser to discuss the valuation investments, private equity investments and listed equities. process. The Manager approved and adopted valuations The valuation of the bonds and fixed income investments prepared by the Investment Adviser. We discussed with and and listed equities is not complex however the valuation of challenged the Investment Adviser as to the appropriateness of the private equity investments is complex and requires the the valuations, using our knowledge of the investments and the application of significant judgment by the directors and in International Private Equity and Venture Capital Valuation accordance with the principal accounting policies of the guidelines. PCC which are included in note 2. The private equity investments are valued on a basis considered the most Applying a multiple to earnings has been used as the valuation appropriate by the directors, dependent on the nature of methodology for 16% of the investment portfolio. The the underlying Investment. If a recent transaction in the procedures performed on the value of the private equity underlying investment has occurred, the Directors consider investments included the following: using this as a basis for the valuation. The Directors also consider whether applying a multiple to earnings is . We obtained the Manager’s valuation model which appropriate. included earnings, trading multiples for listed comparable companies and the multiple used to value Where recent transaction prices are used, the valuation the investments. base currency cost is converted to USD and this amount is . We checked the mathematical accuracy of the model. updated at year end to account for foreign currency . We selected a sample of private equity investments and
22
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BARING VOSTOK INVESTMENT PCC LIMITED (CONTINUED) fluctuation. obtained the supporting management accounts from the Manager as well as budgets and forecasts and Where a multiple is applied to earnings, the multiple is verified these with the underlying portfolio companies normally calculated by considering similar listed directly to corroborate the accuracy of the information companies, and then applying a discount/premium to their included in the valuation models. multiple to account differences such as size, geographical . We assessed the appropriateness of the earnings being location, the socio-political environment and marketability. used based on our understanding of the financial performance of the portfolio companies. . We obtained audited financial statements for the Determining the valuation methodology and determining investees and performed testing to validate the the inputs to the valuation are subjective. This, combined reliability of the management accounts by comparing with the significance of the private equity investments the data included in the management accounts that balance to the Statement of Financial position meant this were used in the prior year valuations with the audited was a key audit matter for our audit. financial statements . We independently sourced trading multiples for comparable companies including, where applicable, considering whether the companies selected were relevant and compared them to the multiples used in the valuation. . We discussed with management the discount/premium taken to those comparable PCC multiples and considered the reasonableness of the discounts. . Based on this work, we were satisfied that the assumptions used by the Manager and approved by the Directors were acceptable and that the model was mathematically accurate. Applying a recent transaction price has been used as the valuation methodology for 6% of the investment portfolio. We performed the following procedures: . We challenged the Manager on whether there had been any changes in facts and circumstances since the deal date which may indicate that a change in valuation would be appropriate. This included the use of financial information to assess the performance of the PCC. . We obtained the supporting documentation and agreed that the transaction price was accurate and relevant to the shares held by the PCC and also that the parties to the transaction were independent of the PCC. . We assessed the mathematical accuracy of the calculation of the valuation.
We assessed, using our knowledge of the investments and the International Private Equity and Venture Capital Valuation guidelines, whether the valuation methodologies applied to value the investments were appropriate.
We also read the disclosures made in the financial statements regarding the key sensitivities in the valuations. The above procedures and testing were performed to our satisfaction and there were no matters or misstatements identified which required reporting to those charged with governance.
23
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BARING VOSTOK INVESTMENT PCC LIMITED (CONTINUED)
Other information The directors are responsible for the other information. The other information comprises the Management and Administration page, the Investment Portfolio and the Report of the Manager (but does not include the consolidated financial statements and our auditor’s report thereon).
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. ______Responsibilities of directors for the consolidated financial statements The directors are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with United Kingdom Accounting Standards, including Financial Reporting Standard 102, "The Financial Reporting Standards applicable in the United Kingdom and the Republic of Ireland" ("FRS 102"), the requirements of Guernsey law, and for such internal control as the directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the PCC’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the PCC or to cease operations, or has no realistic alternative but to do so. ______Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
. Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. . Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the PCC’s internal control. . Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. . Conclude on the appropriateness of the director’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the PCC’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the PCC to cease to continue as a going concern.
24
Consolidated Statement of Comprehensive Income For the year ended 31 December 2016
1 Jan 16 to 1 Jan 15 to 31 Dec 16 31 Dec 15 Consolidated Consolidated Core Cell Total Total Notes USD USD USD USD Income
Movement in unrealised losses on investments 28,759,192 4,848,129 33,607,321 (16,068,631)
Investment income 2 1,282,950 - 1,282,950 2,046,967 Bank interest 6 7,092 3,007 10,099 1
30,049,234 4,851,136 34,900,370 (14,021,663)
Expenditure
Net realised losses / (gains) on disposal of investments 10,728,275 5,238,917 15,967,192 (10,154,601) Management fees 5, 12 839,258 - 839,258 815,769 Legal and professional fees 2 170,178 4,199 174,377 159,694 Administration fees 2, 5 119,654 5,986 125,640 231,922 Directors' fees 5, 12 116,613 5,054 121,667 167,174 Directorial service fees 5, 12 44,294 2,679 46,973 3,525 Audit fees expense / (overaccrual) 46,634 (10) 46,624 67,949 Aborted deal costs 31,735 - 31,735 - Commission charges 15,921 - 15,921 - Listing fees 10,152 2,131 12,283 17,702 Sundry expenses 6,408 264 6,672 13,271 Foreign exchange (gain) / loss (9,139) 120 (9,019) 913
12,119,983 5,259,340 17,379,323 (8,676,682) Total comprehensive income / (loss) for the year 17,929,251 (408,204) 17,521,047 (5,344,981)
The accompanying notes form part of these consolidated financial statements.
All activities are derived from continuing operations for both years presented.
Baring Vostok Investments PCC Limited 26 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016
Consolidated Statement of Changes in Equity For the year ended 31 December 2016
Core Preference Share Retained Notes Share Capital Capital Earnings Total USD USD USD USD
Balance as at 1 January 2015 9 1,856 84,856,229 (7,703,270) 77,154,815
Shares redeemed out of profits - - - - Total comprehensive loss for the year - - (3,793,394) (3,793,394)
Balance as at 31 December 2015 1,856 84,856,229 (11,496,664) 73,361,421
Balance as at 1 January 2016 1,856 84,856,229 (11,496,664) 73,361,421
Shares redeemed out of profits - - (3,184,274) (3,184,274) Total comprehensive income for the - - 17,929,251 17,929,251 year
Balance as at 31 December 2016 1,856 84,856,229 3,248,313 88,106,398
Cell Preference Share Retained Notes Share Capital Total Capital Earnings
USD USD USD USD
Balance as at 1 January 2015 9 25 31,946,158 (14,878,438) 17,067,745
Ordinary shares issued 43 - - 43 Shares redeemed out of profits - - (10,168,590) (10,168,590) Total comprehensive loss for the year - - (1,551,587) (1,551,587)
Balance as at 31 December 2015 68 31,946,158 (26,598,615) 5,347,611
Balance as at 1 January 2016 68 31,946,158 (26,598,615) 5,347,611
Dividends paid 8 - - (4,805,000) (4,805,000) Total comprehensive loss for the year - - (408,204) (408,204)
Balance as at 31 December 2016 68 31,946,158 (31,811,819) 134,407
The accompanying notes form part of these consolidated financial statements.
Baring Vostok Investments PCC Limited 28 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Statement of Cash Flows For the year ended 31 December 2016
1 Jan 16 to 1 Jan 15 to 31 Dec 16 31 Dec 15 Core Cell Total Total USD USD USD USD
Cash flows from operating activities
Total comprehensive income / (loss) for the year 17,929,251 (408,204) 17,521,047 (5,344,981) Adjustment for: Net realised losses / (gains) on disposal of investments 10,728,275 5,238,917 15,967,192 (10,154,601) Movement in unrealised losses on investments (28,759,192) (4,848,129) (33,607,321) 16,068,631 Proceeds on disposal of investments 14,145,339 3,265,592 17,410,931 21,778,271 Acquisitions of investments (1) (19,049,370) - (19,049,370) (6,643,811) Net movement in cash from operating activities before working capital changes (5,005,697) 3,248,176 (1,757,521) 15,703,509
Movement in trade receivables (2,345,024) - (2,345,024) (672,979) Movement in trade payables (498,478) (12,495) (510,973) (63,718)
Net movement in cash from operating activities (7,849,199) 3,235,681 (4,613,518) 14,966,812
Cash flows from financing activities
Dividends paid - (4,805,000) (4,805,000) - Shares redeemed out of profits (3,184,274) - (3,184,274) (10,168,590)
Net movement in cash financing activities (3,184,274) (4,805,000) (7,989,274) (10,168,590)
Net movement in cash and cash equivalents (11,033,473) (1,569,319) (12,602,792) 4,798,222 Cash and cash equivalents at the beginning of the year 16,708,602 1,704,319 18,412,921 13,614,699
Cash and cash equivalents at the end of the year 5,675,129 135,000 5,810,129 18,412,921
(1) The acquisition of investments during the year are net of USD 4,317,593 non-cash transactions (2015: USD nil). In August 2016 each Limited Partner in Baring Vostok Private Equity Fund were offered the opportunity to maintain an investment in Ozon through a re-investment election process or monetize their interests. The Company decided to roll-over its interest of USD 4,317,593 in the new set up investment vehicle.
The accompanying notes form part of these consolidated financial statements.
Baring Vostok Investments PCC Limited 29 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
1. GENERAL INFORMATION
Baring Vostok Investments Limited
Baring Vostok Investments Limited (the "Company") was incorporated in Guernsey, Channel Islands on 5 October 2001.
Baring Vostok Investments PCC Limited
On 17 July 2013, at an Extraordinary General Meeting, the requisite majority of the shareholders of the Company gave consent for the conversion of the Company to a protected cell company ("PCC") and on the same day it changed its name from Baring Vostok Investments Limited to Baring Vostok Investments PCC Limited. Upon conversion, the Company established a "Cell" which holds through its investment in Baring Vostok Investment Holdings Limited (''BVIHL''), a new subsidiary of the Company registered in Guernsey, the Company’s interest in Yandex via Baring Vostok Private Equity Fund, L.P.3 and will not make any new investments. The remainder of the Company’s existing and any new investments will be held in the "Core", directly or indirectly through BVIHL.
In addition, the Company raised USD 32 million of new capital (the "Placing"), by issuing new Core Shares at a Placing Price of USD 3,681 per Share, representing a 2 per cent. premium to the net asset value ("NAV") attributed to each Core Share as at the Calculation Date of 10 June 2013 (used to cover the expenses of the Placing and ensure that the Placing was non-dilutive to such NAV).
On 18 July 2013, the Company’s Cell Shares and Core Shares commenced trading on The International Stock Exchange ("TISE") (previously known as Channel Islands Securities Exchange ("CISE")). According to the announcement on 10 February 2017 the Company provided its intention to cancel the listing of the Cell Shares from TISE.
On 13 January 2015, the Core altered its share capital by way of a stock split resulting in an amendment to the Core Shares value from USD 0.01 per share to USD 0.00001 per share.
2. PRINCIPAL ACCOUNTING POLICIES
Statement of compliance
The consolidated financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of certain financial assets to fair value, and in accordance with United Kingdom Accounting Standards, including Financial Reporting Standard 102, "The Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland" ("FRS 102"). The Directors of the Company have taken the exemption in Section 244 of The Companies (Guernsey) Law, 2008 (as amended) and have therefore elected to only prepare consolidated financial statements for the year.
Basis of preparation
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
Going concern
The Directors believe it is appropriate to continue to adopt the going concern basis in preparing the consolidated financial statements as the assets of the Company consist of sufficient securities which are readily realisable to cover expenses and other expected cash flows as they fall due, there is no gearing and there are minimal creditors. Accordingly, the Company has adequate financial resources available to continue in operational existence for the foreseeable future.
Critical accounting estimates and judgements in applying accounting policies
The preparation of financial statements in conformity with FRS 102 requires the use of certain critical accounting estimates. It also requires management to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements.
Baring Vostok Investments PCC Limited 30 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
Critical accounting estimates and judgements in applying accounting policies (continued) Fair value of investments When the fair values of financial assets and financial liabilities recorded in the Consolidated Statement of Financial Position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including comparable multiple valuation techniques. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments in the Consolidated Statement of Financial Position and the level where the instruments are disclosed in the fair value hierarchy. The models are tested for validity by calibrating to prices from any observable current market transactions in the same instrument (without modification or repackaging) when available.
The Manager bases their assumptions and estimates on parameters available when the financial statements are prepared. However, existing circumstances and assumptions about future developments may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur and may cause a material adjustment to the carrying amounts of assets and liabilities within the next financial period.
Investments
Classification
The Company’s investments primarily consist of positions taken in private equity investments, listed equity and bonds and fixed income investments.
Private equity investments can be made directly but are typically made via structured investment holding companies. The Company’s co-investments into the structured holding companies and underlying portfolio companies can consist of both debt and equity financial instruments. The Company has designated all of its investments as at fair value through the profit or loss as all investments are held and managed on a fair value basis.
The Company has adopted FRS 102 for the valuation of its financial instruments. The Directors believe that in determining fair value the International Private Equity and Venture Capital Valuations (''IPEVC'') Guidelines are an appropriate basis for the valuation of all quoted and unquoted investments. In determining the fair value of investments, the Directors take into consideration the valuation recommendations made by the Manager.
Purchases and sales of investments are recognised on the date on which the risk and rewards of ownership have been fully transferred to/from the Company, and are typically recognised at their transaction price. Legal and professional fees borne in relation to co-investments along with Baring Vostok Private Equity Fund V are capitalised when, in the opinion of the Directors, the benefit of the services provided can be construed to give an economic benefit and enhancement to that investment's value. The capitalised costs are insignificant.
Investments are derecognised when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership. Gains and losses arising from changes in the fair value of investments are presented in the Consolidated Statement of Comprehensive Income in the period in which they arise.
Initial measurement
Investments are included in the financial statements at fair values estimated by the Directors on the advice of the Manager on an individual basis. Initial measurement of fair value is normally the transaction price.
Subsequent measurement
Investments in underlying portfolio companies that are listed on a recognised active stock exchange are valued at their quoted market price less an appropriate discount only where there is a legal restriction attributable to the security itself which prevents the Company from being able to realise these instruments at the reporting date.
Baring Vostok Investments PCC Limited 31 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) Critical accounting estimates and judgements in applying accounting policies (continued) Subsequent measurement (continued) When assessing each unquoted investment at the reporting date, the Company uses a variety of methods and assumptions that are based on market conditions existing at the reporting date. Valuation techniques used include the use of comparable recent arms length transactions, earnings multiples and other valuation techniques commonly used by market participants and as permitted by IPEVC.
Where investments are held via subsidiary structured investment holding companies, the fair value of the underlying portfolio investments is determined as noted above and the fair value attributable to the Company’s respective subsidiary holding company is evaluated and combined with the value of any other assets or liabilities at the holding company level. The Directors then apportion this combined fair value appropriately across each of the debt and equity instruments held by the Company, taking into account amounts accruing on each respective instrument and less any impairment / recoverability provisions required for each instrument as appropriate.
Valuation of investments in private equity funds are valued at the NAV of that investment as determined in accordance with the terms of the underlying funds' constitutive documents and as notified by the respective fund manager or administrator as at the valuation date. The valuation date of each fund may not always be co-terminus with the valuation date of the Company, and in such cases, the valuation of the fund as at the latest valuation date of the fund is used, i.e. the latest available price is used on the valuation date. The NAV reported by the respective fund manager or administrator and used by the Directors as at 31 December 2016 may be unaudited as at that date and may differ from the final audited NAV struck in the relevant fund as at 31 December 2016. However, it is the belief of the Directors that the NAVs used by the Company should not be materially different from the final audited NAV struck for these funds held at 31 December 2016.
In addition, the NAVs used to value these fund investments may also significantly differ from the proceeds realised through distributions to the Company of proceeds generated by the funds from the ultimate realisation of their own portfolios of investments, and these differences may be significant.
Unrealised gains or losses arising on the subsequent revaluation of investments (including exchange gains and losses on unrealised investments denominated in a foreign currency) are recognised in the Consolidated Statement of Comprehensive Income.
Realised gains or losses on the disposal of investments (being the difference between the transaction price and its carrying value at the start of the financial period) are recognised in the Consolidated Statement of Comprehensive Income.
Non-consolidation of investment in subsidiaries
Any investments that are subsidiaries or associate undertakings are held by the Company as part of an investment portfolio and are therefore, not consolidated and are instead presented at their fair value together with all other investments of the Company, as permissible by FRS 102.
Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiary undertakings) made up to the reporting date. Control is achieved where the Company has the power to govern the financial and operating policies of the investee entity so as to obtain benefits directly from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Company Date of ownership Country of Subsidiary undertakings control % incorporation Baring Vostok Investment Holdings Limited ("BVIHL") 17/06/2013 100 Guernsey
Baring Vostok Investments PCC Limited 32 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
Subsidiary undertakings (continued)
Baring Vostok Investment Holdings Limited has issued 100 A Shares ("Yandex Shares") held through the Cell and 100 B Shares ("Continuation Shares") held through the Core, respectively.
The shares in BVIHL which are designated as A Shares shall be entitled to participate in any Distribution (including a Distribution made in relation to the winding up of the company) or Dividend paid by the Company only to the extent that such payment is a Distribution or Dividend of proceeds received by BVIHL relates to its indirect investment in Yandex.
The shares in BVIHL which are designated as B Shares shall not be entitled to participate in any Distribution (including a Distribution made in relation to the winding up of the company) or Dividend paid by the Company to the extent that such payment is a Distribution or Dividend of proceeds received by BVIHL relates to its indirect investment in Yandex.
Subsidiary undertakings are fully consolidated from the date of which control is transferred to the Company. They are de- consolidated from the date that control ceases.
Inter-company transactions, balances, income and expenses on transactions between Company and subsidiaries and those transactions between the Core and Cell are eliminated on consolidation. Profits and losses resulting from inter-company transactions that are recognised in assets are also eliminated. Accounting polices of subsidiary undertakings are consistent with the polices adopted by the Company.
Aggregation of consolidated financial statements
The consolidated financial statements contain the consolidated results of the Company and the subsidiary, together with the aggregated position of the Core and the Cell's separately reported results.
Investment income
Income is included in the Consolidated Statement of Comprehensive Income on the following basis: ■ Dividends are recognised when the underlying investments become ex-dividend and are reflected gross of any withholding tax; and ■ Interest and other investment income, of all forms, is recognised on an accruals basis. Foreign currency
i) Functional and presentation currency The Directors have determined that the Company's functional and presentation currency is US Dollars ("USD") as the majority of the Company's transactions are made in USD.
ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the spot exchange rates at the dates of the transactions.
At each period end foreign currency monetary items are translated using the closing rate. Non-monetary items measured at historical cost are translated using the exchange rate at the date of the transaction and non-monetary items measured at fair value are measured using the exchange rate when fair value was determined.
Foreign exchange gains and losses resulting from the settlement of transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income.
Monetary assets and liabilities in currencies other than USD are translated into USD at the rate of exchange ruling at the reporting date. Transactions in currencies other than USD are translated into the reporting currency at the rate of exchange ruling at the date of the transaction. Foreign exchange gains and losses are recognised in the Consolidated Statement of Comprehensive Income.
Baring Vostok Investments PCC Limited 33 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
Trade receivables Trade receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. Trade payables Trade payables are classified as financial liabilities, and are initially recognised at fair value, and subsequently stated at amortised cost using the effective interest method.
Withholding tax
In accordance with the requirements of the Limited Partnership Agreements of the Baring Vostok Funds, any withholding tax suffered by the Partnerships on income is deemed to have been distributed to the Limited Partners pro-rata to their Capital Commitments. Expenses and expense allocation
Expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis. Expenses incurred on behalf of the Company are allocated between the Core and Cell pro-rata based on the most recently published net asset value. Expenses incurred exclusively by the Core or Cell are allocated in full to the Core or Cell respectively. 3. TAXATION With effect from 1 January 2008, Guernsey abolished certain aspects of the exempt company regime for the majority of Guernsey Companies. Thereafter, these companies are taxed at the standard rate (0%). However, due to the classification of the Company, the Directors were able to elect to remain tax exempt. The States of Guernsey Income Tax Authority has granted the Company exemption from Guernsey Income Tax. 4. DISTRIBUTIONS Core Pursuant to the listing document relating to the placing of the Core and Cell Shares (the "Listing Document"), the Core will distribute 50 per cent of realised gains from private equity investments to Core Shareholders by way of dividends, compulsory redemptions or the repurchase of Core Shares. In determining whether to return such realised gains in the form of dividends, compulsory redemptions or share repurchases, the Directors will have to regard the prevailing share price rating of the Core Shares. In particular, the Directors currently intend to prioritise share repurchases over dividends or compulsory redemptions where the market price at which the Core Shares trade is more than 10 per cent below the NAV per Core Share for more than 1 month prior to any distribution. The Articles also permit the Directors, in their absolute discretion, to offer a scrip dividend alternative to Core Shareholders when a cash dividend is declared from time to time. In the event a scrip dividend is offered in the future, an electing Core Shareholder would be issued new, fully paid up Core Shares (or Core Shares reissued from treasury) pursuant to the scrip dividend alternative, calculated by reference to the higher of (i) the prevailing average mid-market quotation of the Core Shares on TISE over five trading days; or (ii) the NAV per Core Share, at the relevant time. The scrip dividend alternative would be available only to those Core Shareholders to whom Core Shares might lawfully be marketed by the Company. The Directors’ intention is not to offer a scrip dividend at any time that the Core Shares trade at a material discount to the NAV per Core Share. The remaining 50 per cent of realised gains from private equity investments will be reinvested into new private equity investments in accordance with the Core's Investment Policy. Cell Pursuant to the Listing Document, the Cell will distribute 100 per cent of the distributions it receives from its ultimate investment in Yandex via Baring Vostok Private Equity Fund, L.P.3 by way of dividends, compulsory redemptions or the repurchase of Cell Shares. Any net income received will be distributed by way of dividend each year. On 10 February 2017 the Company provided its intention to cancel the listing of the Cell Shares from TISE.
Baring Vostok Investments PCC Limited 34 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
5. MATERIAL AGREEMENTS Manager The Manager of the Company was, until 26 September 2013, Baring Vostok Fund (GP) L.P., a Guernsey registered limited partnership. Under the terms of the Manager’s agreement dated 17 October 2001, the Manager received a fee of USD 1 per annum for its management services to the Company, and is entitled to reimbursement of all out of pocket expenses incurred in the performance of its duties relating to the Company. On 26 September 2013, the Manager of the Company (Baring Vostok Fund (GP) L.P.) a Guernsey registered Limited Partnership, was replaced by Baring Vostok Investment Managers Limited, a Guernsey registered company. Pursuant to the Listing Document and as further defined under the terms of the Management Agreement dated 23 August 2013, the Manager shall receive a Management Fee from the Core for its management services to the Company. The annual fee, paid quarterly, shall be at the rate of 1.5 per cent of the lower of: ■ Adjusted Market Capitalisation; and ■ Adjusted NAV each determined as at the last Business Day of the relevant calendar quarter and as at the last Business Day of the other two months in such calendar quarter and payable within 30 days of the relevant quarter end. "Adjusted Market Capitalisation" means the percentage of the Market Capitalisation of the Core Shares on any given date which is equal to the percentage of the Core Assets which is represented by Qualifying Assets. "Qualifying Assets" means assets of the Core in respect of which no management fees or carried interest is payable to a member of the Baring Vostok Group. For the avoidance of doubt Baring Vostok Private Equity Fund L.P.3. shall not be deemed a Qualifying Asset. "The Baring Vostok Group" refers to the Investment Adviser, the Manager and such other entities as may from time to time share common control with the Investment Adviser. "Adjusted NAV" means the value of the Qualifying Assets comprised in the Core Assets less the value of the portion of all liabilities attributable to the Core which is that proportion equal to the percentage of the Core Assets represented by Qualifying Assets.
Performance fee
Pursuant to the Listing Document the Manager will be entitled to receive a Performance Fee from the Core equal to 20 per cent by which the Adjusted NAV exceeds the Initial Adjusted NAV / Adjusted NAV at the last Calculation Date.
The Performance Fee becomes payable to the Manager if Adjusted NAV on calculation date exceeds the Threshold NAV.
The "Threshold NAV" is the highest of: ■ 1.5 x Initial Adjusted NAV; or ■ Initial Adjusted NAV plus 8% annualised effective internal rate of return; or ■ Highest Adjusted NAV as at any previous calculation.
"Qualified Distributions" means all distributions related to Qualifying Assets by way of any dividends or other distributions or through redemption or purchase of Core shares.
The "Initial Adjusted NAV" means the Adjusted NAV as at close of business on the date of Admission.
Administrator
Under the terms of the Administration Agreement dated 17 October 2001, the Administrator, Ipes (Guernsey) Limited (formerly International Private Equity Services Limited) ("IPES") provides Secretarial, Directors and Administration services to the Company and is entitled to receive administration fees, director’s fees and reimbursement of expenses as may be determined from time to time by the parties. Directorial services The Company received directorial services from Baring Vostok Manager Holding Limited as set out in the Service Agreement.
Baring Vostok Investments PCC Limited 35 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
5. MATERIAL AGREEMENTS (CONTINUED)
Directors’ Fees
During the year ended 31 December 2016, the Directors receive the following remuneration in the form of Directors' fees:
Fee (p.a.) Director USD
J. Dudley Fishburn 60,000 Richard Crowder 45,000 Christopher Legge * - Simon Faure - Peter Touzeau - Andrey Costyashkin - Simon Faure and Andrey Costyashkin have agreed to waive their Directors fees to which they would otherwise have been entitled to. Peter Touzeau's Directors fees of GBP 7,500 per annum, are paid to Baring Vostok Manager Holding Limited. * Christopher Legge resigned from the board in April 2016 and received Directors fees of USD 16,667 during the year.
6. INVESTMENTS 2016 2016 2016 2015 Consolidated Consolidated Core Cell Total Total USD USD USD USD Investment cost 101,213,306 - 101,213,306 91,248,388 Unrealised loss on investments (21,320,709) - (21,320,709) (30,634,359) Valuation 79,892,597 - 79,892,597 60,614,029
The Consolidated total excludes any transactions between the Core and the Cell as per the consolidation policy in note 2. The Cell's investment was acquired from the Core and as such the Consolidated gain on that investment is only recognised once realised within the Cell.
7. TRADE RECEIVABLES 2016 2016 2016 2015 Consolidated Consolidated Core Cell Total Total USD USD USD USD D2Investment income receivable 2,635,773 - 2,635,773 618,000 D3Prepaid investment costs 372,997 - 372,997 46,774 D4Deposit - Otkritie Brokers 46,953 - 46,953 47,722 D5Share capital due (nominal shares) 1,854 68 1,922 1,922 D12Investment cost reallocation 1,789 - 1,789 - D9Bank interest receivable 8 - 8 - D6Share capital due (ordinary shares) 2 - 2 2 3,059,376 68 3,059,444 714,420
Investment income receivable as at 31 December 2016 of USD 2,635,773 (31 December 2015: USD 618,000) represents proceeds receivable and coupons receivable from various listed equities.
Baring Vostok Investments PCC Limited 36 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
8. TRADE PAYABLES 2016 2016 2016 2015 Consolidated Consolidated Core Cell Total Total USD USD USD USD C12Management fees payable 390,029 - 390,029 815,769 C1Administration fees payable 50,413 512 50,925 88,829 C2Audit fees payable 47,098 72 47,170 58,700 C3Directors fees payable 26,210 40 26,250 38,750 C6Directorial service fees 6,937 37 6,974 - C10Other expenses payable 17 - 17 - C4Investment cost payable - - - 30,290 520,704 661 521,365 1,032,338
9. SHARE CAPITAL 2016 2016 2016 2015 Consolidated Consolidated Core Cell Total Total USD USD USD USD Issued: Share capital Ordinary shares of USD 1 each 2 - 2 2 Nominal shares (Core - USD 0.00001 each, Cell - USD 0.01 each) 1,854 68 1,922 1,922
Preference share capital Redeemable participating preference shares* 28,612,500 1,922 n/a n/a Preference shares redemption reserve 84,856,229 31,946,158 116,802,387 116,802,387
84,858,085 31,946,226 116,804,311 116,804,311
The total number of redeemable shares as at 31 December 2016 in Core and Cell were 28,612,500 and 1,922, respectively (2015: 30,237,000 and 1,922, respectively). * In 2016, the Company purchased 1,624,500 shares for a total consideration of USD 3,184,725 under its shares buy back authority (2015: nil). These shares, representing 5% of issued share capital, are held as treasury shares. Rights attaching to the ordinary and redeemable participating preference shares Nominal shares The Nominal Shares shall carry no voting rights, nor any right to dividends. Nominal Shares may only be issued to the Manager at par and for the purposes of providing funds for the redemption of Core Shares or Cell Shares, and shall be issued in respect of the Core or the Cell from which such shares are to be redeemed. In the event of a winding up, the Nominal Shares carry the right to receive a return of the nominal amount paid up on such shares, payable out of the assets of the Core or the Cell, as the case may be (after the return of the nominal amounts paid up on the shares of the Core or the Cell, as the case may be, and (in the case of the Core only) the Ordinary Shares). Ordinary shares
Ordinary Shares shall only be issued in respect of the Core and shall carry no voting rights unless there are no Core Shares or Cell Shares in issue. In the event of a winding up, the Ordinary Shares carry the right to receive out of the assets of the Core a return of the nominal amount paid up on such shares, before the return of the nominal amounts paid up on all Core Shares.
Baring Vostok Investments PCC Limited 37 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
9. SHARE CAPITAL (CONTINUED) Core redeemable preference shares
Core Shares shall carry voting rights, rights on dividends and distributions and rights in a winding up as set out in the Articles, including:
■ the right to receive dividends and distributions paid out of the Core Assets from time to time as determined by the Directors to be distributed by way of interim and/or final dividends or by any other means in accordance with the Companies Law;
■ the right to receive a return of capital or other distribution of assets on a wind up or otherwise (other than conversion, redemption or purchase of shares) the Core Assets available for distribution after the return of the nominal amount paid up on the Ordinary Shares;
■ the right to receive notice of and to vote at a general meetings of the Company. Each holder of a Core Share who is present in person or by proxy (or being a corporation by representative) at a general meeting will have on a show of hands one vote and on a poll every such holder who is present in person or by proxy (or being a corporation, by representative) will have one vote in respect of each Core Share held by him.
The Core Shares are redeemable at the discretion of the Directors, at a price per share determined by reference to the NAV of the Core and as set out in a redemption notice. Core Shares will be redeemed pro rata to the holdings of shareholders in the Core at the relevant time. Cell redeemable preference shares
Cell Shares shall carry rights on dividends and distributions and rights in a wind up as set out in the Articles, including:
■ the right to receive dividends and distributions paid out of the Cell Assets from time to time as determined by the Directors to be distributed by way of interim and/or final dividends or by any other means in accordance with the Companies Law;
■ the right to receive on a return of capital or other distribution of assets on winding up or otherwise (other than conversion, redemption or purchase of shares) the Cell Assets and available for distribution.
The Cell Shares are redeemable at the discretion of the Directors, at a price per share determined by reference to the NAV of the Cell and as set out in a redemption notice. Cell Shares will be redeemed pro rata to the holdings of shareholders at the relevant time. Share buy backs
The Shareholders renewed the Company's Share Buy Back authority during the annual general meeting held on 28 May 2015. The Company was authorised to make market acquisitions of its own US Dollar Core Shares which may be cancelled or held as treasury shares, provided that:
i) the maximum number of shares authorised to be purchased under this authority is equal to or less than 14.99 per cent. of the US Dollar Core Shares, excluding shares held as treasury shares, in issue as at the date of the passing of this resolution;
ii) the minimum price (exclusive of expenses) which may be paid for a US Dollar Core Share shall be US$0.00001 per US Dollar Core Share;
iii) the maximum price (exclusive of expenses) which may be paid for a US Dollar Core Share is no more than an amount equal to the higher of: (x) five per cent above the average of the midmarket value of the US Dollar Core Share taken from the Official List of TISE for the five business days prior to the day the purchase is made; and (y) the higher of the price of the last independent trade and the highest current independent bid for US Dollar Core Shares on the trading venue where the purchase is carried out.
Baring Vostok Investments PCC Limited 38 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
9. SHARE CAPITAL (CONTINUED)
Such authority will expire on the date which is 15 months from the date of the passing of this resolution or earlier if voted at the end of the annual general meeting of the Company to be held in 2016 (unless previously renewed, revoked or varied by the Company by ordinary resolution) save that the Company may make a contract to acquire US Dollar Core Shares under this authority before its expiry which will or may be executed wholly or partly after its expiration and the Company may make an acquisition of US Dollar Core Shares pursuant to such a contract.
10. FINANCIAL RISK MANAGEMENT
The Company has entered into financial transactions with counterparties which have resulted in the following financial assets and financial liabilities: Investments, Trade receivables, Cash at bank and Trade payables.
The Company's activities expose it to a variety of direct and indirect financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company's financial performance.
The Company is exposed to direct financial risks as a result of its own investments, which include investments in other investment funds. Indirect financial risk exposure occurs through the Company's exposure to risks as a result of the investment funds into which it invests. Any significant concentrations of indirect risks are also detailed in this note.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the consolidated financial statements.
Credit risk Credit risk represents the risk that a counterparty to a financial instrument fails to discharge their obligation, contractual or otherwise, which causes the Company to suffer a financial loss. Credit risk has been generated on the following financial assets: ■ Investments ■ Trade receivables ■ Cash at bank
Credit risk is concentrated in the investments and cash at bank balances. Direct and indirect investments in loans are subject to credit risk in as far as the borrower may default on repayments leading to partial or complete loss of the loan amount. The Directors mitigate this risk by considering the credit risk and liquidity of the borrower and in executing their due diligence on investment acquisitions. Other investments are exposed to credit risk in so far as the respective counterparty may fail in its obligations to the Company, leading to partial or complete loss of the amount invested. All transactions in listed and unlisted securities are settled using approved brokers. The cash at bank balances are placed with banking counterparties that are deemed to hold a sound credit rating, the main counterparty has a Moody Long Term A1 rating, which substantially mitigates the credit risks identified.
Market risk Price risk Price risk is the risk that future changes in market prices, other than those generated from interest rate or foreign exchange movements, may adversely affect the value or burden of a financial instrument. Price risk is concentrated in investments. The Company's investments are susceptible to price risk arising from uncertainties about future prices of the investments themselves or the assets and liabilities underpinning the investments. The Manager moderates this risk through a careful selection of securities and other financial instruments within the specified limits agreed with the Board of Directors. The Company's price risk is managed through diversification of the investment portfolio. The Company's overall market positions are monitored by the Company's Manager and are reviewed, as appropriate, by the Board of Directors.
Baring Vostok Investments PCC Limited 39 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
10. FINANCIAL RISK MANAGEMENT (CONTINUED)
The Company does have a significant concentration of risk to the Russian public and private markets. At 31 December 2016, the appropriate concentration of risk through the Company's investments to these mandates was USD 79,892,597 (2015: USD 60,614,029). The fair value of financial assets as at 31 December 2016 exposed to price risk were as follows: 2016 2015 Consolidated Consolidated Total Total Securities traded in an active market designated at fair value through profit or loss 20,862,394 11,811,263 Securities not traded in an active market designated at fair value through profit or loss 18,177,429 10,248,924 Investments in Baring Vostok private equity funds 40,852,774 38,553,842 79,892,597 60,614,029
As at 31 December 2016, had the inputs, used in determining the fair value of investments, increased or decreased by 10% with all other variables held constant, the effect on net assets would have been as shown in the table below:
Investments Fair value as at Valuation Multiple Reasonable Change in 31 Dec 2016 technique (input) +/- shift valuation + /- (USD) Securities traded in an active market designated at 2,086,239 / 20,862,394 Market price Quoted price 10% fair value through profit or (2,086,239) loss Securities not traded in an active market designated at Based on public 1,459,726 / 18,177,429 Multiples 10% fair value through profit or companies (1,370,631) loss Investments in Baring Net Assets Net Assets 4,038,045 / 40,852,774 10% Vostok private equity funds Value Value (4,038,045)
As at 31 December 2015, had the inputs, used in determining the fair value of investments, increased or decreased by 10% with all other variables held constant, the effect on net assets would have been as shown in the table below:
Investments Fair value as at Valuation Multiple Reasonable Change in 31 Dec 2015 technique (input) +/- shift valuation + /- (USD) Securities traded in an active market designated at 1,181,126 / 11,811,263 Market price Quoted price 10% fair value through profit or (1,181,126) loss Securities not traded in an active market designated at Based on public 1,252,433 / 10,248,924 Multiples 10% fair value through profit or companies (954,705) loss Investments in Baring Net Assets Net Assets 3,766,360 / 38,553,842 10% Vostok private equity funds Value Value (3,766,360)
Baring Vostok Investments PCC Limited 40 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
10. FINANCIAL RISK MANAGEMENT (CONTINUED)
Currency risk
Currency risk is the risk that the value of a financial asset or financial liability will fluctuate because of changes in foreign exchange rates. The table below indicates the relative Consolidated Statement of Financial Position direct and indirect exposures as at the reporting date as the Company holds financial instruments denominated in currencies other than the reporting currency:
2016 2015 Direct currency exposure Consolidated Consolidated Total Total GBP GBP Investments - - Cash at bank 53 52 Trade receivables - - Trade payables (97,146) (99,399)
(97,093) (99,347)
As at 31 December 2016, had the exchange rate between USD and GBP increased or decreased by 15% with all other variables held constant, the increase or decrease respectively in net assets would be USD 17,980 (31 December 2015: USD 22,242). The USD:GBP rate as at 31 December 2016 was 0.82 (2015: 0.67). 2016 2015 Indirect currency exposure Consolidated Consolidated Total Total RUB RUB
Investments in Baring Vostok Private Equity Funds 3,580,772,114 3,556,745,586
3,580,772,114 3,556,745,586
As at 31 December 2016, had the exchange rate between USD and RUB increased or decreased by 15% with all other variables held constant, the increase or decrease respectively in net assets would be USD 8,854,530 (2015: USD 7,320,415). The end of period USD:RUB rate as at 31 December 2016 was 60.66 as per the Central Bank of Russia (2015: 72.88).
The Company does not have a policy of hedging exposure, therefore it is exposed to risk on adverse changes in foreign exchange rates.
Interest rate risk
Interest rate risk is represented by the following two component risks: ■ the risk that the fair value of financial assets and liabilities will fluctuate because of market interest rate changes; and ■ the risk that future cash flows of financial instruments will fluctuate because of market interest rate changes.
The Company's assets and liabilities have some exposure to interest rate risk but this is limited to interest earned on cash at bank.
Although the majority of the Company's financial assets and liabilities are non interest bearing, the Company holds USD 5,810,129 (2015: USD 18,412,921) in cash representing 6.58% (2015: 23.39%) of its NAV.
As at 31 December 2016, had the interest rate rate increased or decreased by 25 basis points with all other variables held constant, the increase or decrease respectively in net assets would be USD 14,525 (2015: USD 46,032).
Baring Vostok Investments PCC Limited 41 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
10. FINANCIAL RISK MANAGEMENT (CONTINUED)
Liquidity risk Liquidity risk is defined as the risk that the Company would encounter difficulty in meeting obligations associated with financial liabilities. The Directors of the Company do not regard the liquidity risk as being material. The Directors monitor the liquidity and the recoverability of investments to ensure obligations to creditors can be met. As disclsoed in note 9 the preferance shares are redeemable only at the discretion of the Directors. Financial liabilities held at 31 December 2016 were not material and the Directors consider that sufficient resources exist to meet ongoing obligations of the Company.
11. FAIR VALUE MEASUREMENT
The Company classifies fair value measurements using a fair value hierarchy that reflect the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
■ Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). ■ Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices including interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates) or other market corroborated inputs (level 2). ■ Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgement by Directors. Directors consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, non-proprietary and provided by multiple, independent sources that are actively involved in the relevant market. The categorisation of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to Directors’ perceived risk of that investment.
The following table summarises within the fair value hierarchy the Company’s assets and liabilities measured at fair value at 31 December 2016: 2016 Total Level 1 Level 2 Level 3 fair values USD USD USD USD
Investments 20,862,394 - 59,030,203 79,892,597
Total 20,862,394 - 59,030,203 79,892,597
Investments deemed as level 1 are in quoted securities and bonds and fixed income investments.
The following table summarises within the fair value hierarchy the Company's assets and liabilities measured at fair value at 31 December 2015: 2015 Total Level 1 Level 2 Level 3 fair values USD USD USD USD Investments 11,811,263 - 48,802,766 60,614,029 Total 11,811,263 - 48,802,766 60,614,029
There have been no transfers between levels for the year ended 31 December 2016 (2015: nil).
Baring Vostok Investments PCC Limited 42 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
11. FAIR VALUE MEASUREMENT (CONTINUED)
The carrying values of the assets and liabilities included in the above table are considered to approximate their fair values.
Cash and cash equivalents include cash in hand and fixed short term deposits held with banks. Trade receivables include the contractual amounts and obligations due to the Company and consideration for advance payments made by the Company. Trade payables represent the contractual amounts and obligations due by the Company for contractual payments.
12. RELATED PARTIES
Transactions with key management personnel
During the year ended 31 December 2016, the cost of services provided by the Directors amounted to USD 121,667 (2015: USD 167,174). Directors fees outstanding balance as at 31 December 2016, were USD 26,250 (2015: USD 38,750). See note 5 for details on Directors' remuneration.
Transactions with other related parties
Baring Vostok Investment Managers Limited, a related party, provides management services to the Company under the terms of the Management Agreement dated 23 August 2013 (see note 5 for details of the Management Agreement). During the year ended 31 December 2016, the cost of services provided by the Manager amounted to USD 839,258 (2015: USD 815,769). Management fees outstanding balance as at 31 December 2016, were USD 390,029 (31 December 2015: USD 815,769).
The Company shared 3% of legal and consulting services provided by Baring Vostok Capital Partners Limited ("BVCP"), a related party, to Baring Vostok Private Equity Fund V under the Investment Advisory Agreement dated 21 December 2004. BVCP resigned on 31 December 2015 as Investment Adviser. During the year ended 31 December 2016, the cost of services provided by BVCP expensed through the Statement of Comprehensive Income during the year were USD nil (2015: USD 3,146). BVCP fees capitalised during the year were USD nil (2015: USD 19,370). BVCP fees allocated as Prepaid investment costs (as detailed in Note 7, Trade receivables) as at 31 December 2016, were USD nil (31 December 2015: USD 9,199).
The Company shares 3% of legal and consulting services provided by Baring Vostok Capital Partners Group Limited ("BVCPGL"), a related party, to Baring Vostok Private Equity Fund V under the Investment Advisory Agreement dated 31 December 2015. During the year ended 31 December 2016, the cost of services provided by BVCPGL expensed through the Statement of Comprehensive Income during the year were USD 12,180 (2015: USD nil). BVCPGL fees capitalised during the year were USD 24,398 (2015: USD nil). BVCPGL fees allocated as Prepaid investment costs (as detailed in Note 7, Trade receivables) as at 31 December 2016, were USD 16,514 (31 December 2015: USD nil).
Under a Services Agreement Baring Vostok Manager Holding Limited (''BVMHL'') is entitled to a fee to provide Directorial services to the Fund. During the year ended 31 December 2016, the cost of services provided by BVMHL amounted to USD 42,377, net of disbursements of USD 4,596 (2015: USD 3,033, net of disbursements of USD 492). BVMHL fees accrued by the Fund as at 31 December 2016, were USD 6,700, net of disbursements of USD 274 (31 December 2015: USD nil, net of disbursements of USD nil).
13. UNDRAWN COMMITMENTS
At 31 December 2016, the Company had an undrawn capital commitment of USD 1,097,927(31 December 2015: 2,039,481) to Baring Vostok Fund IV (GP) L.P. and USD 275,823 (31 December 2015: 663,939) to Baring Vostok Fund III (GP) L.P.
Baring Vostok Investments PCC Limited 43 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016 Consolidated Notes to the Financial Statements For the year ended 31 December 2016
14. ULTIMATE PARENT AND CONTROLLING PARTY
The Directors consider there to be no ultimate or immediate controlling party.
15. SUBSEQUENT EVENTS
Between January and April, 2017, the Company made new investments and several follow-on investments for the total amount of USD 3,479,350.
On 13 April 2017, the Company received a distribution of USD 942,108 from Baring Vostok Fund IV (GP) LP.
There were no other material subsequent events which would require disclosure in these financial statements.
Baring Vostok Investments PCC Limited 44 Report and Audited Consolidated Financial Statements for the year ended 31 December 2016