REALISING POTENTIAL ANNUAL REVIEW 2017 Buy and Build SOCIETY NEEDS OUR APPROACH LEVERAGING ENERGY, HEALTH TO REALISING DATA TO DRIVE & RETAIL P8 POTENTIAL P12 RETAIL P28 LETTERONE IS A PARTNERSHIP OF SUCCESSFUL ENTREPRENEURS AND INTERNATIONAL BUSINESS PEOPLE. OUR AIM IS TO BUILD A WORLD-CLASS DIVERSIFIED GLOBAL INVESTMENT BUSINESS. L1 ENERGY Building a world-class upstream oil and gas investment portfolio. L1 TECHNOLOGY Investing in telecoms, technology and software companies that will enable users to improve efficiency. L1 HEALTH Looking for acquisition opportunities that occupy a critical and strategic role in the healthcare chain. L1 RETAIL Leveraging a strong track record in retail to buy and build the next generation of retailers internationally. L1 TREASURY Managing the liquidity and financial investments of L1. LETTERONE ANNUAL REVIEW 2017 CONTENTS ANNUAL REVIEW 2017 02 14 At a Glance L1 Energy 04 18 Chairman’s L1 Technology Review 22 06 L1 Health Chief Executive’s Review 26 08 L1 Retail Market Overview 30 12 L1 Treasury Strategy and Investment 32 Governance 36 L1 Holdings and L1 Investment Holdings Board 38 Find more on our website Financial letterone.com Summary LETTERONE ANNUAL REVIEW 2017 01 AT A GLANCE REALISING BUSINESS POTENTIAL We invest through L1 Energy, L1 Technology, L1 Health and L1 Retail. Our liquidity is managed by L1 Treasury. Our investments in private equity are managed independently. Financial highlights NET ASSETS GROWTH IN NET ASSET VALUE CAPITAL DEPLOYED $25.1 BN 12.9 % $4.7 BN AT 31 DECEMBER 2017 (2016: $22.2 BN) IN 2017 AT 31 DECEMBER 2017 (2016: $1.3 BN) Net assets under management AT 31 DECEMBER 2017 IN USD 16 % OTHER PE FUNDS $4.1 BN 10 % 28 % PE FUND – HEALTHCARE L1 TREASURY AND OTHER ASSETS $2.6 BN $7.1 BN 5 % 24 % L1 RETAIL L1 TECHNOLOGY $1.2 BN $5.9 BN 17 % L1 ENERGY $4.2 BN 02 LETTERONE ANNUAL REVIEW 2017 LIQUIDITY TOTAL PROFIT $7.1 BN $2.9 BN AT 31 DECEMBER 2017 (2016: $9.3 BN) NET PROFIT FOR THE YEAR (2016: $1.1 BN) Return by business unit during 2017 IRR % 1400 26% 30.00% 1200 21% 25.00% 1000 20.00% 15% GAIN ($M) 800 IRR % 15.00% 600 6% 10.00% 400 5.00% 200 0 0.00% L1 TECHNOLOGY L1 ENERGY L1 TREASURY PRIVATE EQUITY *IRR not shown for PE Fund – Healthcare and L1 Retail as investments completed in 2017 LETTERONE ANNUAL REVIEW 2017 03 REVIEW READY TO TAKE ADVANTAGE OF CHANGE CHAIRMAN’S I expect the global economy to continue to improve overall in the coming year. Growth in developed economies may moderate slightly and financial conditions may begin to tighten as REVIEW central banks reduce their stimuli, leading to an increase in interest rates and less liquidity. The continuing political uncertainty – and threat of increased protectionism – continues to present downside risk. BUSINESS AND SOCIETY All markets in which L1 has invested are LetterOne has continued experiencing rapid change. But, as L1 has to build on its solid Capitalism is undoubtedly facing a period of shown, it is ready to take advantage of that fundamental change and challenge. Every change and its focus is on execution. foundations; its deal business that I am involved in faces an industrial revolution as it is hit by the full impact of AI, flow has gained pace; digital, big data, online and 3D manufacturing. and its ability to realise As you will read later in this Annual Review, a company’s potential L1 believes that business has an important Lord Davies of Abersoch in changing markets is role to play and must prove it will harness Chairman of the Board new technology to deliver benefits for all, not starting to pay dividends. just for society’s elites. I believe that we are at a key juncture and business needs to re-evaluate its relationship with society (see page 9 Market Overview). GOOD PROGRESS In 2017 L1 launched a new economics LetterOne (L1) delivered robust performance competition in the UK – The Indigo Prize – that this year. As a Group I believe that we can challenged entrants to consider how to measure reflect on 2017 with pride. L1 has continued economic activity in a 21st century economy. to grow and improve its assets, financial The competition was open to universities, performance and people. Net asset value think tanks, research centres and students increased by USD $2.9 bn to $25.1 bn. (see page 11 Market Overview). This year we have started to see L1’s “buy and build” investment strategy in action. CONTINUING GEOPOLITICAL The results can be seen across the Group in UNCERTAINTY L1 Retail’s acquisition of Holland & Barrett, L1 Energy’s intent to merge DEA, our German Geopolitics has become ever more oil and gas business, with BASF’s oil and gas complicated this year; trade corridors are activities, and L1 Treasury’s sale of its student changing beyond comprehension and there accommodation business. is a danger that progress made on globalisation may be reversed. CULTURE AND GOVERNANCE Whether it is Brexit, calls for Catalonian The culture of a company is arguably its most independence or a tough stance on important asset. L1’s culture continues to immigration, we all have to be careful not evolve and develop favourably, along with our to revert to insularity and the mere protection investment philosophy. L1’s long-term capital, of our own interests. Because ultimately, deep sector expertise and strategic input will poverty, education, climate change and ultimately bring rewards for all. equality can only be resolved through global coordination and leadership. L1’s governance standards are high and we recognise that business needs to engage with As a relatively young Group that looks to society and listen, and to take this into account long-term investment, L1 is not immune in decisions that are made. L1 has begun to from these investment challenges or political develop ways of giving back in a variety of forms. volatility; but its diversity of talent, diversity of business, and diversity of background all We still have work to do at L1 to improve the position L1 well for this challenging period. diversity of our Board and our executive teams. But it is a priority and I am pleased to see Maria Moraeus Hanssen appointed as CEO of DEA this year and Ursula Burns appointed as Chairperson of VEON. It is a Board priority to address this as we grow (see page 32 Governance). 04 LETTERONE ANNUAL REVIEW 2017 More on our 2018 priorities page 7 More on our sectors letterone.com/about-us/our-structure LETTERONE ANNUAL REVIEW 2017 05 REVIEW DISCIPLINED EXECUTION – DRIVING IMPROVEMENT CHIEF IN PORTFOLIO COMPANIES As I mentioned above, all of our business units have contributed to our successful 2017. EXECUTIVE’S In Technology, Turkcell has delivered its best performance ever in terms of underlying operational performance, with revenue growth of 23.4%. These results are driven in large part REVIEW by their strategy of using new and improved SMART DEPLOYMENT digital channels to deliver better service and We made very good efficiency for its customers. OF CAPITAL IN DIFFICULT progress this year. ENVIRONMENT This model is the one VEON is also pursuing. We built on momentum VEON recorded organic revenue growth of 1.9% in 2017. It continues to focus on efficiency and We continued our smart deployment of capital, appointed a new chairperson, former CEO of begun in 2016 – and identifying good assets to buy and build, despite Xerox, Ursula Burns in 2017. made significant an environment of high prices and a very competitive market for the best assets. progress against our Finally, L1 Treasury made excellent returns and ended the year with a net return on total assets L1 Retail bought Holland & Barrett. This was a long-term objectives. of 6.2%. landmark investment in the growing health and wellness retail market and put us on the map in Part of this return was the result of our first the UK, giving us a presence on the high street, material successful home grown buy and and an increased profile. STRONG PERFORMANCE build strategy. Led by our Treasury team, we bought and consolidated, over the last In addition, L1 Treasury purchased a stake in Our financial performance was strong, ending two and a half years, a leading student DIA, the Spanish Food retailer. In January 2018, the year with a 12.9% increase in net asset accommodation business in the UK. This we announced that L1 Treasury had increased value (“NAV”) to USD $25.1 bn ($22.2 bn: 2016). entailed running existing properties, as well as its shareholdership to 15% of DIA’s total share Particularly pleasing was that all our business completing a portfolio of construction projects, capital and had entered into a collateralised units contributed to this success, with strong while adding new revenue streams and forward purchase transaction to acquire an increases from L1 Technology, L1 Energy, properties to the portfolio. Ultimately we took additional 10% of DIA’s share capital. L1 Treasury, and our private equity holdings. the decision to exit and took advantage of a strong market environment to sell the portfolio We have also increased capital employed in We also had good cash realisations at $1.7 bn and realise value. our independently managed Private Equity during the year – so our increase in NAV was portfolio. We supported their continued under-pinned by cash returns, allowing us to investment in the growing healthcare industry, cycle money back for further re-investment COMPLIANCE IS A which we like given the fundamentals of the and returns to shareholders.