1.99 mb - Investcorp.com

INVESTCORP 

MANAGEMENT DISCUSSION AND ANALYSIS 

1. BUSINESS DESCRIPTION 

PRIVATE EQUITY ASSET CLASS 

Investcorp has been active in private equity (PE) investing in North America and Western Europe since 1983, 

making us one of the earliest participants in the transatlantic private equity market. Since that time, we have 

acquired private equity investments totaling approximately $28 billion in a broad range of industries and markets. 

Investcorp products in this asset class can be grouped into three components: 

US and European 

buyouts 

Buyout investments targeting 

middle market companies 

In recognition of the preference of its GCC region clients to exercise discretion on individual investment decisions, 

mid-cap investments are primarily offered to clients on a deal-by-deal basis, in which no advance long-term blind 

commitment is required from the client. The small-cap and growth capital investments are made via commitments 

to funds. 

The following section describes the operations of each of the product components. 

i. Business strategy for US and European mid-cap buyouts (‘buyout’) 

Investcorp conducts its buyout investment activities on an integrated basis out of its New York and London offices. It is 

one of the oldest transatlantic private equity firms in the world. The primary objectives of this single private equity team 

are to select and arrange investments with potential for attractive capital gains, to manage them aggressively for value 

optimization and to seek exit opportunities that generate superior returns on invested capital in the medium-term. 

Investcorp operates a ‘one-firm’ philosophy between its New York and London based teams with more than 30 

professionals dedicated to sourcing, analyzing, executing, adding value and exiting investments. A third of these are 

managing directors who have, on average, been with the Company for ten years and who have significant experience in 

private equity transactions. Investcorp has a unified management structure, cross-over of team members, a single 

investment committee that reviews all transactions, and integrated compensation programs. As a result, the Company 

reduces internal conflicts and is able to focus its attention on the most attractive investments for clients and the firm 

regardless of their geographic location. 

22 INVESTCORP GROUP 2007 ANNUAL REPORT 

Technology 

small-cap investments 

Investments in North American and 

European small capitalized 

(‘small-cap’) technology companies 

with established products 

Growth capital 

Investments to be made in 

greenfield projects, or buyout 

opportunities, within the 

Arabian Gulf region

The business is centered on the following key principles: 

■ Investment approach 

Investcorp’s investment opportunities are primarily sourced through its contacts with a broad range of financial 

institutions and intermediaries throughout North America and Western Europe, which have been built up over its 25 

years in private equity. The Company invests in maintaining and strengthening these relationships, and ensures that its 

relationships have a strong understanding of its business model and strategy and therefore the type of investments in 

which it is interested. In addition to sourcing investment opportunities through financial intermediaries, Investcorp also 

places heavy emphasis on identifying opportunities through extensive networks of senior executives across the corporate 

landscapes in North America and Western Europe. 

Target ownership 

Asset class 

Investment thesis 

Deal size (EV) 

Target profile 

Deal frequency 

Deal flow sources 

Industry focus 

Minority Club 50-50% with ability to 

execute post-acq model 

Senior debt High Yield Mezzanine Venture 

capital 

Globalization 

Drive scale/ 

sector cons. Operational 

improvements 

Market 

growth 

Majority 

Buyouts 

Cash flow 

generation 

$300 million $1.3 billion 

Turnarounds Family owned 

and managed Corporate 

carve-outs 

Relationship PE 

firms 

Sector focus 

Not in current scope 

3–5 deals annually 

Global 

business 

Generalist 

Domestic 

leaders 

Executive contacts Investment banks Proprietary 

Initiatives in process Within current scope 

Investcorp has created a systematic approach to this crucial component of its investment process, through hosting 

periodic informative events of interest for senior corporate executives as well as keeping in regular contact personally and 

through the use of email newsletters and personal correspondence. 

The enterprise value of each targeted company is between $300 million and $1.3 billion, where each requires 

$100 – $350 million of equity and where the expected holding period is between three and seven years. Investcorp’s 

investment thesis is based on a strategy of value enhancement by partnering with talented managers in a given industry 

and focusing on business fundamentals, rather than reliance on multiple arbitrage or use of excessive leverage. 

Investcorp seeks investment opportunities in companies with capable management teams, prominent positions in their 

industry, a strong track record and potential for growth. Specifically, the Company looks for opportunities where a 

combination of revenue growth, margin enhancement through operational improvement and scale economies, and the 

introduction of more sophisticated management techniques and best practices is expected to generate an increase in value 

in the medium-term. The team aims to complete three to five acquisitions in any given year. 

Investcorp and its economic and voting co-investors generally acquires controlling interests in its targets and it generally 

does not engage in transactions in collaboration with other investors unless it acquires the controlling position in 

the acquisition. 

Buyout strategy 

INVESTCORP GROUP 2007 ANNUAL REPORT 23

INVESTCORP 


■ Institutionalized due diligence and risk management 

Investcorp has developed rigorous internal processes that provide the framework and discipline for an institutionalized 

approach to up-front due diligence and post acquisition value enhancement. 

Value addition focuses on applying the combination of financial, strategic and operating skills across the business 

throughout the life-cycle of ownership. Over one third of the buyout team members have strategic or operational 

backgrounds. The specific investment risks associated with private equity are controlled and mitigated by a team of 

experienced acquisition and post-acquisition professionals and advisory directors. 

Timing 

Major 

Focus 

Mix of 

skills 

Pre-close to 1st 150 days 

Acquire 

company 

Kick-start 

agenda 

Manage 

aggressively 

Provide 

support 

Optimize 

exit 

Risk is further mitigated by Investcorp’s established infrastructure and Value-at-Risk (VaR) based risk assessment using 

the MSCI Barra equity models, adjusted for private equity. These risk models have been developed, thoroughly tested and 

improved over time through various market cycles. A detailed description of the VaR-based risk approach is covered in 

the risk management discussion. 

■ Unique offering structure 

Investcorp initially underwrites the equity portion of each acquisition, and most of this equity is subsequently syndicated 

to its client base. Management of the acquired companies is economically aligned with Investcorp and its clients through 

their equity participation. 

Investcorp retains a proportion of the equity on its own balance sheet as a co-investment. It exercises a controlling 

interest over the invested companies via fiduciary agreements with its clients. This co-investment between Investcorp 

and management creates a strong partnership of aligned interests. Furthermore, clients have the opportunity, with full 

discretion, to invest equally in each transaction, leading to superior portfolio diversification and risk-return profile. 

Investcorp is also able to structure a portion of its deal-by-deal private equity offerings in Islamic shariah-compliant 

form in order to attract investors seeking such investments. The Company expects shariah-compliant offerings to be an 

increasingly important source of its private equity AUM in the future. This unique offering structure permits Investcorp 

to earn a large proportion of its overall fees upfront, thereby enhancing the quality of its revenue streams. 

For certain large institutional investors, Investcorp offered its buyout product line in the form of a pledge fund. The 

limited number of clients who participated in its pledge fund invested an agreed upon minimum amount in a specified 

number of its buyout transactions. In return, the pledge fund investors were entitled to a preferential allocation in each 

of Investcorp’s buyout transactions. 


Strategic 

Operating 

Financial 

Value creation 

Leverage 

best practices 

Exit

In fiscal 2007 Investcorp launched a $1 billion buyout fund targeted at North American and Western European 

institutional investors. This fund, which will co-invest alongside our traditional buyout product line, will replace the 

pledge fund such that from fiscal 2008 the original pledge fund investors will participate through this new fund. The 

fund is additive to Investcorp’s placement capacity, thereby allowing for a commensurate enlargement of potential deal 

sizes as the fund invests over the expected five year life cycle. 

■ Commitment to portfolio companies 

Investments are designed to support the Company’s long-term goals and to build value. This theme is consistent with the 

way Investcorp has supported its portfolio companies during difficult times by providing additional resources and capital, 

when there is a clearly identified and supportive value thesis. 

■ Deal financing edge 

Investcorp manages a well capitalized and highly liquid balance sheet. This, coupled with the broad access to financing 

and capital markets and established investment banking relationships, assists in deal sourcing and successful execution of 

acquisitions, even in difficult or competitive market environments. 

Investment process 

Deals are sourced directly or via intermediaries such as investment banks, industry contacts or other financial sponsors. 

Of the 400+ potential opportunities presented throughout the year on average, about 5% will make it through an initial 

screening process following application of Investcorp’s strict selection criteria. Acquisition due diligence and risk analysis 

will then lead to three to five actual acquisitions every year and a targeted annual deployment of equity of $750 – $900 

million, prior to client syndication. 

Acquisition Post-acquisition Realization 

■ Strict investment 

parameters/selection criteria 

- Deal size ($300m–1,300m) 

- Industry attractiveness 

■ Strong due diligence involving postacquisition 

experience/skills 

■ Quality control and dynamic risk 

modeling 

■ Two-tiered, team-based investment 

approval process 

- Investment Committee 

- Commitment Committee 

Network strength 

Banks, advisors, industry 

experts and previous 

management teams 

■ Alignment phase—agree management 

agenda 

■ Specific programs and metrics for key 

value drivers 

■ Advisory directors and industry 

specialists for operating expertise 

■ Portfolio Review Committee focused 

on strategy, management and 

resources 

■ Fresh Look program 

■ Lessons Learned program 

■ Formalized training program 

■ Support funding (same approval 

process) 

Culture 

Active ownership 

■ Exit planning starts at acquisition 

■ Prepare and position company 

for exit 

■ Evaluate multiple divestiture options 

■ Divest opportunistically (flexible 

timing) 

Internal expertise 

Combination of buyout and 

strategic/operational 

specialists 

All acquisitions undergo rigorous analysis at a number of Investment Committee meetings and all such acquisitions, 

add-on financings or exit arrangements also require final approval by an independent cross-functional Commitment 

Committee. 


INVESTCORP 


Investment Committee: first tier review for all 

The Investment Committee comprises the most experienced buyout partners from the New York and London 

offices. The committee meets at least once a week to review new investment proposals and any proposed subsequent 

capital injection. Each new investment is reviewed at least three times during the transaction process. The 

committee shapes the due diligence effort and allocates resources in a phased approach, in light of critical issues 

identified. At the last stage, the investment committee will approve the valuation and the structure of the bid, 

pending commitment committee approval, and advise on deal negotiations. 

Each new investment proposal is supported by detailed analyses that identify the business rationale, relevant 

risks/returns and valuations. The analyses highlight all major risks associated with achievement of targeted returns 

and provide parameters to thoroughly test the business plan for risk mitigation and return optimization 

characteristics. 

Commitment Committee: second tier review of Investment Committee recommendations 

The Commitment Committee is a cross-functional group drawn from the senior management team of the 

Company, to ensure interests of Investcorp’s balance sheet and clients are represented, along with appropriate 

oversight and review, before final approval to make an acquisition or provide add-on funding. The committee 

comprises the COO, the CFO, a senior member of the placement and relationship management team, the head 

of risk management and three senior executives from the buyout team. 

The committee reviews each new investment proposal at least twice during the transaction process. The first 

review is an initial briefing that takes place when the deal team believes there is a reasonable likelihood of the 

consummation of the transaction. The second is a final approval meeting, which takes place immediately after the 

investment committee has recommended making or accepting a binding bid. The committee also examines 

proposals for realization alternatives for existing investments and makes recommendations on the most optimal 

strategy for the eventual realization of each portfolio company. 

The committee approves or rejects a proposed investment or realization from two perspectives: its attractiveness to 

Investcorp’s investor base and its attractiveness to Investcorp as a co-investor, thereby maintaining alignment and 

balance of its fiduciary responsibilities to Investors and shareholders. 

Post acquisition oversight is provided by regular meetings of senior executives, operating company management 

and advisory directors, who are seasoned industry executives each with an average of more than 30 years’ experience in 

specific industries or functional areas. The advisory directors have strong operational experience and, therefore, are a 

strong influential factor in helping achieve successful growth in enterprise value in portfolio companies over the 

investment period. On occasion, they will have daily interaction with the business, including meetings with junior levels 

of management, to implement operational plans. 

Throughout the buyout investment cycle, the focus is on a systematic and defined process that draws on Investcorp’s 

25 years of operating experience in the US and European marketplace. In addition to the advisory directors, Investcorp 

actively uses its industry contact network and close relationships with global and boutique executive search firms to 

source industry experts. These experts can provide focused, sector-based value-add ideas, advice and counsel with 

diligence on specific deals or post acquisition focus on individual portfolio companies. Rigorous internal business 

processes and decision making such as the Alignment Phase and Fresh Look and Lessons Learned programs are designed to 

continuously add value. 

26 INVESTCORP GROUP 2007 ANNUAL REPORT

Portfolio reviews formally establish annual objectives for each portfolio company and develop quantifiable annual 

objectives against which progress can be measured. A portfolio review committee, comprising senior partners and 

advisory directors, meets at least twice a year for each portfolio company to focus on strategy, management talent and 

resources required to execute the Company’s value enhancement strategy. Companies with more complex issues are 

reviewed more frequently. 

Each senior associate, principal and managing director undertakes a structured training program in conjunction with 

senior executive training experts, major corporate relationships and advisory directors. This is aimed at maintaining 

up-to-date thinking on the techniques used to enhance strategic and operating performance of portfolio companies, 

which ultimately drives value enhancement. 

US Advisory Directors 

(Portfolio Company Board) 

Dick Jalkut (TelePacific) 

Former President & Group Executive – 

NYNEX Telecommunications 

Jim Hardymon (PlayPower, FleetPride, 

American Tire, Berlin Packaging) 

Former CEO – Textron 

COO – Emerson Electric 

Bob Geckle (PlayPower, CCC, FleetPride, Greatwide) 

Former Group President – Textron 

Business Unit GM – Emerson Electric 

Dana Snyder (Associated Materials) 

Former COO – Plygem Industries 

President – Alcoa Building Products Group 

Marty Maleska (CCC, SourceMedia) 

Former SVP & Group Executive – Macmillan 

Former President, International & Professional 

Publishing – Simon & Schuster 

Former CEO, Business Information – Primedia, Inc. 

European Advisory Directors 

(Portfolio Company Board) 

Germany 

Stephan Kessel (TimePartner) 

Former CEO – Continental AG 

France 

Alain Redheuil (American Tire, 

Autodistribution, Orefi) 

Former CEO – Rexel Group 

Member of Pinault Printemps Redoute 

executive committee 

Former COO – Michelin Europe 

CEO – Autodistribution 


INVESTCORP 


Alignment phase 

A structured approach 

designed to increase 

likelihood that 

company achieves its 

return targets 

(especially, first year’s 

financial targets) 

Fresh Look program 

Objectives 

■ Briefly review performance against 

original business case investment 

thesis – understand areas of under 

performance 

■ Assess industry outlook and 

competitive dynamics 

■ Evaluate strategy, business plans, 

performance objectives, outlook 

and potential 

■ Review exit options and their 

implications and develop 

independent point of view 

■ Frame options and recommend 

course of action 

■ Test and complete investment thesis and kick off strategic planning 

process 

■ Complete/extend management and organizational assessment 

■ Decide on action plan to address potential upsides to the 

management plan (revenue and cost) 

■ Benchmark fundamental business processes 

■ Agree management agenda with CEO and senior managers, 

including prioritized initiatives and ongoing monitoring 

mechanisms 

■ Establish strategic, operational and financial metrics tied to CEO 

agenda and management bonus scheme and incorporate into 

management dashboard 

Lessons Learned program 

Objectives 

Objective 

assessment 

without 

management 

bias 

■ Identify lessons to be learned 

from each successful deal 

process 

■ Incorporate learning into PE 

business processes 

■ Educate PE team on lessons 

learned and resulting 

improvements to key business 

processes 

ii. Business strategy for global technology small cap (‘TSI’) 

Process 

■ Timing 

- Conducted every two years by 

an independent Investcorp 

partner; or 

- Investment committee 

decision ad-hoc 

■ Duration: four-six weeks 

■ Participants: managing director 

or principal and associate; 

advisory director; supported by 

outside consultants, as needed 

Continuous 

process 

improvement 

through formal 

study of recent 

transaction 

experiences 

Process 

■ Timing 

- upon completion of transaction 

- as part of Fresh Look process 

- following exit 

■ Deal team to conduct formal 

post-mortem assessment 

■ Deal team presents lessons learned 

and recommendations for process 

improvements at new business 

meetings in each office 

The TSI line of business offers Investcorp’s clients the opportunity to invest in select technology sectors in the US and 

Europe. With Investcorp as a co-investor, clients participate on a portfolio basis through dedicated technology investment 

funds. The TSI team manages $530 million through two separate funds: the 2001 Investcorp Technology Ventures 

Fund I (Fund I), with a commitment size of $230 million, and the 2005 Investcorp Technology Ventures Fund II 

(Fund II). Fund II had strong participation from Investcorp’s traditional GCC investors as well as a diverse group of new 

limited partners from North America, Europe and Asia in the TSI team’s first formal offering to these markets. 

The team is focused on making small size investments in control-oriented corporate carveouts, buyouts and public 

situations. With the team targeting these more complex transactions that fall between the focus of traditional venture 

capital firms and traditional buyout firms, the TSI group applies a distinct skill set and operating model. 


The TSI partners have worked together for over five years with many years of financial, operating, technical and 

investing experience between them, and the team has the balance and diversity from different cultural, professional 

and technical backgrounds. 

The TSI business is built on the following key principles: 

■ Disciplined investment approach 

The TSI business benefits from the institutional excellence of Investcorp as a global manager of alternative assets. It has 

developed formal processes for reviewing new investments, determining which investments to pursue, undertaking due 

diligence, engaging advisors and communicating within the team. These disciplined institutional processes – more 

common to successful buyout funds than to most venture firms — are intended to ensure that the team invests in solid 

companies at reasonable valuations. Generally, at least three investment professionals work on every transaction, and all 

investments are vetted by the whole team. This team-based approach allows for the identification of potential risks and 

also serves as a check on the transaction team’s deal evaluations. 

■ Exit focus 

As part of its pre-investment due diligence process for all potential investments, the team spends a substantial amount of 

time analyzing exit strategies, including the consideration of likely acquirers, analysis of relevant precedent transactions 

and public companies as proxies for valuation ranges, and development of an exit ‘waterfall’ to ensure that deals are 

structured appropriately. The TSI team will only invest in situations where it is confident that an exit can be engineered 

within a reasonable time frame. The team’s post investment oversight remains exit-oriented as it works with management 

to drive the company toward growth and continues to evaluate exit strategies in light of business performance, market and 

technology trends and public/private market conditions. 

■ Offering structure 

Unlike the majority of our private equity and real estate investments (which are marketed to our clients on a deal by 

deal basis), our venture capital product is offered to our clients on a dedicated fund basis. Accordingly, capital is raised 

from our investors, and Investcorp as co-investors in each of our venture capital funds, in the form of firm capital 

commitments prior to the fund’s closing. Such capital is subsequently drawn and utilized by the funds to make equity 

investments in the targeted range of technology related companies. 

■ Institutionalized investment experience 

In addition to its institutionalized investment discipline, the TSI team uses its influence to institute or encourage ‘best 

practices’ at its portfolio companies, including the installation of corporate governance controls, audited financials 

and formalized business processes in order to position its portfolio companies for eventual sales or public listings. In 

addition, the team benefits from Investcorp’s extensive network of corporate relationships with current and past buyout 

and TSI portfolio companies; more than 20 chief information officers of current buyout portfolio companies are 

available for due diligence as well as for potential customer introductions. The investment team also works closely with 

colleagues in the buyout business complementing the team’s capabilities with extensive local expertise and networks. 

These are used to generate cross-border deal flow, structure sophisticated technology deals and support companies in 

the investment portfolio. 


INVESTCORP 



The team generally targets four types of investment opportunity: 

TSI investment focus 

Transaction type 

Divestitures and 

corporate spinouts 

Take-privates and 

PIPE transactions 

Venture buyouts 

Expansion stage 

financing 

Since inception, TSI has avoided investing in businesses that rely on the success of specific point technologies or 

standards. Instead, the TSI team examines broader multi-year trends and evaluates the growth potential of businesses 

based on these trends. TSI technology sector trends are long-term in nature: 

■ Corporate focus on cost reduction and return on investment 

■ Emergence of next generation data networks 

■ Advancement of mobility and ‘anytime, anywhere’ access 

■ Expansion of IT security solutions 

■ Continued penetration of digital content and media 

■ Convergence trend in consumer electronics 

Driver Examples 

Non-core assets or corporate orphans that 

have strong growth prospects but limited 

access to capital 

Small public companies with 

growth prospects but limited access 

to public capital 

Mature technology companies lend 

themselves to a leveraged buyout 

Volatile public markets force 

later stage growth companies to 

seek private capital 


■ Magnum (Cirrus Logic spinout) 

■ Antares (Kulicke & Soffa spinout) 

■ Willtek (Acterna spinout) 

■ Softek (Fujitsu spinout) 

■ Utimaco (Frankfurt Exchange PIPE) 

■ Viewlocity (Nasdaq take private) 

■ Mania (Frankfurt Exchange PIPE) 

■ InfoNXX (a venture buyout of Conduit) 

■ PortalPlayer (IPO November 2004) 

■ Trema (Trade sale July 2006)

The team focuses on companies that broadly fall into four key areas: mobile data technologies and applications, 

enterprise software, communications infrastructure products and applications, and digital content enablement. 

The following chart illustrates how these key trends drive the four focus areas of the Funds: 

Technology trends 

■ Advancement of mobility and ‘anytime, anywhere’ 

access 

■ Emergence of next-generation data networks 


■ Corporate focus on cost reduction and ROI 




■ Corporate focus on cost reduction and ROI 



■ Convergence trend in consumer electronics 

■ Advancement of mobility and ‘anytime, anywhere’ 

access 

A unique advantage for the TSI business in its deal sourcing is its ability to leverage the network of relationships of the 

senior management team as well as those of Investcorp. Investment opportunities are sourced through several avenues, 

including: (i) other lines of business at Investcorp; (ii) existing portfolio companies within the funds or other parts of 

Investcorp; (iii) venture capital firms that approach Investcorp; (iv) banking intermediaries; and (v) entrepreneurs who 

make a direct approach. The majority of the transactions that have been reviewed by the TSI team are internally sourced 

with no intermediaries or competitive processes involved. 

Potential investments undergo a detailed and extensive selection process intended to identify investments which meet 

Investcorp’s and its clients’ investment criteria and provide the potential for sizeable capital gains at exit, including: 

■ extensive pre-investment due diligence on all aspects of the business model, market dynamics, technology, financial 

and accounting processes, and management viability; 

■ detailed valuation modeling; and 

TSI focus areas 

Mobile data 

technologies and 

applications 

Enterprise 

software and 

technology 

outsourcing 

Communication 

infrastructure 

products and 

applications 

Digital content 

enablement 

Sample sectors 

■ Location-based services 

■ Chips for mobile routing 

■ Wireless data infrastructure 

■ Wireless test equipment 

■ Enterprise security 

■ Financial software 

■ Legacy integration 

■ Supply chain management 

■ Media processing 

■ Network devices 

■ Network security 

■ Wireless backhaul 

■ Chips for video applications 

■ ‘Digital home’ applications 

■ Electronic Payment 

■ On-line advertising 

■ detailed VaR-based risk modeling of the impact of new investments on the overall fund 

Example 

investment 

Willtek 

Softek 

Dialogic 

Magnum 

Progressive approval and buy-in from the TSI team is sought throughout the process, with all final investment decisions 

subject to unanimous approval by the members of the team. This dynamic and rigorous process approach is increasingly 

important in a competitive venture capital environment. 

With respect to corporate governance, Investcorp typically requires board representation or board observer rights for 

each investment. In certain situations, it will also seek representation on audit and executive compensation committees 

and look to implement appropriate corporate governance practices within each portfolio company. Investcorp does 

not seek to run a portfolio company on a day-to-day basis but is committed to continually monitoring the operational 

performance of individual portfolio investments through regular update calls, board meetings, strategy sessions and 

day-to-day interaction on specific projects. 


INVESTCORP 


The TSI team works closely with portfolio companies in areas such as strategy development, budgeting, financial and 

competitive analysis and sale or IPO process management. The portfolio companies can also gain access to an extensive 

network of investment banking and consulting relationships in order to facilitate the execution of many business needs 

or goals, including financing, litigation and restructuring. 

iii. Business strategy for Gulf growth capital 

The Gulf growth capital (GGC) line of business was established in the second half of fiscal 2007 to provide investors the 

facility to participate in the growing number of private equity investment opportunities in the Gulf region. 

The Gulf Cooperation Council (GCC) and surrounding region is undergoing an unprecedented level of economic 

transformation driven mainly by the need to create employment for the millions of citizens looking to enter the job 

market over the coming few years, the need to diversify the economy away from over-reliance on energy-based natural 

resources, and the need to generate greater value from hydrocarbon resources. 

In order to cope with these imperatives, governments in the region are channelling a large proportion of the fiscal 

surpluses generated by higher energy prices and production levels to invest in the long-term development of the region, 

including social infrastructure projects, energy production capacity expansion projects and non-hydrocarbon 

industrial development. 

Realizing that the private sector will have to assume a disproportionate role in meeting those imperatives, governments 

in the GCC are also promoting measures intended to create a more attractive investment environment (e.g., gradual 

liberalization of economies, improved legal environment, strengthening of eco-system for investment). 

As a result of these developments, the economic outlook for the GCC is robust and investment opportunities within the 

region are becoming increasingly abundant. 

In parallel to these favorable economic conditions are several encouraging developments that have made the deployment 

of private equity more attractive in recent years. These developments include: strong growth in deal flow, availability 

of acquisition financing, ability to add value and exercise control, efforts to improve corporate governance, growth in 

exit options, and the willingness of family-owned businesses to seek third-party equity partners in order to enhance 

growth opportunities. 

Investcorp has created an inaugural Fund (the ‘Fund’) for its GGC business line to take advantage of these positive 

economic developments. The Fund will source, create, and execute unique investment opportunities by bridging the 

needs of the region with businesses, technologies and know-how from around the world. 

Investment strategy 

The Fund intends to make a number of investments over a period of approximately five years with a target gross IRR in 

the range of 30%. Through the application of rigorous investment criteria, these investments will be targeted towards the 

economic sectors that are expected to benefit most from the unprecedented growth in the GCC and which are in need 

of additional capital and expertise to finance transformation and expansion. To capture the investment return potential 

offered by the expansion in these high growth sectors, the Fund will target both ‘build’ and ‘buy’ opportunities. 


The Fund intends to focus on investment opportunities generated by four strategic drivers: 

GGC investment strategy 

Strategic drivers 

Massive level of investment required 

to increase region’s hydrocarbon 

production capacity 

Need to extract more value from 

hydrocarbon resources 

Demographic dynamics (massive 

population growth, entry of 

millions to job market, growth in 

senior citizen segment) 

Need to diversify economic base 

away from energy 

GGC will seek to source, create, and execute unique investment opportunities guided by the four strategic drivers with the 

aim of bridging the needs of the region with businesses, technologies and know-how from around the world. 

HEDGE FUNDS ASSET CLASS 

Investcorp offers clients a range of hedge fund (HF) products using carefully selected hedge fund managers with 

a strong pedigree whose performance is closely monitored. Though hedge fund products have historically been 

marketed primarily to GCC region clients, Investcorp recently established a distribution team to make its hedge 

fund product offerings available to institutional investors in North America and Europe. Investcorp currently 

offers several funds of hedge funds and acts as a distributor and incubator for emerging manager seeded funds. 

Business strategy for the hedge funds asset class 

Investcorp is notable in this sector as it has been involved in HF for 11 years. The Company has developed a strong 

performance track record utilizing a high degree of portfolio transparency and leading-edge risk management tools and 

techniques. Investcorp’s hedge fund business was established in 1996 to manage the Company’s own liquidity and was 

introduced to clients the following year. The business seeks to seamlessly integrate a diversity of hedge fund products 

and services, often on a customized basis, from a single investment platform. 

The hedge fund business has three principal product lines: 

Priority sectors Investment types 

Multiple opportunities in ancillary 

support services (e.g., oil services) 

Variety of investment opportunities 

in energy intensive down-stream 

industries (e,g., plastics) 

Additional opportunities in 

healthcare, education, housing, and 

consumer finance 

Investment opportunities in 

non-hydrocarbon sector (e.g., 

tourism, transportation) 

■ Fund of hedge fund products, which invest in established hedge fund managers. 

■ Single manager funds 1, which are generally managed by new and upcoming hedge fund managers identified as having 

excellent potential for specific strategies. Investcorp shares in the revenues of each fund in return for providing initial 

seed capital, risk oversight and capital raising from Investcorp’s investor base. 

1 An emerging manager is typically one who is just starting their firm, but may also include an established manager at low AUM levels. 

A combination of 

‘Build’ (i.e., greenfield 

projects) and ‘Buy’ 

(i.e., minority or 

majority buyouts) 

transactions where 

Investcorp is uniquely 

positioned to act as 

a bridge between 

investment 

opportunities and 

the need for 

technology, know-how, 

and expertise 


INVESTCORP 


■ Structured products, which include: customized fund of funds, collateralized fund obligations, leveraged fund of 

funds, principal protected and index linked fund of funds. 

Investcorp’s hedge fund strategy is to make available to clients a suite of investment products that are relatively liquid, 

that aim to achieve attractive returns over the medium-term and show low correlation to traditional and other alternative 

asset classes. 

The HF product line employs about 70 professionals, including fund specialists and risk analysts. The co-heads of the 

business have each been with Investcorp for 14 years. The majority of the hedge funds team is located in New York. 

The HF team determines strategic asset allocations, selects top performing third party fund managers and monitors 

the performance of the various managers and investment strategies to ensure that the program’s risk/return objectives 

are met. To do this, they draw on sophisticated measures of risk and return, environmental and industry knowledge 

and portfolio stress testing, including through IT systems which are regularly reviewed to ensure that they are using the 

best technology available. 

The hedge fund business strategy is distinguished by: 

■ Distinct investment approach 

The team employs a highly advanced asset allocation methodology together with an intensive screening of the manager 

universe. This allows the Company to select the ‘best of breed’ hedge funds among the strategies that hold the best 

risk-return potential in the near- to medium-term. 

■ Highly developed risk management 

The business employs advanced risk measurement capabilities using proprietary analytical tools with strong 

operational controls to ensure rigorous ongoing performance monitoring and utilizes high levels of transparency. 

RMS-3, an enhanced generation of risk management tools developed by Investcorp, has been rolled out for systematic 

use in identifying, managing and mitigating risk across Investcorp’s entire hedge fund investing platform. 

■ Specialist sales and distribution teams 

The Gulf-based placement team employs hedge fund product specialists who provide customized portfolio solutions for 

clients and offer a deeper insight into performance and trends. Interactions with clients lead to exchanges of ideas and the 

development of new products. 

The US-based distribution team, part of the group’s US initiative, progressed further in fiscal 2007 and succeeded in 

generating significant institutional interest and new investment mandates. 

■ Co-investment with clients 

Investcorp’s significant balance sheet commitment of approximately $2 billion drives a strong alignment of interests 

with clients. 


■ Liquidity and diversified income for Investcorp 

The strategic advantages of hedge fund investments to Investcorp include the efficient deployment of the Company’s high 

level of liquidity and the diversification of balance sheet risk, where hedge funds balance and complement the risk-return 

profile of the Company’s medium-term private equity co-investments. The business provides a stable stream of recurring 

income through fees from client AUM and from returns on its own co-investment that offset Investcorp’s overall cost of 

funds and other operating expenses. 


Investcorp has developed sophisticated value-add processes to manage the investment cycle. The investment processes 

are robust and use quantitative tools, combined with prudent qualitative judgment based on the collective business 

experience of the Investcorp HF team. The team comprises individuals with extensive experience and complementary 

skills in the areas of trading, investment, risk management, research, portfolio management and operations. 

Investment philosophy and 

product definition 

Asset 

allocation 

Portfolio construction 

Monitoring 

Manager 

selection 

Recent developments 

■ Increased US based manager sourcing 

and networking 

■ Wider international search for new 

managers 

■ Black-Litterman techniques 

implemented for asset allocation 

■ Significant advances in alpha project 

research 

■ Developed next generation risk platform 

■ Extensive peer group research 

(including persistence analysis and 

alpha-beta analysis) 

Objective is to 

maintain top quartile performance 

Investment philosophy and product definition 

The investment philosophy is to use performance oriented managers with a proven track record in order to generate 

attractive returns. Diversification across different hedge fund strategies and investment styles results in a typical low level 

of correlation of portfolio returns to those of traditional asset classes such as bonds and equities and a controlled level of 

volatility of returns on a blended portfolio basis. 

A high level of transparency facilitates comprehensive risk assessment and proactive risk mitigation. 

The business continued to enhance the investment process during fiscal 2007 by: refining the asset allocation framework 

using Black-Littermann techniques, continuing a research project (described below) dedicated to uncovering drivers of 

hedge fund strategy performance, and developing the third generation of a proprietary risk management system (refer to 

the discussion of RMS-3 in the section ‘performance monitoring and risk management’). Significant investment in 

process continues in an effort to ensure that Investcorp’s competitive edge and performance are sustainable. 


INVESTCORP 


The range of HF strategies included in Investcorp’s various fund of hedge funds offerings are listed in the table below: 

Hedge Fund Strategies 

Convertible arbitrage: purchase of convertible bonds, preferred stock or warrants and simultaneous sale of 

underlying equity, futures or baskets of securities essentially leaving the equity option exposure embedded in the 

convertible bond. 

Equity market neutral: capturing technical and fundamental inefficiencies in equity markets through a 

market-neutral long/short portfolio using statistical techniques and valuation models. 

Fixed income relative value: intra-yield curve (long/short positions along yield curve), inter-yield curve, basis and 

other types of trades in global fixed income markets. 

Risk (merger) arbitrage: trading in equities of companies likely to undergo some M&A activity as an acquirer 

or acquiree. 

Multi-strategy: managers with allocations to convertible arbitrage, risk arbitrage and other strategies dynamically 

changing their exposures to the underlying strategies depending on opportunities and the market environment. 

Distressed: trading in equities, bonds and claims of companies undergoing financial/operating difficulties or a 

restructuring process, with a view to capturing returns from mispricing of improved cash flow or value. 

Hedge equities: long or short investments in equities and their derivatives in three regional exposures: US, Europe 

and Japan. 

Macro: opportunistic long or short investments in a wide range of strategies and assets (financial and/or 

non-financial): 

Macro-discretionary: investment decisions based on qualitative factors such as fundamental 

macro-economic analysis. 

Macro-systematic: investment decisions based on technical trend-following models or on fundamentally 

based quantitative techniques. 

Portfolio insurance: provides cushion for the program during periods of substantial widening of credit spreads 

and declines in equities. 

Asset allocation 

Asset allocation is a key value-added process by which the HF team determines how the assets of a particular fund 

product will be invested across different hedge fund investment strategies. Our diversified products combine hedge 

fund strategies to produce portfolios that are relatively uncorrelated, in their return generation, to each other and 

to global bond and equity markets. The majority of hedge fund assets under management are in products that are 

invested in multiple strategies. 

Certain of Investcorp’s funds of hedge funds invest in the hedge equities strategy in the US, European and Japanese 

markets. Emerging manager funds typically pursue a single strategy. In addition, structured funds provide customized 

risk/return features to investors. 


The well developed strategic and tactical asset allocation processes, described below, serve as powerful mitigants against 

the various risks related to the program. 

Strategic asset allocation Tactical asset allocation 

■ Generates optimal strategy allocations by 

selecting strategies that: 

- are forecasted to produce superior 

risk-adjusted returns 

- have exhibited staying power under 

various environments 

■ Modeling based on mean-variance 

optimization 

■ Capped diversification across strategies 

■ Over/under weighting specific strategies 

to reflect near-term opportunities 

■ Based on quantitative research on 

environment, markets and strategies 

■ Portfolio optimized to incorporate tactical 

views and maximize manager alpha 

■ Constrained allocations to managers 

minimizes event risk 

Strategic asset allocation — development of investment guidelines that meet a product’s objective of generating returns 

while ensuring that the expected volatility corresponds to the product’s philosophy. These guidelines take into account 

strategy-specific risks, such as illiquidity, a medium-term market outlook and insights from proprietary research on 

hedge fund strategies. They also place allocation constraints on individual strategies within a product. Historical data are 

processed by a proprietary optimizing model, generating a range of model allocations. In addition, a sensitivity analysis 

is conducted to determine the stability of strategy allocations. 

Tactical asset allocation — deciding actual investment allocations for each strategy within a product. Once strategic 

allocation bands are established and a core portfolio determined as described above, allocations are made tactically within 

the strategic ranges, based on a thorough review of the macro-economic environment and a bottom-up review of each 

strategy. This process provides the flexibility to take advantage of short-term macro-economic opportunities or to 

manage risks emanating from unfavorable market conditions. Adjustments are made at regular intervals throughout 

the year. 

Advisory board — Investcorp also takes informal counsel from an advisory board. The board’s mandate is to provide 

external and objective advice on topical issues, including (but not limited to): macroeconomic analysis, hedge fund 

specific areas of interest, standards for best-in-class investment processes, and broader investment issues. 

Hedge funds advisory board: 

Ronald Liesching, Chairman of Pareto New York LLC, the appointed representative office of Pareto Investment 

Management Limited, a London-based investment management firm specializing in currency overlay strategies 

with over $50+ billion in assets under management. Ron is a founding member of Pareto and has over 20 years’ 

experience in quantitative modeling and currency management. He has written and lectured extensively on risk 

management techniques. 

Lawrence Lindsey, the Chief Executive of The Lindsey Group. Larry held the position of assistant to the President 

and Director of the National Economic Council at the White House and was the chief economic adviser to candidate 

George W. Bush during the 2000 Presidential campaign. Dr. Lindsey also served as a Governor of the Federal 

Reserve System from 1991 to 1997 and was on the faculty of Harvard University for five years. 

Robert Schulman, the Chief Executive Officer for Tremont Group Holdings, Inc. Bob oversees all global strategic 

planning for the firm. He is a member of the investment advisory board where he provides strategic top-down 

insights in the determination of Tremont’s strategy allocations. 

Barry Colvin, Vice Chairman of Balyasny Asset Management, a multi-strategy hedge fund based in Chicago. 

Barry plays an active role in helping to grow and institutionalize the business. He also provides advisory services 

through Colvin Capital LLC and serves as an investment counselor to a family office in New York. 


INVESTCORP 


Manager selection 

Manager selection is based on extensive due diligence with an emphasis on investment style, philosophy and risk 

management discipline, using both qualitative and quantitative approaches. Each manager’s track record is analyzed, 

focusing on profit attribution and performance in periods of market volatility. The strategies used by the managers and 

their investment exposures are also analyzed and correlated to others in the portfolio. Once the HF team has short-listed 

potential managers, it will typically hold a series of meetings with each manager to review their business, risk management 

processes and operational infrastructure. The team completes the due diligence process by conducting a background 

investigation on managers and their underlying fund vehicles. 

Allocations to individual managers are monitored, thus protecting against manager concentration risks. The HF team 

also takes into consideration redemption characteristics of the underlying investment vehicles to facilitate relatively rapid 

availability of liquidity should any adverse event arise. 

Portfolio construction 

Using a combination of asset allocation (quantitative) and manager selection (quantitative and qualitative) processes 

allows the construction of a range of diversified and theme funds using the underlying managers. Ultimately, Investcorp 

aims to integrate seamlessly a diversity of hedge fund products and services, often on a customized basis, from a single 

investment platform. 

Investcorp co-invests the majority of its own surplus liquidity into two of the diversified funds of hedge funds, IBF and 

DSF, on a 50:50 basis. 

Performance monitoring and risk management 

Investcorp continues to strengthen its administrative, risk management and performance management architecture and 

uses best-in-class proprietary risk systems for this. RMS-3 (see description overleaf) is now more integrated into the 

Company’s infrastructure, thereby enhancing monitoring and reporting systems. This emphasis on risk identification 

and mitigation is also viewed positively by the Company’s long-term investors, particularly institutions. 

Prime broker/fund manager 

Quality assurance process 

Monte Carlo based risk 

management system 

VaR 

consolidation 

Exposure 

analysis 

Scenario based on risk 

tracking 

Valuation, reconciliation, 

guidelines monitoring 

Simulation based, full 

valuation risk engine— 

position by position 

Consolidated risk analysis. 

Strategy specific exposure 

analysis 

Monitoring procedures address such risks as under-performance, excessive risk-taking, style drift, fraud/valuation errors 

and legal/documentation errors. Investcorp’s risk team monitors manager adherence to the program’s investment 

guidelines and independently verifies valuations. In most instances, Investcorp seeks to obtain position-level transparency 

on a frequent basis with its underlying hedge fund managers. This facilitates ongoing comprehensive assessment 

and mitigates risks across the entire portfolio, while allowing independent verification of valuations and adherence 

to guidelines. 


RMS-3 

This risk analytics platform is used to support the investment process from manager selection to portfolio 

construction and manager monitoring besides monitoring the aggregate risk levels across the various investment 

products. The third generation of this risk measurement platform is designed to extend the HF team’s capability 

in each of these processes through analytical and technological improvements. 

Specifically, the platform deepens the analytical toolset available for the monitoring of several of the strategies 

including convertible arbitrage, special situations, risk arbitrage and credit arbitrage. It also has analytical modules 

to monitor capital structure arbitrage, distressed and volatility arbitrage strategies. The platform will improve the 

ability to monitor the risks of the portfolio with a wider set of portfolio risk metrics. These include extension of the 

VaR-based analytics as well as better tail risk monitoring with extensive scenario analysis. 

From a technology perspective, the platform is designed to be more flexible and accessible. Users are able to define 

and process targeted ad hoc analytics within a reporting infrastructure that help to ‘slice and dice’ information, and 

the system can be deployed over a wider network for ready accessibility of risk data. 

Each manager’s operations infrastructure is reviewed on a regular basis to ensure the presence of appropriate controls and 

procedures. Investcorp maintains a ‘watch list’ for those managers whose risk profiles or performance levels deviate from 

targeted guidelines and will redeem investments with such managers if the deviation is not corrected. Transparency is 

enhanced through the establishment of separate accounts with some of the managers, making it easier for the team to 

monitor the managers effectively. 

The Company employs a wide range of qualified experts to monitor managers: 

■ Investment analysts: senior strategy specialists review quality assurance data and risk analytics to develop an overall 

understanding of the portfolio. They maintain an extensive ongoing dialog with each fund manager to understand 

trades and market outlook. 

■ Investment risk unit: creates risk analytics across the entire portfolio using best-in-class risk tools. 

■ Operational risk unit: monitors operational risk with managers including in-person due diligence meetings. 

■ PRIM unit: provides valuation and reconciliation based on daily transaction level data from prime brokers and fund 

administrators. 

Alpha project 

As part of Investcorp’s strategy to strengthen its manager selection and asset allocation process, a multi-year research 

effort was launched in 2005 to determine — based on security level data — the fundamental drivers of hedge fund returns. 

The objective of Investcorp’s alpha research is not only to build pure indices of hedge fund returns, but also to better 

understand the drivers behind hedge fund returns and isolate manager alpha. The four areas of focus are to: 

■ identify underlying trades of each fund strategy; 

■ use security level data to create time series of returns by hedge fund strategies and sub-strategies; 

■ break down each strategy into components of trade; and 

■ engineer the trades to create return series of indices usually by passive (baseline comparison or buy/hold) and active 

strategies (alpha generation or rule based). 

The alpha project is benefiting our asset allocation decisions by helping to determine factors that drive periods of outperformance 

and use insights to develop forward looking views. It also enables benchmarking of manager performance. 


INVESTCORP 


REAL ESTATE ASSET CLASS 

Since 1995 Investcorp has completed real estate (RE) acquisitions approximating $6 billion in value and today 

oversees a portfolio with a total investment value approximating $4.1 billion. The real estate team invests in 

properties throughout the United States in all sectors including office, retail, residential, hotel and industrial as 

well as commercial, residential and lifestyle/resort development. The team focuses on acquiring controlling 

interests in properties to guarantee unimpeded decision-making on leasing, capital investment and realization. 

Properties are typically aggregated in a series of multi-property portfolios to create an appropriate critical mass for 

placement with clients. Portfolios are categorized by level of risk, and these portfolios are then offered to clients on 

a unique deal-by-deal basis, in which no advance long-term blind commitment from the client is required. 

Instead, real estate assets are initially acquired using Investcorp’s own financial resources and underwritten on the 

balance sheet. A significant portion of the economic interests in the real estate assets are then placed with clients. 

Business strategy 

The RE asset class continues to provide important diversification and low correlation benefits within the range of 

alternative asset products offered by Investcorp. Attractive returns with lower inherent volatility and current cash yield 

through rental income make real estate investments a valuable component of Investcorp’s balance sheet and offering to 

clients. Real estate also provides an accretive stream of both fee and asset-based income for Investcorp. 

The RE team comprises around 20 real estate professionals based in New York and Los Angeles, who are dedicated to 

sourcing, analyzing, executing and managing investments. The co-heads of the real estate business have each been with 

Investcorp for more than 11 years and the senior members of the team have a strong mix of acquisition and post 

acquisition expertise in the US real estate industry. 

Investcorp’s RE business is centered on the following principles: 

■ Investment approach 

Investcorp has a strong real estate capability based in the US and is focused on properties across all sectors and 

geographies within that market targeting top tier risk-adjusted returns. The Company annually invests in properties 

totalling $1.5 – $1.8 billion in aggregate purchase price and comprising assets from the ‘core plus’ and ‘opportunistic’ 

sectors. Core plus properties aim to produce current yield, based on strong occupancy rates and good tenancy, as well as 

solid capital gains. Opportunistic properties aim to produce higher capital gains by investing in slightly higher risk 

projects involving renovation, refurbishment, conversion or ground-up development. Opportunistic property portfolios 

were a product extension during the last five years and have now developed into an established part of the business. 

Investcorp’s investment process seeks to minimize the risk, while enhancing returns for both core plus and opportunistic 

properties. The Company targets annual cash distributions of 7 – 9% net and overall net IRRs of 9 – 10% for core plus 

and 14% or more for opportunistic. 

■ Investment structure 

While Investcorp initially underwrites the equity portion of each acquisition, most of this equity is subsequently 

syndicated to its client base. Investcorp typically retains 5 – 10% for its own balance sheet as a co-investment and, 

therefore, aligns its interests with those of its clients. Investcorp often assembles multiple properties into portfolios to 

ensure diversification by property sector and geography. These portfolios are structured for either conventional or 

Islamic investors, thereby meeting the demands of both investor classes. 


■ Partnership approach 

The RE business has developed strong relationships with regional operating partners in the US who have extensive local 

expertise, are virtually integrated operators, co-invest and ensure quality deal flow. This is complemented by the use of 

external advisors with relevant track records in the market. Access to a broad base of industry expertise augments 

Investcorp’s ability to create value through the post acquisition property management process. 

■ Managed risk profile 

Real estate portfolios are constructed to provide diversification across properties, financed with debt that is non-recourse 

to Investcorp and use financing techniques that aim to mitigate the negative impact from higher interest rates. 

■ Balance sheet edge 

Investcorp’s ability to access its own balance sheet, and its entrenched relationships within the financing markets, provide 

a critical edge in the successful execution of property acquisitions, even in difficult market environments. 

■ Unique offering structure 

As with our private equity product line, we package our real estate offerings in a variety of ways in order to satisfy the 

varying investment goals and preferences of our clients. In general, the properties are acquired using a variety of holding 

companies in order to provide flexibility, and assembled as single assets or portfolios held by us and our voting and 

economic co-investors prior to equity placement to our clients. The real estate investments are then offered to clients 

on a deal by deal basis in order to provide diversification across properties and geographies. 

We are able to package certain of our deal by deal real estate investments both as conventional and as shariah-compliant 

investments. We will typically approach our clients with approximately six real estate investments in a given year. On 

average our placement and relationship management team will complete the placement of a real estate investment to our 

clients within four to five weeks after completion of the portfolio. The client focus for our deal-by-deal product is high 

net worth individual and institutional investors in the GCC region. 

In fiscal year 2007 we launched and closed a real estate fund, in association with TriLyn, dedicated to mezzanine 

investments and targeted at a combination of North American and GCC region investors. TriLyn is an established real 

estate investment firm with a focus on mezzanine investments in real estate. Of the total amount committed, $80 million 

is through Investcorp and the balance of $20 million committed by another financial institution. The fund is targeted at 

capitalizing on market conditions that provide attractive opportunities to originate, invest in and hold mezzanine debt, 

preferred equity and/or leveraged first mortgage investments in high quality US properties. 


Investcorp’s RE team selects and underwrites a range of properties that can then be aggregated into a series of multiproperty 

portfolios. These diversify risk both for Investcorp and for clients evaluating the investments. The RE team 

works closely with Investcorp’s marketing specialists to place these portfolios with investors. 

The real estate investment process, in common with Investcorp’s private equity process, is based on a controlled and 

methodical approach carried out by a team of experienced in-house professionals and involves two tiers of approval. 

To augment its own capabilities, Investcorp works with regional and local property management firms, providing access 

to local expertise. 


INVESTCORP 


Investcorp’s strong investment process and unique value proposition is shown below: 

Value 

proposition 

Experienced, 

professional team 

Investcorp and RE 

team co-investment 

Exclusive 

operating 

relationships 

Tax-efficient 

structuring for 

non-US investors 

Cash flow and total 

return focus 

Investment control 

Proven track record 

In evaluating acquisitions, the team seeks a range of attributes from targeted properties: 

Attributes for real estate acquisitions 

Acquisition Post-acquisition Realization 

■ High quality and well located US 

real estate 

■ Acquisitions across major asset 

classes 

■ Controlling interest 

■ Comprehensive due diligence 

■ Tax-efficient structuring for 

non-US investors 

■ Core Plus and Opportunistic 

Network strength 

Regional and national real estate 

partner companies across the US 

■ location in major markets, with favorable demographic factors 

■ attractive and competitive acquisition prices 

■ Close cooperation with operating 

managers 

■ Active yield management: 

- increasing occupancy rates 

- managing lease renewals 

- controlling operating expenses 

■ Capital improvements 

■ Effective repositioning and 

refurbishment of properties 

■ Management of interest rate risk 

■ Opportunistic divestment to take 

advantage of property and capital 

market conditions 

■ Projected holding period of three 

to seven years 

Internal expertise 

New York and Los Angeles based team with 

approximately 20 real estate professionals; 

key team members in place for over six years 

■ partnerships with locally based and experienced operating partners to perform property management 

and leasing roles 

■ strategic plan for value enhancement through maximizing occupancy/sales and cost efficiency 

■ attractive potential for capital gains over a medium-term investment period 

Core Plus Opportunistic 

■ stable underlying cash flow from strong occupancy 

■ invest with well-reputed developers in high-growth 

rate, secure tenants and manageable short-term market segments 

lease rollovers ■ invest in senior debt or equity tranches in addition 

■ opportunity for growth in rental income on expiry to or instead of common equity 

of leases ■ obtain additional upside through warrants 

The RE team uses a rigorous internal due diligence process. It reviews potential acquisitions based on the above criteria, 

and this is further enhanced by an analytical model that deconstructs and evaluates the risks of a specific property and 

then assesses the impact of these risks on the portfolio as a whole. All properties under final consideration are reviewed 

and approved by the real estate investment committee. Properties are acquired using Investcorp’s financial resources, 

supplemented by non-recourse mortgage financing and often a level of capital participation by operating partners. 

At the time of acquisition, Investcorp, together with the operating partner, generally assumes ownership of the equity, 

with Investcorp taking a controlling position acting in a fiduciary capacity for its investors. Typically, Investcorp targets 

retention of approximately 5 – 10% of the total original equity investment after placement of the remainder with clients. 


Significant focus is placed on post acquisition asset management of each property investment. Investcorp has an 

experienced ‘hands on’ team dedicated to this part of the investment process, with the goal of achieving the business 

plan for each property and ultimate successful realization of each investment. 

PLACEMENT AND RELATIONSHIP MANAGEMENT 

The growth and success of Investcorp’s business is underpinned by its unrivalled alternative investments placement 

capability in the GCC region. The majority of its products are distributed to GCC region clients through a 

dedicated placement and relationship management team based in Bahrain. In addition to this capability, Investcorp 

has also increased its placement capabilities in North America and Europe, particularly with respect to its hedge 

funds products. 

Business strategy 

Since inception in 1982, Investcorp’s placement and relationship management team has raised in excess of $15 billion 

from its clients, of which over $8 billion has been channelled into buyout deals, $4 billion has been channelled into hedge 

funds, about $1.5 billion into real estate portfolios, $500 million into technology small-cap funds and the remainder into 

the new Gulf growth capital fund. The Company’s unique ability to provide tailored solutions and services to the client base 

has resulted in a significant amount of repeat business from long term clients plus growth through attraction of new clients. 

Finally, Investcorp has also been successful in increasing the cross-sale of products from each of its five product lines. 

The placement effort is built on some key principles: 

■ Organizational platform 

Investcorp’s placement and relationship management team’s intensive and highly personalized approach has allowed it to 

build long term relationships with its clients and successfully leverage its strong brand name in the GCC region. The 

Bahrain-based placement and relationship management team is made up of around 50 members, about half of whom are 

relationship management professionals, most of whom travel regularly throughout the GCC region, maintaining close 

personal contact with GCC region clients. 

An additional seven members of the placement and relationship management team, including three professionals, are 

located in North America and are focused on growing Investcorp’s hedge funds product AUM in that market. 

Product 

specialists 

Institutional 

client team 

Private client 

team 

Marketing 

support 

Within the placement and relationship management team, Investcorp 

has a few sub-teams, each with a distinct focus. These include our 

institutional client team, the private client team and product specialist 

teams dedicated to certain of the Company’s product lines. 

Client segmentation: the institutional team targets and serves 

government institutions, banks, insurance companies and corporate 

investors; the private client team targets and serves high-net-worth 

individuals and private investment companies 

Product specialists: people who add analytical and structuring 

capabilities to provide customized solutions and greater product 

insight for clients in each asset class 

The marketing support team: the team strives towards continually enhancing ‘client relationship management’ systems 

and processes, acting as a support vehicle for the institutional, private client and product specialist teams. These subteams 

provide Investcorp with a unique ability to tailor its marketing approach to the specific goals of a particular client. 


INVESTCORP 


Investcorp places a great deal of emphasis on mentoring, developing and retaining members of its placement and 

relationship management team. The long term relationships it maintains with many of its clients are driven in part by the 

stability of the team of key relationship managers, including the co-heads of placement and relationship management, 

both of whom have been with us for about 19 years. 

Investcorp tracks the progress of its relationship managers to ensure that performance levels are high and that placement 

progress is consistent with individual goals. The Company also operates a call tracking system as a management tool to 

ensure that time is spent productively on matching clients to the most suitable investment opportunities. 

■ Client base 

A majority of Investcorp’s clients are high net worth individuals and institutions from the GCC region, one of the fastestgrowing 

wealth markets in the world. The Company expects that a large portion of GCC region investable wealth will 

continue to be invested outside the region, with a growing allocation to alternative assets of the type it offers its clients. 

The combination of wealth creation in the GCC region and a growing trend towards increasing allocations to alternative 

asset classes should continue to support Investcorp’s unrivalled GCC region placement capacity for its existing and 

new products. 

GCC region investors have generally trailed North American and Western European investors in accepting alternative 

assets into their investment portfolios. Investcorp, along with various other market participants, has been instrumental 

in introducing the alternative asset class to the GCC region. Its relationship managers actively introduce strategic asset 

allocation concepts to the GCC region investor base and explain the important role in terms of diversification and 

risk-adjusted return that private equity, hedge funds, real estate and venture capital play in an appropriately 

balanced portfolio. 

The advisory role played by Investcorp’s relationship managers is integral to its philosophy and objectives of developing 

the investment profile of the GCC region to match that of best-in-class investors in North America and Western Europe. 

■ Relationships 

Investcorp’s placement capability in the GCC region has developed over a 25-year period and today it has relationships 

with more than 1,100 investors in the GCC region. The placement and relationship management team is in regular contact 

with clients and uses mapping techniques to identify untapped pockets of wealth, to understand the Company’s position in 

the market and to develop strategies to reach segments, individuals or institutions who represent prospective clients. 

Investcorp’s relationship-based approach allows the team to develop a detailed understanding of each client’s goals 

and preferences for allocation between different asset classes allowing it to tailor investment offerings to anticipate the 

needs and capacity of a particular client and to avoid misdirected selling efforts. The Company also uses account planning 

and follow up to outline major opportunities for clients and has clear strategies for completion and timelines for 

such opportunities. 

In addition to its role in the placement process, the placement and relationship management team also provides feedback 

in relation to the type of products which may be popular with investors, such as clients’ interest in shariah-compliant 

investment opportunities, which has resulted in the design of a number of products packaged as compliant investments. 

■ Product customization 

Investcorp offers its product lines to clients in a variety of structures, and continues to develop new product structures, in 

order to make its products attractive to a broad array of potential clients and to allow the members of the placement and 

relationship management team to tailor the mix of products in a product structure to the specific needs and goals of each 

client. For example, Investcorp often customizes its hedge fund offerings to meet the liquidity, risk-return profile or 

investment allocation preferences of its largest clients. 


Investcorp has a well-established shariah board comprised of persons experienced in Islamic shariah (legal) matters and 

who typically have served on shariah investment boards of other companies. Its shariah board reviews its Islamic themed 

products for shariah compliance, and issues the relevant opinions of fitness. Upon Investcorp’s request, the shariah board 

also assists in developing new structures for the Company’s products and is generally available to respond to client 

inquiries regarding the products that it offers. 

Know your customer policy 

An important aspect of the placement process, and one of Investcorp’s competitive advantages, is the Company’s 

in-depth knowledge of clients’ business activities and sources of wealth. This puts Investcorp in a strong position in 

terms of its compliance with applicable international regulations in respect of its client base and sources of funding. 

Investcorp is subject, as are all global financial institutions, to a range of anti-money laundering regulations, 

and significant resources are allocated to implementing and monitoring such regulations. Investcorp has in place 

comprehensive Know Your Customer (KYC) policies pursuant to which the Company positively identifies all of its 

customers and is aware of clients’ income sources. 

Investcorp’s compliance policies, which are applicable to all Investcorp Group companies and affiliated entities 

managed by Investcorp, are in accordance with both the Bahrain and Cayman Islands laws and regulations regarding 

money laundering and prevention of financing of terrorism, and such laws and regulations reflect the same 

international standards as those in the United Kingdom and the United States. 

Through its membership of the GCC, Bahrain is represented on the Financial Action Task Force (FATF), which 

is the international organization responsible for developing anti-money laundering policies. Bahrain’s current 

anti-money laundering law is contained in Legislative Decree No 4 of the Year 2001 with respect to the Prevention 

and Prohibition of the Laundering of Money issued on January 29, 2001 and the Financial Crimes Module of the 

Central Bank of Bahrain’s Rulebook which was first issued on July 1, 2004 and is periodically updated. By virtue of 

its group structure, Investcorp is also subject to the Cayman Islands anti-money laundering laws, including The 

Proceeds of Criminal Conduct Law (2005 Revision) and The Money Laundering Regulations (2006 Revision). 

In June 2003, Bahrain was added to the Schedule 3 list of approved countries contained in the Cayman Islands 

Guidance Notes on the Prevention and Detection of Money Laundering. This recognizes that both the Cayman 

Islands Government and the Cayman Islands Monetary Authority accept Bahrain as a jurisdiction with equivalent 

legislation regarding money laundering. 

Furthermore, Investcorp has supplemented its in-house placement capabilities in North America with third party 

placement agents in connection with offerings of its private equity and venture capital products to North American 

institutional investors. 

BALANCE SHEET MANAGEMENT 

Investcorp’s overall philosophy is to maintain a conservative balance sheet, based on high liquidity, long dated and 

diversified funding, low leverage and high capital adequacy. The corporate financial management group has oversight and 

responsibility for management of the balance sheet structure and implements strategy and policies within a framework set 

by the Financial and Risk Management Committee (FRMC), under oversight of the Board Audit Committee. The FRMC 

comprises the COO, the CFO, the heads of each business line, the head of treasury and the head of risk management. 

This conservative approach to balance sheet management is a conscious strategy to mitigate refinancing and liquidity risk 

from the Investcorp business model of originating and syndicating alternative assets, and its ongoing commitment to 

stakeholder alignment by way of balance sheet co-investment. It also immunizes the business from any market liquidity 

stress or forced refinancing of debt facilities during a sustained period of difficult economic environments. Assets are 

principally composed of ‘core’ cash liquidity pools and accessible liquidity held in the form of hedge fund co-investments. 


INVESTCORP 


Total liquidity, with varying risk/return profiles, is structured to have a low correlation with returns on Investcorp’s other 

major asset class, its portfolio of medium-term co-investments in private equity, real estate and venture capital. The ability 

to access half of Investcorp’s balance sheet in the short-term also acts as a major counter-balance to the illiquid nature of 

other funded assets. Investcorp’s capital adequacy ratio under Basle I and Basle II guidelines is targeted to remain well 

above regulatory minimums, and is intended to keep the Company in the tier of the best-capitalized banks in the world. 

Ratings 

Since 1998, Investcorp has been investment-grade rated by major international rating agencies. Investcorp’s stated 

strategy is to maintain a strong BBB equivalent rating. Rating agencies and lenders profile Investcorp as a European credit 

risk given that almost all of the group’s assets are held under Investcorp SA, a Luxembourg entity. As a matter of course, 

certain loan covenants require the Company to maintain at least 95% of its assets within the Luxembourg domicile. 

The full reports by the ratings agencies can be read online at www.investcorp.com. 

Some of the key themes referred to by the rating agencies in their reports are: 

■ diversification benefits inherent to the business model from the establishment and growth of new business lines; 

■ strong client franchise with high degree of brand name recognition and respect in the Arabian Gulf; 

■ the strength and longevity of the management team; and 

■ the conservative balance sheet management approach for liquidity, funding and capital. 

Liquidity management 

Investcorp maintains a high level of accessible liquidity at all times. This is achieved by a combination of on-balance 

sheet liquidity held in the form of invested liquidity and off-balance sheet liquidity in the form of un-drawn committed 

revolving bank facilities. Access to available but uncommitted short-term funding from the Company’s established 

breadth of regional Gulf and international bank relationships provides additional comfort. 

Liquidity provides diversification from illiquidity risks of Investcorp’s other dominant asset class, co-investments in 

private equity, and produces a strong stream of recurring asset-based income that covers interest expense and fixed 

operating costs. Investcorp’s corporate treasury manages one liquidity pool in the form of deposits with banks or 

held in externally managed cash funds, while a larger liquidity pool is invested in hedge funds, as a co-investment 

alongside clients. 

The Company’s on-balance sheet liquidity is supplemented by off-balance sheet liquidity in the form of committed 

medium-term revolving credit facilities provided by relationship banks. Such facilities are mainly used in the normal 

course of business for acquisition underwriting prior to placement with clients, which takes on average between four to 

eight weeks. Bank revolvers, therefore, supplement core invested liquidity, and together they provide a large pool of 

accessible liquidity to underwrite multiple acquisitions for placement with clients, without having to draw upon the 

hedge fund co-investment. 

Access to liquidity is one of Investcorp’s priorities. This is achieved through the combinations of cash sources described 

above, with over $1 billion being accessible within 30 days. 

Investcorp stress tests its liquidity on a regular basis to ensure that it has sufficient cash in the near-term to meet 

unforeseen obligations. This worst-case stress scenario assumes: (i) the disappearance of almost all short-term funding 

sources; (ii) repayment of call deposits; (iii) below par performance of liquidity pools; and (iv) additional support to 

portfolio companies. To meet obligations in such an unlikely situation, Investcorp would dip into its internally managed 

cash pool and, only partially, into the externally managed cash and hedge funds pools. Testing indicates that consequently, 

even in such a worst-case stress scenario, Investcorp would still have a reasonable level of liquidity to maintain 

diversification of risks on the balance sheet. 


Funding structure 

The conservative approach to balance sheet structure is applied to Investcorp’s funding activity. Investcorp’s strategy 

is to maintain a wide range of lender relationships, provide them with continual dialog on business developments and 

financial results, and be responsive on issues and questions that arise. A prudent approach to financial management has 

led to a conscious strategy to secure long- and medium-term funding from a geographically diverse lender base. This has 

been achieved from the traditional global medium-term syndicated bank loan market, together with capital markets 

transactions such as private placements with institutional investors. Investcorp has a high positive structural funding gap 

where the average maturity of liabilities is targeted at 60 months, compared to an average maturity of under 24 months 

for assets. 

Refinancing requirements are managed to avoid maturity concentration in any given period and the Company 

continually reviews opportunities to access new financing markets or sources with new funding products. 

Investcorp’s funding sources can be summarized as follows: 

■ Short-term funding comprises interbank takings as well as deposits from clients and non-banks, all with maturities 

of less than one year. Except for transitory deposits relating to client subscription funds pending investment in new 

deals or hedge fund products, or client exit proceeds pending distribution, the residual short-term funding balance 

represents a consistent and stable component of Investcorp’s core funding. Interbank deposits are arranged through 

a large number of close relationship banks, both regional and international. 

■ Medium-term funding comprises committed bank facilities (drawn and revolving), capital markets bonds and a 

portion of client deposits. This pool has staggered maturities over five years to reduce repayment or refinancing 

concentration and to match the medium-term nature of Investcorp’s working capital cycle. 

■ Long-term funding comprises capital markets financings with original maturities up to 30 years, including private 

placements with US, Asian and European insurance companies and pension funds. 

A combination of high liquidity, long dated drawn and committed funding and actively managed debt maturities provides 

adequate coverage, in a worst-case scenario, for all future debt repayments over the next five years. 

Given Investcorp’s current ratings and ratings outlook, favorable results and business outlook, the Company will focus on 

maintaining a healthy and diverse funding profile while targeting a lowering of the overall cost of funds. Strategies will be 

pursued to increase access to short-term funding in the Gulf and Europe, tap into the growing pool of Islamic liquidity 

and opportunistically look at the international market for targeted private placement. 

Leverage 

Consistent with its overall conservative approach to balance sheet management, Investcorp aims to maintain a moderate 

leverage ratio, adding debt where appropriate and ensuring availability of adequate revolving loan facilities for short-term 

underwriting of new acquisitions. Internal risk management guidelines cap the leverage ratio at 3.0:1, which is lower than 

covenant ratios. Investcorp has traditionally operated with a liability base of between two and three times capital. The 

Company calculates leverage as total liabilities less temporary liabilities (transient deposits with expected maturities of less 

than three months) divided by the equity capital base. Two event-specific activities temporarily inflate total liabilities. The 

first is drawdowns on revolving term facilities to fund private equity and real estate acquisitions before placement with 

clients. These are self-liquidating on receipt of client funds, within one to two months. The second is the receipt of 

transitory client funds relating to proceeds from deal exits, prior to distribution, and the receipt of client funds pending 

investment in hedge funds which are temporarily lodged with Investcorp. These are also self-liquidating. 

Investcorp does not count these two temporary liabilities in its leverage calculations, unless they remain on the balance 

sheet for more than three months. 


INVESTCORP 


Investcorp is comfortable with its leverage in the above range, given that continuous thorough analysis of the risks on its 

balance sheet determines and ensures its capital adequacy and minimum capital cushion under severely stressed scenarios. 

The notional leverage calculation above reflects a very basic measure of financial risk. It does not give any benefit to the 

fact that a high proportion of borrowed money is retained in the form of accessible liquidity. 

While Investcorp does manage its balance sheet with this ratio in mind, it also focuses on risk capital, which is, in 

the Company’s opinion, a more holistic measure of the risks on the balance sheet as described below in risk management. 

Investcorp’s analysis confirms that its capital base can withstand a prolonged stressed environment as well as event risks, 

while its cash flow and liquidity position can cover interest and debt repayment obligations. 

RISK MANAGEMENT 

Investcorp takes an enterprise-wide approach to risk management and proactive identification and mitigation of all 

embedded risks is an integral part of the corporate decision making process, which includes among others the Financial 

and Risk Management Committee (FRMC) and the Asset Liability Council (ALCO). The FRMC, which comprises the 

COO, the CFO, the heads of each business line, the head of treasury and the head of risk management, performs a review 

of balance sheet risks from a company-wide perspective. The committee evaluates risk planning and discusses all major 

actions undertaken to manage risks from the standpoint of Investcorp’s capital base. 

The ALCO of Investcorp assesses and reviews various balance sheet risks arising from Treasury activities on an ongoing 

basis and decides on mitigation strategies for these risks, operating under the guidelines agreed by the Bank’s FRMC. 

ALCO is chaired by the Chief Financial Officer and includes the head of risk management, head of treasury and other 

senior members from the finance group. ALCO will debate and decide whether to pursue tactical hedging initiatives to 

protect against or reduce undesired levels of these balance sheet risks in order to preserve Investcorp’s capital base and 

adequacy ratios. In addition, separate risk review forums are used for each line of business (e.g., investment committees 

for private equity, hedge funds, real estate and venture capital) to determine specific action to be taken for each 

new investment. 

Types of risk 

Balance sheet risks can be grouped under the following categories: 

■ credit risk: no significant exposure [Note 21(i)*] 

■ liquidity risk: discussed earlier in the previous section [Note 21(ii)*] 

■ concentration risk: diversification discussed in each business unit section [Note 21(iii)*] 

■ market risk: use of Value-at-Risk (VaR) approach for co-investment in hedge funds [Note 21(iv)*] 

■ foreign currency risk [Note 21(iv)(a)*] 

■ interest rate risk [Note 21(iv)(b)*] 

■ operational risk [Note 21(v)*] 

■ reputational risk 

*References are to footnotes in the fiscal 2007 Investcorp Bank BSC financial statements (which provide further information). 


Investcorp has developed sophisticated tools in conjunction with leading risk management consultants to perform 

detailed risk analysis, specifically addressing each individual line of business. 

Interest rate/currency risk management 

Assets and liabilities give rise to interest rate risk if changes to the level of interest rates impact the value of future cash 

flows generated from assets or the future cash flows paid in respect of liabilities. The exposure of Investcorp’s balance 

sheet to interest rate risk is regularly and frequently measured and monitored, using sophisticated risk management tools 

that provide in-depth analysis across all investment and funding sources. The current amount of interest rate sensitivity of 

the balance sheet is shown in Note 21(iv)(b) of the financial statements of Investcorp Bank BSC. 

Investcorp management maintains a strategic stance, unchanged from prior years, that shareholders’ equity is best 

protected from interest rate risk in the long run by maintaining a floating rate funding strategy. This strategy is supported 

by research of practitioners and academics alike. Investcorp uses a combination of interest rate swaps and purchased 

interest rate caps in order to protect against such rises, while preserving the benefit of potential lower rates. Investcorp 

does not take any material foreign exchange positions on its assets and liabilities denominated in currencies other than 

US dollars. Investcorp systematically hedges significant non-dollar asset and liability exposures in the forward foreign 

exchange market or by using currency derivatives. The small amount of net foreign currency exposure is shown in 

Note 21(iv)(a) of the financial statements of Investcorp Bank BSC. 

Line of business risks 

The following graph summarizes the risk/return profiles of each line of business based on internal analysis. The 

risk/return statistics are all ex-ante, reflecting the future expected return environment and the specific risks of existing 

investments. These specific risks are impacted by sector diversification and relative size of investments. 

Expected return 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

Hedge funds 

8% risk 

Real estate 

14% risk 

0% 10% 20% 30% 40% 

Risk 

Buyouts 

24% risk 

Technology 

small-cap 

35% risk 

Private equity investment 

Private equity investment risk is a significant component of the balance sheet and, therefore, is a key focus of analysis for 

the risk management team. The investment risk that is particular to the mid-cap US and European buyout business is 

mitigated by a set of tools that are used at all stages of the investment process. At pre-acquisition, the risk management 

(RM) team works alongside the deal team to implement a proprietary risk model based on the target company’s financial 

projections. This allows identification of how the target company might perform under various scenarios, focusing, where 

appropriate, on specific characteristics of the deal. Sensitivity analysis and risk contribution of identified drivers to the 

main outcomes (EBITDA, IRR) are essential elements of the risk assessment. The analysis is performed in addition to 

the extensive due diligence undertaken by the buyout team and enables the measurement of the target company’s risk 

compared to previous deals undertaken by Investcorp, as well as the fit of the target company from a client franchise 

and balance sheet retention perspective. 


INVESTCORP 


Once a company is purchased, Investcorp takes a portfolio approach to evaluate the risk impact of the investment on the 

balance sheet. The RM team regularly performs such risk analyses to ascertain how the risks of the portfolio change over 

time and how it relates to internal limits and guidelines. Correlation analysis among the portfolio holdings is conducted 

on a regular basis in order to identify any over-concentration to a specific sector and evaluate hedging of any undue 

downside risk. Finally, when exiting a portfolio company, hedging strategies may be used to mitigate risks associated with 

the exit process and to protect the expected realization proceeds from downside risks. 

As in Investcorp’s buyout business, the goal in small cap technology investing is to seek returns that justify the risk being 

taken. The higher risks of venture capital investing are alleviated through the following: 

■ fund approach to investment; 

■ smaller investment exposures in a broad range of investments; 

■ seeking out second- and third-round financings, or pre-IPO financings, rather than providing early-stage seed capital; 

■ working in conjunction with recognized and proven venture capital partners; 

■ focusing on proven business prospects, rather than concepts; 

■ taking board-level representation; and 

■ establishing protection in the financing structure with liquidation preference. 

Throughout the investment cycle, there is a strong emphasis on due diligence and proactive post-investment 

management. In addition to risk-mitigating processes, all investment proposals are scrutinized rigorously by the venture 

capital investment committee, which has final approval over all Technology Ventures Fund I and Fund II investments. 

For purposes of assigning risk capital, Investcorp assumes that every dollar invested should be supported by a dollar 

of risk capital (i.e., there is 100% VaR coverage, with no leverage). 

Hedge funds investment 

Investcorp manages its hedge funds portfolio risk both from a market strategy and manager selection perspective. 

The most prevalent market risks emanate from an unfavorable market environment and strategy-specific risks such as 

illiquidity. Manager risks and portfolio risks include style drift, underperformance, excessive risk taking, fraud/valuation 

errors and legal/documentation errors. Investcorp mitigates these risks through manager due diligence and selection, 

diversification, monitoring, stress testing, transparency and control of leverage. The availability of portfolio detail 

through the use of separate accounts and pre-negotiated transparency with hedge funds managers enables a more 

complete VaR analysis, as well as meaningful strategy-specific exposure and profit attribution analyses. 

The various risks related to the program are monitored and managed through a well-developed process and infrastructure 

that provide powerful mitigants. These include: 

■ strategic asset allocation — generating a core portfolio range with expected volatility within guidelines for the 

program; and 

■ tactical asset allocation — ensuring flexibility to adjust within a range set by the strategic allocation process in light of 

prevailing macro-economic opportunities. 


Investcorp’s risk management philosophy is to diversify the portfolio across managers and strategies. Allocations 

to individual managers are capped at less than 10% of the portfolio, thus protecting against manager concentration 

risks. Manager selection is based on extensive due diligence with an emphasis on investment style, philosophy and risk 

management discipline. Each manager’s track record is analyzed, focusing on performance in periods of market volatility, 

while the manager’s operating infrastructure is also reviewed regularly to ensure the presence of appropriate controls and 

procedures. Investcorp maintains a ‘watch list’ for those managers whose risk profiles or performance levels deviate from 

targeted guidelines, with a view to redeeming the investment with such managers if such deviations are not corrected. 

One of Investcorp’s competitive strengths is the process by which it increases transparency, such as establishing 

separate accounts with managers, thereby controlling leverage and undesirable exposures. Almost half of invested 

assets are transparent either by way of separate accounts or position-level details which are accessible by Investcorp’s 

quality assurance unit. This unit monitors manager adherence to investment guidelines and independently verifies 

valuations. While investment in hedge funds is designed to have a low level of correlation to various markets, liquidity 

can temporarily decrease during periods of extreme stress, and correlations between previously independent strategies 

may increase. The HF team is mindful of these risks and has incorporated specific actions in its asset allocation, 

monitoring guidelines and separate accounts to cushion or mitigate these risks during periods of extreme market 

volatility and stress. 

Real estate investment 

Risk management strategies used for private equity investment are also employed to mitigate risks associated with the 

acquisition and performance of real estate. In addition, the RE team further mitigates specific risk in three ways: 

■ concentration on high quality, income producing properties with high occupancy rates; 

■ establishment of partnerships with regional professionals, enabling access to local knowledge and reputation; and 

■ controlled risk profile with a conservative capital structure aimed at protecting properties against the negative impact 

of interest rate and/or occupancy fluctuations. 

To this end, the team monitors interest rate and occupancy sensitivities on each property, both prior to acquisition and 

during the ownership phase. This process serves to identify and assess conditions and levels that may cause the property to 

incur cash flow difficulties. The team is proactive in managing properties that show signs of potential difficulties. 

Risk management tools are used at all stages of the RE investment process from pre-acquisition through to realization. 

At pre-acquisition, for larger size or opportunistic property investments, the RM team works alongside the RE deal team 

to implement a proprietary risk model based on the target investment’s financial projections. This allows identification of 

how the property might perform under various scenarios, focusing, where appropriate, on specific characteristics of the 

investment. The analysis is performed in addition to the extensive due diligence undertaken by the RE team and allows 

the Company to gauge the target property’s risk compared to previous deals undertaken by Investcorp, as well as the fit of 

the target property from both client franchise and balance sheet retention perspectives. 

Once an investment is made, the Company takes a portfolio approach to evaluate the risk impact of the investment on the 

balance sheet. The RM team regularly performs such risk analyses to ascertain how the risks of the portfolio change over 

time and how they relate to internal limits and guidelines. 

Operational risk 

Operational risk (OR) has been a focus of Investcorp’s overall risk management framework since fiscal 2006. 

Operational risk is defined as the risk of loss arising from inadequate or failed internal processes, people and systems or 

from external events (such as natural disasters, changes in regulation or outsourcing of operations). Investcorp includes 

in this definition all legal and reputational risks but excludes strategic and business risks. 


INVESTCORP 


Investcorp is preparing to meet the 2008 regulatory requirements for Basle II implementation, which includes 

the set-up of an OR framework. A dedicated senior member of the risk management team is responsible for the full 

implementation of all Basle II requirements under supervision from the head of Risk Management. The goal is to develop 

and implement a standardized framework to identify, measure, monitor and manage operational risk across the Company. 

This framework, which evolves with the changing needs of our businesses and regulatory guidance, takes into account 

internal and external operational risk events, business environment and internal control factors, the ongoing analysis of 

business-specific risk metrics and the use of scenario analysis. While individual business units have direct responsibility for 

the control and mitigation of OR, the proposed framework will provide a consistent methodology across the Company. 

As part of the preparation to meet the 2008 regulatory requirements for Basle II, Investcorp’s Board of Directors will 

define the Company’s operational risk framework. In so doing the Board may delegate the day-to-day supervision of 

operational risk to the head of risk management. In order to manage operational risk effectively, Investcorp has designed a 

structure to facilitate the flow of information between risk management, the various lines of business, senior management 

and the board of directors by designating an operational risk specialist (ORS) in each line of business. This open and 

collaborative organizational structure provides an effective and regular reporting oversight on operational risk to the 

management and the board, thereby allowing for any immediate action in instances where the level of operational risk 

is high. 

Investcorp manages operational risk through the application of long-standing, but continuously evolving, companywide 

control standards. It has been implementing an integrated framework since January 2006 in order to meet the 

requirements of the Basic Indicator Approach (BIA), with best in class practices under Basle II regulation, by January 1, 

2008. The implementation of Basle II will enable Investcorp’s management to manage and mitigate operational risk 

through an integrated operational framework that serves to minimize events that create operational risk and any attendant 

economic impact. 

Investcorp’s methodology to tackle operational risk is highlighted below: 

■ Definitions and structures relate to the definition of operational risk at the group level as well as in each line of 

business. The identified operational risks are mapped against the matrix defined by Basle II to facilitate their 

regulatory reporting. These are structured into databases to keep track of their causes and consequences. 

■ Loss data will be documented in a loss database as soon as an OR event arises in the Company. The loss database will 

reference all available information concerning an operational risk event such as the date of its occurrence, the line of 

business it arose in, its causes and consequences for the Company, its potential or actual impact, its mitigants, etc. 

■ Risk assessment lies in a qualitative evaluation of the likelihood and impact of an OR event. 

■ Key Risk Indicators (KRIs) are factors that can provide real-time and early warning signals on systems, processes, 

products, people and the broader environment. Reports will be circulated to management on a regular basis, enabling 

Risk Management to prioritize its remedial actions on the areas at risk in the Company. 

■ Mitigation of OR takes different forms at Investcorp. Depending on the situation, risk management has developed a 

training program for employees, redefined roles and responsibilities, encouraged collaboration between teams, 

added controls in exposed areas, redesigned processes and enhanced IT security. 

■ Capital modelling will help fulfill the required regulatory reporting on Investcorp operational risk management and 

also gauge its effectiveness by creating an incentive to lower the capital charge for operational risk. 

■ Investcorp’s information technology provides the platform to operate the framework efficiently throughout 

the Company. 


The risk management team has conducted risk & control self assessments (RCSA) in every line of business to identify and 

assess the major operational risks and the relevant controls which mitigate these risks. Where necessary, a mitigation plan 

has been drawn up to improve the control environment, and its ownership has been allocated to the ORS of the relevant 

line of business. The head of risk management has designated a senior member of the group as the operational risk 

manager (ORM) who will be responsible for all OR related activities and reporting. The ORM will liaise on a regular basis 

with the designated ORS to ensure that all major risks are appropriately mitigated. Key risk indicators have also been 

identified and adjusted to enable a comprehensive and efficient early warning system. Report cards are being designed for 

circulation to management and the ORS of each line of business of the Company. 

Adequacy of economic capital 

Investcorp uses a VaR approach to determine if it has sufficient economic capital to cover for the combination of all 

balance sheet risks, while maintaining sufficient flexibility to facilitate future growth plans and protect against periods of 

prolonged and extreme stress in the Company’s operating environment, execution or performance. 

In the VaR approach, a dynamic five-year model based on the current balance sheet exposures and a bottom-up 

input from all businesses, regarding base case expectations and variability around those, is used to project the equity for 

the Company at the end of each of the next five years. The model uses statistical techniques (Monte Carlo simulations) 

to project several thousand P&L and balance sheet scenarios, with the focus being on the amount of Investcorp equity 

in the bottom 1% of simulated projections (termed the ‘stress-case’). A stress-case scenario represents multiple and 

simultaneous stressed conditions across all lines of business over an extended period of time. The objective is to maintain 

an equity cushion of at least $100 million even in such stress-case scenarios to ensure solvency and flexibility for new 

business initiatives. 


INVESTCORP 


2. KEY PERFORMANCE INDICATORS 

Fiscal Fiscal 

2007 2006 Year-on-year 

Equity deployed in new acquisitions ($b) 1.5 1.2 + 24% 

Placement and fundraising ($b) 3.4 1.7 +101% 

Client assets under management ($b) 9.0 6.1 + 47% 

Distributions and realization proceeds ($b) 2.5 1.5 + 64% 

Proprietary co-investments ($b) 3.0 2.9 + 1% 

Net income ($m) 302.3 130.8 +131% 

Return on equity 29% 19% � 10% 

Fee margin 41% 39% � 2% 

Yield on proprietary co-investments 12% 6% � 6% 

Cost to income ratio 50% 65% � 15% 

Earnings ($) per share* 390 153 +155% 

Ordinary dividends ($) per share* 75 50 + 50% 

Dividend yield (%) per share** 2.9% 2.1% � 0.8% 

Book value ($) per share* 1,567 1,092 + 43% 

Free float 39% 20% � 19% 

* Ratio is calculated using the number of ordinary shares outstanding as of June 30, 2007 (719k) and as of June 30, 2006 (725k). Per share values are reduced by a factor of 

100 to get GDR values. 

** Dividend yield is calculated using the higher of the equivalent GDR price quoted on the London Stock Exchange and the ordinary share price quoted on the Bahrain 

Stock Exchange. 

3. EXECUTIVE SUMMARY 

Market environment 

Demand for absolute return solutions has continued to fuel record interest in alternative investment managers. 

$200 billion in assets was acquired by private equity financial sponsors in 2006, up from the previous record set in 

2004. According to Watson Wyatt Investment Consulting, the world’s top 150 alternative asset managers hold a 

combined $600 billion of pension fund assets predominantly in real estate, funds of hedge funds and private equity. 

Some of the primary drivers for the growth in alternative asset investing include: 

■ Low correlation of returns from alternative assets to traditional asset classes such as equities, bonds and money 

market deposits; 

■ The proven ability, over the last ten to 20 years, of alternative assets to generate superior risk-adjusted returns — 

median performance in the private equity industry has provided a 2 – 5% spread over equity indices; hedge funds have 

matched equity returns but with only about one third of the volatility; and real estate has provided high current 

returns along with attractive capital gains; and 

■ Increased investor sophistication in managing their investment portfolios. 

The growth story in the Gulf Cooperation Council (‘GCC’) countries 1 also remains very strong, supported by improving 

fiscal positions from energy revenues, sizeable government and foreign investment in regional infrastructure and the 

benefit of returns repatriated from increasing amounts invested in international assets. 

1 Comprising Bahrain, Qatar, the United Arab Emirates, Oman, Saudi Arabia and Kuwait. 


Overall, the GCC economies continue to generate strong GDP growth with rapidly improving fiscal positions. The 

combined external current account surplus of the GCC was more than $200 billion in 2006 2 equivalent to about a 

quarter of the US current account deficit. The Institute of International Finance estimates that the GCC countries will 

have acquired more than $450 billion in foreign assets by 2008 and remain a major source of global liquidity. 

GCC governments run a surplus at oil price levels between $35 – $40 per barrel, and only prices below this would have a 

direct negative impact on nominal GDP. The average oil price throughout 2006 and for the six months to June 2007 has 

been above $60 per barrel. The value of oil exports by member states of the Organization of Arab Petroleum Exporting 

Countries (OAPEC) reached almost $400 billion in 2006. 

The medium term outlook for energy prices and production is expected to underpin healthy annual growth rates and 

continued high levels of nominal GDP of more than $500 billion per annum. 

While HNWI wealth on a global basis is forecast to grow at a 6.8% annual compound rate in the five years to 2011, the 

Middle East is expected to experience the strongest growth as a region, at levels close to 10%. 

Gulf oil production capacity 

(million barrels per day) 

35 

30 

25 

20 

15 

10 

5 

0 

24 

2005 

29 

GCC governments’ attempts to diversify their economies into industries such as tourism, finance, and petrochemicals 

also support the sustainability of wealth creation and investment in the Gulf into the long term and lessen the impact 

from any significant fall in energy prices. Although an increasing part of this wealth will likely be invested back into 

GCC markets through major infrastructure and urban development projects, a large portion will continue to be invested 

outside the region. Furthermore, soft performances and increased volatility in GCC equity markets and other global 

traditional asset classes are likely to continue to support a diversification of wealth outside the region and more generally 

into alternative assets. 

Global liquidity flows continue to be robust as a result of strong economic growth in Europe, Japan and the emerging 

markets, together with increasing consumption and demand for natural resources. Availability of cost-efficient capital, 

along with a willingness to optimize value, has driven private equity and real estate activity on both sides of the Atlantic, 

while funds of hedge funds assets continue to grow at more than 20% per annum, driven by new money inflows from 

institutions and wealthy individuals as they allocate increasing amounts to alternative assets. 

2 Source: Institute of International Finance. 

32 

CAGR 

(’05–’15) 

3.0% 

–3.4% 

3.4% 

2.2% 

2.7% 

Other 

Middle East 

Qatar 

Kuwait 

UAE 

Expected gas prices 

($/thousand cubic feet) 

2005 Scenario 

KSA 

0 

2010E 2015E ’90 ’95 ’00 ’95 ’10E ’15E ’20E 

10 

8 

6 

4 

2 

High 

Reference 

Low 


INVESTCORP 


Notwithstanding generally strong underlying economic conditions and global growth forecasts, June and July 2007 have 

witnessed some adversity in capital market liquidity driven by a change of sentiment in the credit markets, resulting from 

losses in the US sub-prime sector and its subsequent impact on international debt and equity markets. To date, much of 

the market correction has been characterized by a healthy re-pricing of risk premiums without any shift in underlying 

fundamentals for corporate credit or liquidity. 

As an alternative asset manager with an unrivaled franchise in the GCC region, Investcorp’s diversified business model 

helps mitigate against the above described market conditions, and, in fact, is expected to position the Company to benefit 

on an opportunistic basis going forward. Investcorp’s business diversification across three different alternative asset 

classes—private equity, real estate and hedge funds — has historically reduced the volatility of its income through different 

investment cycles. Furthermore, the GCC region continues to experience strong economic growth and increasing wealth 

creation, and Investcorp’s strong investor franchise in the region, coupled with potential higher investor demand for 

alternative assets given increased volatility in the global equity and debt markets, should continue to fuel strong growth in 

AUM above the record fund raising reported by the Company for fiscal 2007. The combination of these factors is 

expected to result in stronger management fee income flows during fiscal 2008. 

In private equity buyouts, Investcorp expects to have a competitive advantage with respect to deal flow in the mid-market 

sector, as the Company’s value enhancement based approach should differentiate it in an environment where debt 

multiple arbitrage is unlikely to be a primary driver of future value creation. Furthermore, Investcorp’s addition of the 

Gulf growth capital line of business in fiscal 2008 gives it enhanced geographical diversification in this asset class, in a 

part of the world where it already possesses a strong competitive advantage. 

The Company’s US real estate business focuses on institutional quality assets outside of the sub-prime sector, where 

demand and supply continue to be in good balance with ample opportunities for value generation in the medium term. 

In hedge funds, the Company does not invest in asset backed or mortgage dedicated hedge fund managers with long 

exposure to CDO tranches. In fact, in fiscal 2007, the Company made a tactical decision to invest in hedge fund 

managers that are short the weakest tranches of the sub prime collateral pools as a form of credit insurance. This strategy 

contributed to the returns during periods of credit market turmoil this year, including February – March and June – July. 

Financial performance 

Favorable industry and market factors together with Investcorp’s pre-eminent position within the GCC have helped 

drive Investcorp’s earnings to an unprecedented level this year. The record financial results for fiscal 2007, together 

with several near-term initiatives to grow assets under management (AUM) and the global depositary receipt (GDR) 

offering of shares on the London Stock Exchange (LSE) in December 2006 have set a firm platform for the Company’s 

growth agenda in fiscal 2008. This will include the new Gulf growth capital line of business which, as part of Investcorp’s 

overall private equity offering, will see the Company invest in the Gulf region for the first time. 


Five year net income trend 

9% 

75 

FY’03 

Net income of $302.3 million for the year ended June 2007 (fiscal 2007 or FY’07) represents a 131% increase over 

the $130.8 million of net income reported for last year (fiscal 2006 or FY’06). Return on average equity (ROE) for 

FY’07 was 29%, a significant improvement over last year’s ROE of 19%. 

Earnings per Ordinary Share based on ordinary shares outstanding at fiscal year-end for FY’07 were $390 compared 

to $153 for FY’06, equivalent to earnings per GDR of $3.90 ($1.53 for FY’06). EPS has therefore increased by 155% 

year-on-year, growing at a higher rate than net income. 

The Board of Directors has proposed an ordinary dividend payout of $75 per share ($0.75 per GDR), a 50% increase 

over the dividend payout for FY’06. The Board has also approved the utilization of FY’07 earnings to redeem $186m 

of outstanding preference shares at their next dividend payment date in September 2007. 

Client AUM grew to $9.0 billion from $6.1 billion at June 30, 2006, an increase of $2.9 billion, or 47%, during the 

year. The AUM growth has been accelerated by continued success in growing Investcorp’s placement franchise in the 

GCC, several new fund offerings, the placement of new deals and strong momentum in hedge fund asset gathering. 

4.8 

2003 

15% 

86 

FY’04 

Client assets under management 

($ billions) 

4.9 

2004 

18% 

105 

FY’05 

Net income ($ millions) ROE 

5.7 

2005 

19% 

131 

FY’06 

6.1 

2006 

29% 

302 

FY’07 

9.0 

2007 

Gross revenues increased by 50% over last year to $856 million, reflecting good performance in gross fee income 

(up 17% to $384 million) and extremely strong gross asset-based income (up 94% to $472 million). 


INVESTCORP 


Year-on-year management fees were 8% higher, activity fees (earned primarily from acquisition and placement fees on 

deal-by-deal offerings) increased 19% and performance fees were 22% higher. 

$ millions 

500 

450 

400 

350 

300 

250 

200 

150 

100 

50 

0 

FY’03 

(18 mo.) 

Gross fee income 

FY’04 FY’05 FY’06 FY’07 

Gross asset-based income 

Net fee income increased by 21% to $156 million from $129 million reported last year. 

Overall net fee margins (net fee income/gross fee income) improved to 41% this year compared to 39% in FY’06, 

reinforcing the scalability of the existing infrastructure and the significant operating leverage embedded within the 

overall business model. 

The $229 million increase in gross asset-based income to $472 million reflects a reversion to normalized returns on 

Investcorp’s private equity co-investment portfolio with little drag from legacy investments from the late nineties that had 

muted returns in previous years. Investcorp’s proprietary returns from private equity (PE) co-investments were $113 

million higher than FY’06. There was another very strong performance from co-investment in the hedge funds (HF) 

business at LIBOR + 11.9% ($118 million higher) and a 153% increase ($15 million) in real estate (RE) returns. Interest 

expense increased from $190 million to $214 million, mainly as a result of higher global short term interest rates. 

Net asset-based income, after deducting interest expense and operating expenses associated with co-investments, 

increased to $146 million from just under $2 million in the prior year, representing a net return on total average 

equity of 14%. 

Aggregate operating expenses increased by 28% due to the increase in variable compensation in line with profits and 

performance. Headcount has increased from 342 to 369, reflecting the addition of professional staff primarily in the 

Gulf-based investment and placement teams. The overall cost to income ratio (opex/net income + opex) improved to 

50%, considerably lower than the 65% in FY’06 and at the lower end of the range for the asset management industry. 

Capital 

At June 2007, the shareholder base of the Company is composed of 39% public shareholders, 34% strategic 

shareholders and 17% management. Public shareholders held 19% in ordinary shares listed on the Bahrain Stock 

Exchange (BSE) and 20% in GDR form listed on the LSE, which reflects a 1.5% conversion from ordinary shares 

into GDRs since the initial offering in December 2006. The balance of 10% is held by the Company in the form of 

treasury shares. 

Book equity including preference shares increased to $1,382 million ($1,567 net book value per ordinary share) and 

financial leverage (liabilities/equity) fell from 2.9 times to 2.1 times. The increase in book capital was driven by a 


Fee margin 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0%

combination of the record level of earnings and the net additional equity raised from the GDR offering after paying off 

various equity loans. 

During the year, the Company repurchased 6.2% of its issued preference shares from the market as treasury shares. At 

June 2007, the nominal value of preference shares outstanding was $186 million. Investcorp has the option to redeem 

the shares in whole or in part on the first dividend payment date falling after December 2006. Subject to the consent of 

the Central Bank of Bahrain (‘CBB’) and the Bahrain Ministry of Industry and Commerce, Investcorp intends to call all 

of the outstanding preference shares on the next dividend payment date in September 2007. The total amount payable on 

redemption net of treasury shares will be approximately $207.8 million, consisting of the par amount and the proposed 

dividends calculated for the period from July 1, 2006 up to the expected repayment date. 

Investcorp’s regulatory capital adequacy ratio at June 2007 was 31.4% versus a regulatory minimum of 12%. Based on 

current information and ongoing discussions with the CBB, the pro forma Basle II ratio was 20.6%. The pro forma 

Basle II ratio adjusted to reflect a full call of the outstanding preference shares is 16.7%. This ratio level is in line with our 

stated regulatory capital target of mid-to-high teens under Basle II, which becomes effective for the Company from 

January 1, 2008. 

Balance sheet 

Total assets increased marginally by 4% to $4.3 billion, which is in line with the steady state balance sheet target size of 

between $4.0 billion and $4.5 billion. Proprietary co-investments in private equity, hedge funds and real estate remained 

flat at approximately $3 billion in total. The marginal growth in balance sheet assets reflects an increase in temporary cash 

liquidity. Total accessible liquidity, defined as total cash liquidity less term debt maturing within one month plus 

committed undrawn facilities, was $1.7 billion at June 2007 ($0.9 billion at June 2006). This is equivalent to 33% of 

assets (adjusted for drawing revolvers). Similarly, the net liquidity, including proprietary hedge funds co-investments, 

would be $3.5 billion or 68% of adjusted assets (FY’06 $2.6 billion/58%). 

The average maturity of the Company’s medium and long term debt (including committed revolver facilities) is 

approximately five years. The Company has used some of its excess liquidity arising from exits and realized earnings to 

prepay $343 million of term debt, thus lowering overall leverage and facilitating a reduction in aggregate cost of funds 

going forward. 

The Company’s investment grade credit ratings from Moody’s (Baa2, stable outlook), Fitch (BBB, positive outlook) and 

Capital Intelligence (A-, stable) remain unchanged. 

Business activity — investment 

Investcorp offers investment management services across three alternative asset classes, structured into seven distinct 

product offerings: 

Asset class/segment Products 

Private equity US and European buyouts 

Technology small-cap investments 

Gulf growth capital 

Hedge funds Fund of funds 

Single managers 

Structured products 

Real estate US real estate 


INVESTCORP 


Private equity 

Investcorp’s private equity (PE) asset class includes three lines of business: 

■ US and European buyouts (‘buyout’) — since 1982, Investcorp’s oldest and largest line of business focusing on 

control-oriented buyout investments in North America and Europe targeting middle market companies; 

■ Technology small-cap investments (TSI) — since 2001, investments in North American and European small-cap 

technology companies with established products; and, 

■ Gulf growth capital (GGC) — a new line of business, growth capital investing in the GCC region in greenfield and 

buyout opportunities. 

The US and European buyout (‘buyout’) team made five acquisitions during the year (Greatwide, Armacell, Moody, 

Icopal and Berlin Packaging 3 ), with an aggregate purchase value of $3.3 billion and equity deployment of more than 

$1 billion, up 29% from last year (FY’06: $0.8 billion). Realization proceeds of $2.2 billion (FY’06: $1.2 billion) were 

achieved from a combination of five full exits (APCOA, Hilding Anders, Harborside, Aspective and Helly Hansen) and 

one dividend recapitalization (Welcome Break). 

Investcorp’s buyout portfolio at June 2007 represents 51% of total book equity, a dramatic reduction from the level of 

93% at June 2006. Following realization activity in FY’07, the total carrying value of buyout investments purchased 

pre-2001 represents 30% of the current co-investment portfolio which is a reduction of $243 million since June 2006. 

The largest amongst these is TelePacific at approximately 21% of the total portfolio. TelePacific, with a carrying value 

of $148 million, represents the only co-investment on the balance sheet that is slightly more than 10% of book 

equity. The increase in TelePacific’s carrying value from $126 million at June 2006 reflects its strong underlying 

business performance. 

The Technology small-cap (TSI) business made three new acquisitions and four further add-on investments for 

Fund II, deploying $77 million of equity. One partial and two full exits from Fund I and two partial exits from Fund II 

resulted in distributions of $48 million. 

The new Gulf growth capital (GGC) business has the nucleus of its investment team in place, including the co-heads 

of the business and expects to have the full team of 15 investment professionals in place during FY’08. The business has 

commenced deal screening across a range of targeted sectors and expects to start investing committed capital during the 

first half of FY’08. 

Hedge funds 

Client assets under management in hedge funds (HF) have grown by 60% over the year from $2.7 billion at the end of 

June 2006 to $4.2 billion at the end of June 2007. Proprietary co-investments in HF remained relatively stable at an 

average of around $1.9 billion and earned an exceptionally strong return of 17.6% 4 , which is 12.2% in excess of LIBOR, 

double the targeted spread of 5 – 6% over LIBOR. The strength of returns and the growth in client AUM have driven an 

increase in management and performance fees by 24% year-on-year, as well as a strong increase in asset-based income on 

Investcorp’s proprietary co-investment of 58% ($118.3m) year-on-year. 

A third tranche of the Investcorp Leveraged Diversified Strategies Fund was successfully closed in May and the business 

also launched a fund to provide clients with access to promising early stage managers. The team continued to provide 

other bespoke investment products to Gulf based clients, structured around the two flagship diversified strategy funds 

of hedge funds. 

3Fees from Berlin Packaging are not included in FY’07 results. 

4Non dollar weighted performance. 


Investcorp’s single manager platform (SMP) is designed to provide investors with access to, and capacity with, 

leading emerging hedge fund managers 5 . A new product was launched in FY’07 that provides a systematic exposure to 

all managers on Investcorp’s single manager platform, together with leverage, over a five year period. At year end the 

single manager seeding platform consisted of four managers, with two more in the pipeline for addition in the near 

term going into FY’08. 

Real estate 

The real estate (RE) business deployed $369 million in equity across 15 new investments in the US with an aggregate 

transaction size of $1.7 billion. The acquisition strategy during the year was to actively pursue opportunities in the retail 

and hotel sector. The team exited 15 properties, yielding $201 million in cash returns and sales proceeds for Investcorp 

and clients. The business also opened a fully operational office on the West Coast of the US. 

Business activity—placement and fundraising 

Total GCC and international placement and fund raising activities, including commitments for new closed-end fund 

products, raised $3.4 billion in FY’07, which is double the prior year’s level of placement. Of this amount, more than 

$1 billion (32%) was raised outside the GCC from institutional investors, who subscribed to Investcorp’s HF products 

or participated in the first close of the PE buyout fund and the real estate mezzanine fund. 

Investment placement and fundraising activities 

($ millions) 

1,004 

FY’03 (18 mo.) 

774 

FY’04 

76 

Gulf Non-gulf 

1,556 

1,480 

FY’05 

1,710 

314 

1,396 

FY’06 

3,443 

1,089 

2,354 

FY’07 

FY’06 

5 An emerging manager is typically one who is just starting their firm, but may also include an established manager at low AUM levels. 

47% 

12% 

41% 

100% 

Hedge funds 

Real estate 


46% 

10% 

44% 

FY’07 


INVESTCORP 


New closed-end funds 

Significant progress was made in fiscal 2007 on initiatives to increase client AUM and to expand the Company’s PE and 

RE deal-by-deal placement capacity in the GCC. Investcorp’s stated target, to raise a total of about $2.6 billion in newly 

committed capital, via traditional closed-end funds, is on track following a first close in June 2007 of the Private Equity 

2007 Fund for US and European buyouts, the launch in April 2007 of Technology Partners III Fund, a first close in 

July 2007 of the Gulf Opportunity Fund I and the closing of the Real Estate Mezzanine Fund I in January 2007. 

Original Target 

target Committed final 

Line of business Fund fund size to date close 

US and European buyouts Private Equity 2007 Fund, L.P. $1,000m–$1,500m $ 636m Mar-08 

Technology small-cap Investcorp Technology Partners III, L.P. $ 400m–$ 500m – Dec-07 

Gulf growth capital Gulf Opportunity Fund I $ 500m–$1,000m $ 650m Dec-07 

Real estate Real Estate Mezzanine Fund I $ 100m $ 108m Closed 

Total new fundraising ~$2,600m $1,394m 

To maintain its strong alignment of interest philosophy, Investcorp will co-invest alongside clients in all of the above 

Funds. The total targeted final amount of $2.6 billion in fundraising is expected to include approximately $400m 

(approximately 15% of the total) of Investcorp proprietary capital. 

The first close of Private Equity 2007 Fund, L.P., with total commitments of $621 million (which increased to 

$636 million by June 30, 2007) from 12 institutions, is a milestone towards the Fund’s minimum target size of 

$1 billion, including a $250 million commitment from Investcorp. The Fund will generally invest in all transactions 

made by Investcorp’s buyouts group on a fixed pro rata basis, with the Fund’s share initially being 30% of the total equity 

invested in each deal. The balance of the equity of each deal will be placed with Investcorp’s Gulf client network and, 

from time to time with co-investors, or held on the balance sheet of Investcorp. With the Fund, Investcorp expects to 

continue making control-oriented buyout investments in North America and Europe with an annual target equity capital 

deployment of $800 million to more than $1 billion, across three to five transactions per year. The Fund’s initial 

investments will include Icopal and Berlin Packaging. 

The technology small-cap investment business launched its third fund, Investcorp Technology Partners III, L.P. with a 

first close expected in Q1 FY’08 and a final close expected by December 2007. The Fund has been launched with a target 

minimum size of $400 million. 

The GGC line of business made substantial progress in fundraising for the Gulf Opportunity Fund I, with a first close 

announced on July 31 of commitments totaling $650 million (of which $550 million has been committed by June 30, 

2007), and a final close of $1 billion expected by December 2007. The Fund, which will target growth capital investments 

within the MENA region, is being offered primarily to Gulf investors. 

The Real Estate Mezzanine Fund I was closed in January for a total of $108 million. Funds were raised predominantly 

from Gulf based clients and included commitments of $5 million by Investcorp (including affiliates) and $20 million 

by Bank of Scotland. The Fund will participate in mezzanine debt, preferred equity and first mortgages of US real 

estate investments with favorable competitive dynamics that have been arranged by high quality sponsors. The first 

investment by the Fund was the acquisition of an existing Tranche B Note on a condominium conversion project in 

Bethesda, Maryland. 

The foregoing information about closed-end funds is being provided to satisfy the requirements of the UK Financial Services Authority. The provision 

of the foregoing information does not constitute an offer to sell or a solicitation of an offer to buy securities in the United States or any other 

jurisdiction. Interests in the foregoing funds have not been registered under the US Securities Act of 1933, as amended, or any US state securities laws, 

and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. 


GCC placement 

Initiatives to grow Gulf client AUM by increasing the number of new clients and broadening long established 

relationships continued to bear fruit in 2007. The proportion of AUM from new clients added in the prior three years 

has increased to 13% from 8%. 

The average time taken for deal-by-deal placement of new buyout deals was between five to six weeks in FY’07, indicating 

the benefits of client re-investment from proceeds returned on Investcorp’s exit activity and also providing evidence of the 

ability to grow this part of the overall business model on a sustained basis. 

Fiscal Fiscal Fiscal 

Gulf client AUM 2005 2006 2007 

From clients added more than five years ago 87% 84% 77% 

From clients added four to five years ago 5% 8% 10% 

From clients added ≤three years ago 8% 8% 13% 

AUM growth in the Gulf has also benefited from the increase in the number of products taken by existing and new 

customers as a proportion of AUM. The number of clients increased by five percent and the average AUM per client 

increased by 24% to $6.9 million. 

The momentum in product placement and cross selling provides a positive outlook for the placement pipeline. The first 

half of FY’08 will see the placement of recently acquired buyout deals to Gulf clients, including Icopal (partly placed as at 

June 2007), Berlin Packaging and underwritten real estate assets, including Bravern, that were warehoused for placement 

at year end. 

Gulf cross-selling across product lines 

($ billions) 

8 

7 

6 

5 

4 

3 

2 

1 

0 

30% 

22% 

25% 

23% 

5 products 

4 products 

3 products 

2 products 

1 product 

10% 

25% 

22% 

25% 

18% 

2006 2007 


INVESTCORP 


Assets under management 

Total AUM, including proprietary co-investments increased from $9.8 billion to $13.2 billion. 

The major component of increase in the AUM was client AUM, which grew by 47% from $6.1 billion to $9.0 billion. 

Proprietary AUM increased only slightly in the year by $0.2 billion to $3.3 billion; affiliates and co-investors grew by 

$0.3 billion to $0.8 billion. 

The amounts committed for the new private equity and real estate funds now complement the traditional Investcorp 

classification of AUM which in the past has only reflected cash invested by clients on a deal-by-deal basis. 

Committed closed-end funds pending investment represented 13% of total client AUM at June 2007, other funds 

(Technology Fund I and client investments in hedge funds) were 48% and the balance (39%) was monies invested in 

private equity buyouts and real estate on a deal-by-deal basis. 

$0.3 

6,139 

FY’06 

client 

AUM 

Total client AUM 

($ billions) 

$6.1 billion 

$2.7 

$3.1 

2006 

849 

PE & RE 

DBD 

placement 

1,081 

PE & RE 

new fund 

commitments 

by June ’07 

1,512 

(650) 

HF new PE & RE HF perf. 

subscriptions realizations (net of 

redemptions) 

$9.0 billion 

$1.2 

$4.3 

$3.5 

2007 


80 

9,012 

Closed-end committed funds 

Other invested funds 

Deal-by-deal 

PE and RE 

investments by 

GCC investors 

FY’07 

client 

AUM

The PE and HF asset classes are the dominant components of client AUM, making up over 90% of total assets. HF now 

represents approximately 46% of total client AUM. 

Total client AUM 

Hedge funds 

43% 

DISCUSSION OF RESULTS 

Net income 

Fiscal Fiscal Year-on-year 

$ millions 2007 2006 change % 

Gross fee income 383.9 328.5 17% 

Gross asset-based income 471.8 242.9 94% 

Gross revenues 855.8 571.4 50% 

Operating expenses (305.4) (239.4) 28% 

Interest expense (213.8) (189.9) 13% 

Provisions (34.2) (11.3) 

Net income 302.3 130.8 >100% 

Gross revenues in FY’07 increased by 50% to $855.8 million (FY’06: $571.4 million) driven by a near doubling of 

asset-based income (up 94%) and strong growth in gross fee income (up 17%). 

Operating expenses were 28% higher at $305.4 million (FY’06: $239.4 million), and interest expense grew by 13%. 

Provisions for receivables, loans and advances were 4% of gross revenues (2% in FY’06). 

Fee income represented 44% of total revenues (FY’06: 57%) and asset-based income represented 56% (FY’06: 43%). 

PE and HF contributed 89% of total revenues (FY’06: 83%). 

Asset-based 

income 

55% 

Real estate 

8% 

2006 

$6.1 billion 


49% 

Revenues by category Revenues by asset class 

Management fees 

8% 

Activity fees 

31% 

Performance fees 

5% 

Figures may not reconcile due to roundings. 

Hedge funds 

46% 

Hedge funds 

45% 

Others 

2% 

Real estate 

8% 

2007 

$9.0 billion 


44% 

Corporate 

4% 

Real estate 

7% 


44% 


INVESTCORP 


The operating leverage of the business platform, supporting broader scale at lower incremental operating costs and 

interest expense, resulted in a net income growth of 131% to $302.3 million (FY’06: $130.8 million). 

Fee income 

Gross fee income increased by 17% in FY’07 to $383.9 million (FY’06: $328.5 million), primarily due to higher activity 

fees earned on PE and RE acquisition and placement activity compared to last year, together with an increase in 

management fees resulting from growth in client AUM. 

Expenses attributable to fee income grew at 14% to $227.5 million (FY’06: $199.3 million) and the benefits of business 

model scalability enabled an improvement in net fee margin to 41% (FY’06:39%), allowing overall net fee income to 

grow by 21% to $156.4 million (FY’06: $129.1 million). 

Fiscal Fiscal 

$ millions 2007 2006 

Management fees 71.6 66.1 

Activity fees 268.3 226.2 

Performance fees 44.0 36.2 

Gross fee income 383.9 328.5 

Expenses attributable to fee income (227.5) (199.3) 

Net fee income 156.4 129.1 

Operating expenses associated with fee generation activities are equal to total operating costs less the operating 

expenses directly attributable to principal co-investment activities that are calculated in a formulaic manner. 

Asset-based income 

Gross asset-based income showed a dramatic growth of 94% to $471.8 million (FY’06: $242.9 million), substantially due 

to a normalization of returns from the PE co-investment portfolio. 

Realized income was even higher because of record exit activity throughout the year. The average yield on HF 

co-investments was 17.2%, driven by a very strong second half performance. HF co-investment yields over the year of 

LIBOR + 11.9% were easily in excess of targeted returns. 

Fiscal Fiscal 

$ millions 2007 2006 

Gross ABI income 471.8 242.9 

Expenses attributable to ABI income (77.9) (40.1) 

Interest expense (213.8) (189.9) 

Provisions (34.2) (11.3) 

Net ABI income 145.9 1.7 


Operating expenses attributable to asset-based income grew by 94% to $77.9 million (FY’06: $40.1 million), reflecting a 

higher component of carry payable on the co-investment returns based on the formulaic calculation described below. 

Overall, net asset-based income grew to $145.9 million from a negligible level in FY’06 ($1.7 million). 

Operating expenses associated with principal co-investing activities are determined to be: 

■ A fixed management fee charge calculated at 1.2% of average proprietary invested assets. Invested assets comprise 

proprietary co-investments in each of the lines of business, placements with banks and placements with external 

cash managers reported in the Group’s balance sheet. 

■ Plus a 20% carry on gains on aggregate asset-based income in excess of interest expense and the 1.2% charge 

described above. 

Revenue by business unit 

The following table summarizes the revenue contribution of each business segment, showing gross fee income and 

asset-based income earned by each unit. 

Summary by Full Year 

business unit Fee income Asset-based income Total 

$ millions FY’07 FY’06 Change FY’07 FY’06 Change FY’07 FY’06 Change 

Private equity 283.4 240.0 18% 89.3 (23.8) >100% 372.7 216.8 72% 

Hedge funds 64.1 51.9 24% 322.5 204.1 58% 386.6 256.0 51% 

Real estate 36.4 36.0 1% 24.2 9.5 >100% 60.6 45.6 33% 

Corporate 

support – – – 35.9 53.0 (32%) 35.9 53.0 (32%) 

Revenue 

contribution 383.9 328.5 17% 471.8 242.9 94% 855.8 571.4 50% 

Operating 

expenses (227.5) (199.3) (14%) (77.9) (40.1) (94%) (305.4) (239.4) (28%) 

Interest 

expense – – – (213.8) (189.9) (13%) (213.8) (189.9) (13%) 

Provisions – – – (34.2) (11.3) >(100%) (34.2) (11.3) >(100%) 

Net income 156.4 129.1 21% 145.9 1.7 >100% 302.3 130.8 >100% 

The increase in PE fee income reflects activity fees from the record levels of acquisition, placement and exit activity. 

Asset-based income improved dramatically despite a final write down of $25.8 million on Polestar during the year and 

$10.6 million in net overall write down in the value of older Fund I technology investments. The gross yield on PE assets 

was 14% for FY’07 (but 10% after the impact of write downs), a significant improvement over FY’06 which was adversely 

impacted by the one-time write down of legacy investments. 

The annual yield on average balances of $1.9 billion held in HF co-investments was 5.8 percentage points higher than last 

year, producing $118.4 million in additional asset-based income. 

Real estate revenues grew by 33%, largely on the back of increased volume of new acquisitions. The larger amounts of 

equity deployed resulted in increased asset-based income during the underwriting period, with the component from 

management and activity fees generally stable versus FY’06. 


INVESTCORP 


Interest expense 

Total interest expense of $213.8 million in FY’07 is 13% higher than last year. As Investcorp generally runs a floating rate 

reset basis for its debt portfolio, most of this increase is because of higher average short term benchmark rates in the US 

and Europe. 

Although the average level of debt was lower over the year, the mix between short term and long term debt remained 

relatively constant. 

Fiscal Fiscal 

$ millions 2007 2006 

Average interest-bearing liabilities 3,244 3,362 

Interest expense 213.8 189.9 

LIBOR (1-month) 5.3% 4.3% 

Spread to LIBOR (1-month) 1.2% 1.3% 

Cost of funding 6.5% 5.6% 

The improvement in average spread to LIBOR, therefore, reflects the progressive tightening of Investcorp’s cost of 

funding in the medium term. 

The rise in the general level of global interbank benchmark rates had the most significant impact on overall 

interest expense. 

$ millions 

FY’07 vs. 

FY’06 

Balance-related variance 6.7 

LIBOR-related variance (34.9) 

Spread-related variance 4.3 

Total variance (23.9) 

Operating expense 

Total operating expenses of $305.4 million in FY’07 increased by 28% (FY’06: $239.4 million). 

Total staff compensation represented 62% of total operating expenses, slightly higher than the 61% last year. The 

increase in compensation cost is consistent with the higher variable compensation payouts attributable to the record 

earnings performance. 


Viewed over a five year period, compensation per full-time equivalent (FTE) employee has mostly trended in line with 

overall profitability, while the spread to revenue per FTE has widened, reflecting again the scalability of the current 

resource pool. 

Revenue vs. personnel costs per FTE 

expenses 

39% 

($ thousands) Other 

1,617 

FY’06 

402 

FY’03 

1,321 

Staff 

compensation 

61% 

470 

FY’04 

1,428 

FY’05 

Other 

expenses 

38% 

Non-compensation expenses consist of non-compensation costs (including staff training and recruitment), professional 

fees, travel and business development, and administration and infrastructure costs. 

Fiscal Fiscal 

Opex metrics 2007 2006 

Fee margin 41% 39% 

Fee opex/fee income 59% 61% 

Opex/(net income + opex) 50% 65% 

Compensation/(net income + compensation) 38% 53% 

Headcount 369 342 

All operating metrics improved year-on-year. In particular, net fee margins increased to 41%, showing the benefit of 

Investcorp’s significant operating leverage in its product sourcing and distribution platform. 

BALANCE SHEET 

Below are the key balance sheet metrics. 

1,671 

FY’06 

FY’07 

2,319 

382 426 512 

Revenue per FTE Staff compensation 

Staff 

compensation 

62% 

FY’07 

2007 2006 

Total assets $4.3 billion $4.1 billion 

Financial leverage 2.1x 2.9x 

Shareholders’ book equity $1.4 billion $1.1 billion 

Regulatory risk asset ratio (Basle I) 31.4% 25.7% 

Maturity spread (liabilities — assets) 42 months 48 months 


INVESTCORP 


Assets 

At June 2007, total assets were $4.3 billion, relatively unchanged from last fiscal year-end ($4.1 billion). This reflects 

a steady level of co-investments in the PE, HF and RE asset classes at $3 billion and a marginal increase in on-balance 

sheet liquidity which is earmarked for payment of dividends and redemption of preference shares following regulatory 

and shareholder approval in Q1, FY’08. Investcorp continues to target a steady-state balance sheet size of between 

$4.0 billion and $4.5 billion. 

Fiscal Fiscal 

$ millions 2007 2006 % change 

Cash and equivalents 818 563 45% 

HF co-investments 1,856 1,698 9% 

PE and RE co-investment 1,075 1,201 (11%) 

Other 558 679 (18%) 

Total assets 4,307 4,140 4% 

Significant increases above this range arising from the bunching of investment underwriting activity or the impact of 

transitory cash from exit activity placed with the Company by clients are generally temporary. 

Liquidity 

Investcorp approaches liquidity from two different perspectives. 

For structural balance sheet liquidity, it maintains a long dated funding profile that allows good visibility to refinancing 

requirements and a high level of total liquidity, which includes its proprietary investment in hedge funds (approximately 

40% of total assets). At June 2007, the average maturity of liabilities was approximately five years, with an aggregate 

maturity cushion of 42 months over the average maturity of assets. 

For tactical balance sheet liquidity, the Company maintains cash and cash equivalents and access to a comfortable level of 

undrawn committed term facilities. 

Accessible liquidity — $3.5b 

($ billions) 

Hedge funds 

1.86 

Undrawn 

revolvers 

0.87 

Cash 

0.68 

Enhanced cash 

0.14 


The graph shows a time profile, as at June 30, 2007, of access in order of priority to $3.5 billion of total 

accessible liquidity. 

4,000 

3,500 

3,000 

2,500 

2,000 

1,500 

1,000 

Access to HF 

co-investment 

500 

0 

Cash and 

deposits 

1 day 1 week 1 month 3 months 6 months 12 months 

Draw on 

committed revolvers 

This is sourced from cash and cash equivalents ($818 million), undrawn medium term revolvers ($865 million) and 

ultimately if needed, managed timely redemption of hedge fund investments ($1,856 million). Even in a stressed liquidity 

environment, cash and undrawn revolvers are sufficient to meet repayment of all short term deposits ($664 million) 

and the possible, but unlikely, requirement of an additional $1 billion for sustained investment activity over a 

three-month period. 

Liabilities 

Total liabilities fell by 5% at June 2007 to $2.9 billion, compared to $3.1 billion at June 2006. 

The decrease in liabilities reflects the early repayment of $343 million of various medium term facilities during the year 

which were contractually due at various dates up to December 2009. 

Fiscal Fiscal 

$ millions 2007 2006 % change 

Short term deposits 664 562 18% 

Medium term debt and deposits 889 1,201 (26%) 

Long term debt 983 988 (1%) 

Other 389 325 20% 

Total liabilities 2,925 3,076 (5%) 

The prepayments have been supported by excess liquidity resulting from exit proceeds, and are substituted by new 

syndicated and bilateral facilities provided by relationship banks totaling $559 million, $540 million of which are in 

the form of committed medium term revolvers. 

The Company also issued a medium term note (MTN) to Asian investors in June, which was the first issue under the 

Global MTN platform for two years. 


INVESTCORP 


The various financing activities over the year have maintained a geographically well-diversified portfolio of 

committed funding. 

Well diversified global sources 

of medium and long-term debt 

($ millions) 

Asia 

709 

The maturity ladder below demonstrates that there is no concentration of maturing debt (time deposits, medium- and 

long-term facilities) in the near term. Hence, absent any unplanned material growth in the Company’s balance sheet, 

funding activity will continue to focus on other attractive re-financing opportunities to reduce the average cost of funding 

without compromising its average residual tenor. 

64 

27% 

Europe 

943 

($ millions) 

36% 

MENA* 

277 

11% 

518 

26% 

FY’08 FY’09 FY’10 FY’11 FY’12 FY’13 FY’14 FY’30 FY’33 

As at June 30, 2007, $138 million of client call accounts are held in a fiduciary trust. These balances and a corresponding 

amount of cash and cash equivalents are therefore no longer recognized on Investcorp’s consolidated balance sheet. 

Liquid assets held in the trust are reported under ‘corporate support’ client AUM and are not counted as part of 

Investcorp’s accessible liquidity. 

*Middle East North Africa. 

US 

672 

535 

375 

763 


The prepayment of medium-term 

facilities and the healthy level of total 

committed facilities have removed any 

significant refinancing requirements 

for the Company until FY’09. 

40 35 

337 

50

Credit ratings 

Investcorp maintained an investment grade credit rating throughout FY’07 and remains committed to its target of 

a strong BBB equivalent across its public ratings. The rating agencies have all released their annual reviews. Below is a 

summary of the Company’s credit ratings as at June 30, 2007. 

Agency Rating Comment 

Capital Intelligence A– Stable outlook Kept outlook stable in Feb ’07 

Moody Baa2 Stable Outlook Short-term deposit rating upgraded from P-3 to P-2 

in Dec ’06. Assigned C– BSFR in June ’07 

Fitch BBB Positive outlook Kept outlook positive in Dec ’06 

The full reports by the rating agencies can be read online at www.investcorp.com. 

Book capital 

Net book equity (including fair value adjustments) at June 30, 2007 was $1,382 million, a $318 million increase from 

June 30, 2006. 

This increase predominantly reflects FY’07 net income and the net impact of the GDR secondary offering less the 

payment of dividends declared last year. 

Fiscal Fiscal 

$ millions 2007 2006 

Preference share capital 186 199 

Ordinary share capital 1,127 792 

Proposed dividends 76 60 

Fair value adjustments (7) 12 

Net book equity 1,382 1,064 

The table below provides a summary of the movements in net book equity since the end of FY’06 and the impact of the 

proposed call of preference shares in September 2007 together with the payment of dividends. 

1,063.7 

Net 

book equity 

June ’06 

GDR 

net 

proceeds 

397.1 

Net treasury 

FY’07 

share sales 

income 16.5 

302.3 316.0 

57.7 

24.0 

Changes in FY ’07 

* Other FV changes and appropriations 

Equity loans repaid from GDR 

FY’06 dividend payments 

Other* FY’07 pref. dividends 

21.8 

53.9 

FY’07 ord. dividends 

186.0 

Pref. redemption 

1,381.9 

Net 

book equity 

June ’07 

1,120.2 

Net 

book equity 

Sept.’07 

Pro forma for 

dividends and 

pref. call 


INVESTCORP 


Regulatory capital 

Investcorp has an implementation plan, approved by the Board of Directors, to be Basle II compliant by January 1, 

2008, as required by the Central Bank of Bahrain (CBB). This plan follows extensive analysis and work with external 

consultants to address specific issues around the Basle II framework guidelines provided by the CBB Draft Basle II 

Rulebook. The Board of Directors reviewed and approved a detailed gap analysis and agreed the proposed methodologies 

for calculating credit, market and operational risk. A project steering committee, designated by the Board Audit 

Committee and consisting of senior executives drawn from relevant disciplines and experience within the finance 

team, is now overseeing the final stages of implementation. 

As part of the implementation, an operational risk framework will be in place to ensure an appropriate controls 

infrastructure, one that establishes key risk indicators and mitigation controls at all business levels. Where necessary, a 

mitigation plan has been drafted to supplement the control environment and ownership allocated to a clearly identified 

‘operational risk specialist’ within each line of business. Investcorp has elected to apply the Basic Indicator Approach 

(BIA) to measure operational risk, while reflecting best-in-class qualitative standards expected under the Basle II 

Standardized Approach. 

25.7% 

Basle I 

CAR 

June ’06 

31.4% 

Basle I 

CAR 

June ’07 

21.0% 21.0% 20.6% 

Investcorp target ratio: 14–16% 

CBB regulatory requirement: 12% 

Basle II 

Credit 

RWA 

Basle II 

Market 

RWA 

Basle II 

Operational 

RWA 

(10.8%) 

20.6% 

Basle II 

CAR 

June ’07 

Pro forma 

Basle II CAR 

Sept.’07 

(Post pref. call 

and dividend payment) 

Investcorp aims to apply the Foundation Internal Ratings Approach (FIRB) for investment credit risk on private equity 

and the Standardized Approach for other credit risks. Investcorp’s experience and expertise with BARRA models for 

private equity should facilitate CBB approval of a model-based approach in determining risk weights for private equity 

co-investments held on the balance sheet. 

On the basis of current dialog with the CBB, the pro forma capital adequacy ratio (CAR) calculation under Basle II 

principles as of June 2007 was 20.6%. The major difference in ratios in moving from Basle I is the treatment of private 

equity exposures, which under Basle I had a uniform risk weight of 100% but under Basle II have an appropriately higher 

risk weight of 200% to 300% reflecting their relative risk profile. 

Even after a pro forma adjustment to reflect a full redemption ($186 million) of the outstanding Preference Shares and 

FY’07 proposed dividend payments ($75.7 million), the Basle II CAR (excluding impact of any Q1 FY’08 earnings) is 

16.7%, in excess of the current regulatory minimum requirement under Basle I of 12% and consistent with Investcorp’s 

stated target levels of regulatory capital. 

Economic capital 

The Company maintains levels of regulatory capital comfortably in excess of the current CBB and Basle I regulatory 

minimum requirement of 12%, as the key driver of the Company’s capital management activities is economic capital. 

Investcorp aims to maintain a sufficient economic capital cushion determined using a five-year forward dynamic 

VaR approach. 


16.7%

Projected equity cushion in 1% worst case scenarios 

($ millions) 

$600 

$500 

$400 

$300 

$200 

$100 

The economic capital cushion allows Investcorp to pursue organic growth plans across its existing businesses, pursue new 

business opportunities, and most importantly to withstand simultaneous prolonged stress environments across all its 

business lines. 

Capital base 

The secondary offering of ordinary shares, via Global Depositary Receipts (GDR) quoted and traded on the London 

Stock Exchange and completed in December 2006, provided approximately $192 million of additional economic capital 

(after repayment of equity loans) in order to support on-going business growth initiatives. As of June 2007, 19.6% of 

ordinary shares were held in the form of 15.7 million GDRs. Approximately 1.5% of total issued shares have been 

converted into GDRs from ordinary shares held directly on the Bahrain Stock Exchange since the initial offering. 

GDR traded volume per LSE 

Number of Investcorp shares traded on LSE (thousands) 

$0 

700 

600 

500 

400 

300 

200 

100 

0 

FY’08 

FY’09 

FY’10 

FY’11 

January February March April May June 

Traded liquidity reported by the LSE has gradually increased since the offering, and average daily volume has doubled 

over the six months since January 2007. The volume weighted average price over that period has been $25.25. 

FY’12 


INVESTCORP 


There is also a significant amount of GDR traded volume 

that is not reported over the LSE, which only aggregates trade 

data reported to it by brokers who have a reporting obligation. 

According to data available on Bloomberg ® , average traded 

daily volume in the six months to June 30 was approximately 

35,000 GDRs, which represents an average traded weekly 

value of $4.5 million and is equivalent to a turnover of 1.1% 

per week of issued GDRs. 

At June 2007, Investcorp remains a management controlled 

company, with strategic partners and management owning 

a total of 51%. The public float of 39% is held roughly equally 

between owners holding ordinary shares on the BSE and 

those holding GDRs on the LSE. The balance of 10% is held 

as treasury shares. 

Ownership Structure 

Bahrain Stock Exchange 

(Ordinary shares) 

19% 

Free float Management control 

London Stock Exchange 

(GDRs) 

20% 

39% 


Licensed wholesale bank 

Investcorp Bank BSC 

(Bahrain) 

100% 

Investcorp SA 

(Luxembourg) 

Management 

and employees 

17% 

Principal operating and asset holding company 

Investcorp’s common shares are listed both on 

the Bahrain Stock Exchange, trading under the 

symbol ‘INVCORP’, and on the London Stock 

Exchange (represented by GDRs) trading under 

the symbol ‘IVC’. 

■ Bahrain Stock Exchange — www.bahrainstock.com 

■ London Stock Exchange — 

www.londonstockexchange.com 

■ Bloomberg ticker symbol: INVCORP BI / IVC LI 

■ Reuters ticker symbol: INVB.BH / INVBq.L 

More information is available at 

www.investcorp.com. 

61% 

Strategic 

34% 

Treasury 

10%

4. LINE OF BUSINESS REVIEW 

PRIVATE EQUITY (PE) ASSET CLASS 

US and European buyouts (‘buyout’) 

Business environment 

The transatlantic private equity buyout market in fiscal 2007 demonstrated record levels of activity. According to 

Thomson Financial, calendar 2006 set a record for mergers and acquisitions worldwide with deals totaling $3.8 trillion, 

38% higher than in 2005, driven by consortium buyout bids for larger companies and a high number of deals valued at 

more than $10 billion each. Private equity firms were the major contributors in this trend, responsible for 20% of global 

M&A activity and 27% of activity in the US. More than $197 billion in assets were acquired by financial sponsors such as 

private equity buyout firms, up from the previous record of $118 billion set in 2004. The scale and liquidity features that 

affect the large and mega buyout market segment has relatively little impact on the mid-market buyout sector, in which 

Investcorp’s private equity business operates. 

US private equity funds raised a record $102 billion, up from $96 billion in 2005, and overall fund raising by all types of 

European private equity funds reached a record of €112 billion last year, up 56% from 2005. Worldwide, private equity 

firms raised a record $260 billion for new investment funds in the first half of calendar 2007, on course to raise an 

unprecedented $500 billion in the full year. According to Mergermarket, of the $2.3 trillion in deals announced in the first 

half of 2007, more than $600 billion (28%) involved leveraged buyouts, with activity likely to exceed the $800 billion of 

deals announced in 2006. 

Total debt to EBITDA leverage ratio 

Mid-cap Europe vs. US 

4.7 

4.1 

1999 

Europe 

4.2 4.0 

4.2 

3.4 

4.0 3.9 

2000 2001 2002 

US 

Source: Standard & Poor’s Q1 2007 LBO Report 

4.1 3.8 

4.7 

4.2 

4.9 4.7 

Investing and capital raising activity has been fueled by an abundance of liquidity in the global debt markets and the 

demand for yield. Leverage multiples have increased to their highest levels this decade according to Standard & Poor’s. 

The leverage finance market is now beginning to push back against aggressive ‘covenant-lite’ documentation and larger 

financing packages, which reflects a cautionary market sentiment, following CDO losses in the US subprime market. 

With underlying economic growth and credit fundamentals still strong however, Investcorp anticipates that deal flow 

will continue to be robust, notwithstanding more normalized financing conditions. 

5.6 

4.7 

5.7 5.4 

2003 2004 2005 2006 1Q 2007 


INVESTCORP 


Competition for quality middle market deals has been intense. Purchase price multiples have been at near to peak 

levels in most industry sectors driven, to a large extent, by businesses achieving strong top line growth, solid cash flow 

performance and higher transaction leverage financing levels. The enterprise value (EV) to EBITDA ratio of some deals 

involving private equity buyers has reached 17.6x, a level which has not been seen since 2001. Average EBITDA purchase 

multiples have approached double digits. 

Purchase price as multiple of EBITDA 

Mid-cap Europe vs. US 

7.8 

1999 

7.1 7.2 6.9 7.0 

Europe 

5.9 

6.9 6.7 6.7 7.0 

7.8 

Private equity funds, and consequently deal sizes, continue to get larger. Buyout volumes are expected to continue to grow 

partly as a result of the capital overhang available for investment as well as benefiting from continued economic growth on 

both sides of the Atlantic. Assuming a reversion to normalized conditions in the global capital markets, the US and 

European private equity markets are expected to remain active over the next 12 months. 

However, some normalization of returns should be expected over the next few years. The environment for exits may 

remain strong in the US and Europe, however, there are already signs that large scale leveraged buyouts are beginning to 

see resistance from lenders. The industry is also subject to the potential risk of a downturn in the economy from a variety 

of areas, including an economic slowdown, a deep and prolonged stock market downturn, or extended credit tightening 

by central banks beyond normal levels. 

Investcorp’s buyout strategy will remain the same with a very specific approach to increasing the value of portfolio 

investments for its investors by focusing on growth and operational improvements, where returns come from an increase 

in earnings, not just a shift in multiples. 

Acquisition activity 

Consistent with the overall private equity buyout market in fiscal 2007, Investcorp’s performance has been record 

breaking for capital deployed and cash distributions to investors. Investcorp signed five new acquisitions in fiscal 2007 

for an aggregate deployment of $1,029 million of equity. This is 29% higher than fiscal 2006, when $796 million in 

equity capital was deployed for five new acquisitions. 

7.2 

8.3 8.5 

9.2 

8.1 

9.0 9.0 

2000 2001 2003 2004 2005 2006 1Q 2007 

US 

Source: Standard & Poor’s Q1 2007 LBO Report 


Equity deployed 

$334m 

FY’03 

(18 mo.) 

Following the buyouts of Greatwide, Armacell and Moody in the first half of fiscal 2007, the team acquired Icopal in 

a secondary buyout from a consortium of private equity sponsors. Icopal is the leading European manufacturer of 

bituminous waterproofing membranes. Its products are used by the non-residential construction market across Europe, 

with an increasing focus on the high growth markets of Central and Eastern Europe. 

Just prior to fiscal year end in late June 2007, the team signed a definitive agreement to acquire Berlin Packaging. Fees 

relating to the acquisition (and placement) of Berlin Packaging will be recognized in FY’08. Berlin is the second largest 

distributor of rigid packaging in the US providing plastic, glass, and metal packaging to a variety of customers in the food 

and beverage, personal care, healthcare and chemicals end markets. 

Realization activity 

Realization proceeds 

$0.5b $0.5b 

FY’03 

(18 mo.) 

*recapitalization 

$356m 

FY’04 

FY’04 

$802m $796m 

FY’05 

$0.7b 

FY’05 

TimePartner €63m 

FleetPride 

$204m 

Orefi 

€80m 

Autodistribution 

€164m 

CCC 

$215m 

FY’06 

Minimax 

Stratus* 

Stahl 

SI Corp 

Saks 

US Unwired 

$1.2b 

€287m 

$53m 

€191m 

$246m 

$140m 

$155m 

FY’06 

$1,029m 

Total realization proceeds for FY’07 were $2.2 billion, versus $1.2 billion in the prior year. The largest component was 

APCOA, a car park operator acquired in 2004 that was sold to Eurazeo for an enterprise value of €885m, and which 

marked a very successful exit for Investcorp and its clients. The buyout team supported APCOA’s performance growth 

with attention from and access to Investcorp’s team of industry and operations experts. It also helped install better 

management information systems and analytic tools and developed a strategy to maximize growth which delivered an 

Berlin 

$195m 

Icopal 

€220m 

Moody 

$150m 

Armacell 

€94m 

Greatwide 

$265m 

FY’07 

$2.2b 

£143m 

€664m 

$69m 

$275m 

£15m 

€479m 

FY’07 

Welcome Break* 

APCOA 

Helly Hansen 

Harborside 

Aspective 

Hilding Anders 


INVESTCORP 


increase in cash flow of 50% per annum over three years. On exit, the CEO of APCOA paid public tribute to Investcorp’s 

value added model and how its genuine entrepreneurial backing had helped APCOA to flourish through its three-year 

ownership period. 

The same sentiment was echoed by the Harborside Healthcare management team after the sale of the company had 

been completed following clearance by US regulators. The company particularly recognized the support funding that 

Investcorp had provided in order to implement operational improvements and finance add-on acquisitions. 

Welcome Break successfully completed a recapitalization in January 2007. This represented a meaningful milestone 

in the turnaround of this investment after Investcorp had provided significant support capital in mid-2004 as part 

of a debt restructuring. Since that time, under new management and with the support of the buyout team, Welcome 

Break’s operating and financial performance has improved significantly. This and the buoyant credit market created the 

recapitalization opportunity. After repaying existing debt, proceeds of this new financing were used to repay in full the 

support capital provided by Investcorp as well as to provide a return of original equity to both Investcorp and its clients. 

For Investcorp, proceeds resulted in a reduction of approximately $92 million from the balance sheet co-investment 

exposure of $131 million as at June 2006. For retail clients, the return of capital represented approximately 40% of 

their original investment, while continuing to retain full equity ownership. 

In addition to the proceeds from realization activity, Investcorp received $99 million from the secondary sale of some 

of its proprietary balance sheet co-investment exposure in FleetPride, SourceMedia, TelePacific, Autodistribution and 

Polyconcept. The secondary sale was made to a consortium of institutional investors participating in the fundraising of 

Investcorp’s PE Fund at the underlying fair value of each investment on the balance sheet. 

Portfolio 

The carrying value of Investcorp’s balance sheet co-investment in US and European buyout investments at June 2007 

was $707 million ( June 2006: $993 million) across 19 companies. Please refer to the table in Note 9 (a) of the consolidated financial 

statements of Investcorp Bank BSC which lists the June 30, 2007 and June 30, 2006 carrying values for each investment. 

The current buyout portfolio contains only one individual exposure, TelePacific, in excess of 10% of shareholders’ 

equity. The increase in exposure for TelePacific to $148 million ( June 2006: $126 million) reflects an uplift in valuation 

driven by an improvement in the performance of the company and the expansion of the company’s size through internally 

funded acquisitions. Including the amount currently being underwritten for placement in FY’08, the geographical 

distribution of the PE co-investment portfolio is 67% US and 33% Europe/UK ( June 2006: 52% US and 48% 

Europe/UK). The net change in EU/UK assets arises from the substantial reduction in exposure to Welcome Break 

(UK), as described above as well as the realizations of Helly Hansen, Hilding Anders and APCOA. 

Geography Sector 

US 

67% 

Europe 

33% 

Industrial 

services 

27% 

Tech and telecom 

21% 


Consumer products 

12% 

Distribution 

14% 

Consumer services 

5% 

Industrial products 

21%

Technology small-cap (TSI) 


Corporate technology spending in the US has grown more than 5% per year since 2003 and consumer electronics 

spending has increased approximately 8% per year, both higher than the overall growth in US GDP. Approximately 

$26 billion of capital was invested in 2006, the highest level since 2001. 

The technology sector will continue to drive global economic expansion as computer hardware, software and 

telecommunications improve productivity for enterprises and consumers. Enterprises are relying on technology 

deployment to drive efficiency and competitive differentiation while consumers are increasingly comfortable adopting 

new technology in their everyday lives for entertainment, communication, information and commerce. Investcorp 

expects that the existing trend for substantial investment in technology will continue to provide ample investment 

opportunities with attractive growth characteristics that fit its investment profile. 

Consistent with its investment strategy to date, TSI has launched a new fund that will target three main types of investment 

opportunities: corporate carve-outs, buyouts and public situations. During the investment lifetime of the new Fund, 

Investcorp expects the technology sector as a whole to expand faster than the rest of the economy, in both the US and the 

rest of the world. 

Realizations 

During the year the TSI team returned $48 million from two full exits and three partial exits. In addition there were two 

write-downs of older Fund I investments. Details of the exits can be found in the table below: 

Realization Hold Return (cost 

Exits Company Sector type period multiple) 

Fund I Mobile365 Wireless data infrastructure Trade sale 5.3 years 2.3x 

Softek Storage software Trade sale 2.8 years 2.0x 

Willtek Wireless testing equipment Partial n/a n/a 

Dotcast Delivery network Writedown 7.5 years 0.0x 

Viewlocity Supply chain software Writedown 2.9 years 0.0x 

Fund II InfoNXX Enterprise software Partial n/a n/a 

Mania Communications infrastructure products Partial n/a n/a 

Investments/portfolio 

The $230 million Fund I is fully invested and maintains cash reserves for investing in follow-on rounds of financing in 

existing portfolio companies and for covering fund expenses. The team remains highly involved with the remaining eight 

companies in the Fund I portfolio. During fiscal 2007 the team deployed $7.1 million in add-on investments across five 

existing portfolio companies. 

Fund II, with capital commitments of $300 million, is 70% drawn and invested in ten companies. In fiscal 2007 the 

team made three new acquisitions for a combined total of $55.0 million and deployed $14.9 million follow-on funding 

across four investments. The table below gives details of the three new acquisitions made in fiscal 2007: 

Acquisitions Company Sector 

Amount 

$ millions 

Fund II Dialogic/Eicon Media and signaling 25 

Moneybookers E-commerce platform 16 

Zustek E-marketing 14 


INVESTCORP 


Below are consolidated views of Fund I and Fund II current investments by sector, investment cycle and geography: 

Digital content 

22% 

Sector Stage Geography 

Communications 

42% 

Other 

3% 

Wireless data 

18% 

Enterprise 

software 

15% 

Gulf growth capital (GGC) 

Late 

64% 


The private equity industry has experienced unprecedented growth in the GCC and MENA region since 2005. More 

than $18 billion is estimated to have been raised over the past two years whilst the total value of announced investments 

has approached $6 billion over the same period. Comparatively, the period from 2002 – 2004 saw approximately 

$2.1 billion of fundraising and announced deals of less than $600 million. Perhaps more significantly, the average size 

of investments has increased sharply and in a short space of time, to more than $100 million in 2006 from just over 

$30 million in 2005. Prior to 2005, average investment sizes were typically found to be in the $10 – 20 million range. 

The fundamentals remain very supportive for both build and buy opportunities. The number and size of the 

opportunities should continue to grow. This is helped by the favorable liquidity conditions, large fiscal surpluses, major 

government investment projects and privatization programs, a healthy M&A market as well as local companies looking for 

external growth capital, technology and operational expertise. The desire of many owner-managed businesses to consider 

partnership or exit opportunities and look for assistance in institutionalizing their companies is a further source of 

investment opportunities. 

Activities 

In the interim as business plans crystallize, the co-heads 

of the business have been building up the infrastructure, 

including the recruitment of four professionals to 

establish the nucleus of the investment team. 

The core team blends complementary skills in terms 

of M&A activities and experience in asset management 

and business growth. Active recruitment is ongoing 

to round out the team during fiscal 2008. Going into 

the year end, the GGC team has been working closely 

with the placement and relationship managers on 

fundraising matters and has also been screening both 

buy and build opportunities in a number of sectors in 

the Arabian Gulf. 


Early 

14% 

Mid 

22% 

Europe 

20% 

North America 

80% 

The co-heads of the new Gulf growth capital 

business are Azmat Taufique and Christophe 

de Mahieu. 

Azmat has 25 years of management and investment 

experience. Prior to joining Investcorp, he was the 

Senior Regional Manager of the Middle East North 

Africa Department at the International Finance 

Corporation (IFC), World Bank Group. 

Christophe was previously with McKinsey & Co and 

Exxon Corporation where he spent, respectively, 

14 and six years of his career. His last appointment 

at McKinsey was as Director and Managing Partner 

of the Middle East and Asia Pacific Industrial 

Practice and core member of the Global Corporate 

Finance Practice based in Dubai and before that in 

Asia-Pacific and Europe.

Outlook 

The strong growth trends evident in raising and deploying private equity funds in the region are expected to continue as 

the economic transformation of the region progresses aided by the increasing influence of both regional and international 

private capital. Investcorp’s GGC team is working actively to ensure it is well placed to source and secure the optimum 

investment opportunities for the business. 

Financial performance of private equity asset class 

The table below summarizes the income earned from the PE asset class, comprising US and European buyouts as well as 

technology small-cap investments: 

$ millions 2007 2006 Change 

Management fees 25.1 28.4 (3.3) 

Activity fees (acquisition, placement, ancillary) 237.1 198.0 39.1 

Acquisition fees 71.1 70.0 1.1 

Placement fees 132.2 113.0 19.2 

Ancillary fees 33.9 15.0 18.8 

Performance fees 21.1 14.1 7.0 

Gross fee income 283.4 240.6 42.8 

Expense attributable to fee income (150.6) (129.6) (21.0) 

Net fee income 132.8 111.0 21.8 

Realized investment income 63.9 35.7 28.2 

Unrealized investment income 25.4 (59.5) 84.9 

Gross asset-based income 89.3 (23.8) 113.1 

Expense attributable to asset-based income (21.7) (5.0) (16.7) 

Interest expense (42.4) (46.2) 3.8 

Net income 158.0 36.0 121.9 

Management fee income from PE remained relatively unchanged at $25.1 million (FY’06: $28.4 million), consistent 

with the stable level of client AUM for the period, adjusted for the reduction in management fees on invested assets in 

Technology Fund I. Activity fees increased by 20% to $237.1 million (FY’06: $198.0 million) due to higher acquisition 

activity and deal-by-deal placement. 


INVESTCORP 


The table below summarizes the primary drivers of income for PE, comprising US and European buyouts and technology 

small-cap investments: 

Fiscal Fiscal 

$ millions 2007 2006 Change % 

Closed-end committed funds 1,109 268 >100% 

Deal-by-deal investments** 2,783 2,670 4% 

Closed-end invested funds 53 66 (20%) 

End client AUM 3,944 3,004 31% 

Average client AUM 3,054 3,234 (6%) 

Equity deployed 1,106 880 26% 

Buyouts acquisitions deal size* 2,948 2,619 13% 

Deal-by-deal placement in GCC 601 546 10% 

Management fees/client AUM 82 bps 88 bps (6 bps) 

Acquisition fees/deal size* 2.4% 2.7% (0.3%) 

Placement fees/deal-by-deal placement 22.0% 20.7% 1.3% 

Average Investcorp co-investment 864 1,064 (19%) 

Yield on co-invested PE balance sheet 10.3% (2.2%) 12.6% 

Yield on co-invested PE balance sheet excluding Polestar 13.6% 33.6% (20.0%) 

* Excludes Berlin Packaging as associated acquisition fee income will be recognized in FY’08. 

** Unlike other private equity asset managers that refer to committed AUM, under our deal-by-deal placement approach, we include only invested rather than committed AUM. 

Supported by strong economic growth and significant value creation opportunities captured by portfolio companies, 

Investcorp continues to deliver shareholders’ value through realizations of its new and maturing vintage portfolios. 

The exceptional realization opportunities have resulted in strong asset-based income contribution in FY’07, in line with 

long-term return expectations for the PE asset class. The highly successful exits of APCOA and Hilding Anders, have 

contributed significant realized income, although this was lowered by the impact of the final write-down of $25.8 million 

for Polestar. Excluding Polestar, sales of buyout investments during FY’07 resulted in proceeds of $438 million, 

$84 million (24%) higher than their carrying value as at June 2006. This demonstrates the robustness of Investcorp’s 

valuation practices and the PE team’s ability to obtain good value for investments upon realization. 

Asset-based income 

$ millions Realized Unrealized Total 

Buyouts before 2001 + TSI Fund I 16.9 29.2 46.1 

Buyouts since 2001 + TSI Fund II 47.0 (3.8) 43.2 

Total 63.9 25.4 89.3 

The unrealized value of the older portfolios has grown substantially. This is as a result of continued strategic expansion 

and value-enhancement efforts focused on growth, achieved through organic and new acquisition opportunities. 


HEDGE FUNDS (HF) ASSET CLASS 


Strong performance and continued inflows helped push global hedge fund assets up 29% in 2006. Growth was the result 

of positive manager performance and new capital inflows. A study by Greenwich Associates released in June 2007 shows 

that direct investments by endowments, foundations, corporate pension funds and public pensions together represent a 

quarter of the assets of the world’s largest hedge funds, up from 22% in 2006. For the first time, pension plans and 

endowments are investing more in hedge funds than affluent individuals and family offices, which contributed 21% of 

total assets. Over the next 12 to 18 months, institutional investors are expected to add another $85 billion into the hedge 

fund industry with public pension plans, endowments and corporate pension plans as the biggest contributors. 

Globally, funds of hedge funds AUM grew by 39% to approximately $550 billion in 2006, about 50% of total HF AUM. 

Industry estimates are that total HF asset inflows were $60 billion in Q1 2007, nearly quadruple the previous quarter’s 

$16 billion. 

Funds of funds AUM 

600 

500 

400 

300 

200 

100 

0 

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 

AUM ($ billions) Number of funds 

Source: Hedge Fund Research (HFR) database 

A study by Deloitte Research shows that as hedge funds grow in size and complexity, risk management and valuation 

practices are becoming increasingly important for hedge fund advisers, investors and regulators. Institutions are, 

therefore, major investors in funds of hedge funds, which provide them with access to diversification, risk controls and 

general industry expertise. These continue to be important positioning factors for Investcorp as it broadens its 

distribution activities to institutional clients globally. Investcorp’s portfolio positioning has remained largely unchanged 

from June 2006, generally favoring directional strategies rather than relative value. The drivers of strong performance 

have, therefore, been overweight allocations to Japan and Asia, emphasis on activist and event driven strategies, the 

strength of the global equity markets and ongoing enhancements to the manager selection process. 

Assets under management 

Total hedge funds AUM increased by 36% over the year from $4.7 billion to $6.4 billion. Client AUM increased by 

$1.6 billion (60%) from $2.7 billion to $4.25 billion. The growth has come from a combination of re-invested 

performance gains and several new institutional mandates. 

2,500 

2,000 

1,500 

1,000 

500 

INVESTCORP GROUP 2007 ANNUAL REPORT 85 

0

INVESTCORP 


AUM includes investments in fund of fund (FoF) products, structured products, clients separately managed accounts as 

well as managers seeded on the Single Manager Platform (SMP). The distribution of AUM across product groups and 

investor base is shown below: 

Fiscal Fiscal 

$ millions 2007 2006 

CLIENTS 

Diversified FoF 1,616.2 1,160.4 

Theme FoF 413.4 261.8 

Structured products 1,608.4 1,108.2 

Single managed accounts 422.8 88.8 

Single manager platform 188.4 37.7 

Total client AUM 4,249.3 2,656.9 

PROPRIETARY CO-INVESTMENTS 

Diversified FoF 1,418.2 1,447.6 

Single manager platform 301.6 170.0 

Other 166.9 289.2 

Total proprietary co-investments 1,886.7 1,906.8 

Affiliates 240.8 130.5 

Grand total 6,376.8 4,694.2 

Allocations for the two flagship diversified strategies funds of hedge funds in which Investcorp has co-invested: 

IBF June 30, 2007 DSF June 30, 2007 

Opportunistic 

Portfolio insurance 5% 

4% 

Distressed 

7% 

Convertible arbitrage 

5% 

Macro systematic 

6% 

Macro discretionary 

8% 

Equity market neutral 

8% 

Fixed income/relative value 

4% 

Event-driven multi-strategy 

Hedge equities (Japan) 

16% 

2% 

Event driven strategy 

14% 

Hedge equities (US) 

10% 

Hedge equities (global) 

3% 

Hedge equities (Europe) 

8% 

Product launches 

Opportunistic 

3% 

Portfolio insurance Distressed 

Macro systematic 6% 7% Convertible arbitrage 

4% 

9% 

Macro discretionary 

4% 

Equity market neutral 

Hedge equities (Japan) 

11% 

14% 

Fixed income/relative value 

7% 

Hedge equities (US) 

Event-driven multi-strategy 

10% 

1% 

Hedge equities (Europe) Event driven strategy 

7% 15% 

Hedge equities (global) 

2% 

A third tranche of the Investcorp Leveraged Diversified Strategies Fund (LDSF) was successfully completed in May. 

The underlying fund is a diversified strategies fund of hedge funds which has a bias to lower risk relative value strategies. 

The fund is constructed to have low volatility, low draw downs and low correlation to traditional markets making it an 

ideal product for leverage. Leverage is provided synthetically by a third party bank in a cost efficient manner and 

competitively priced on a non-recourse basis. Total assets of LDSF are presently $1.4 billion. 

Two fund products were launched focused on providing investors with access to the SMP. The first offers investors the 

opportunity to benefit from Investcorp’s manager selection expertise and knowledge of the hedge funds industry to 

identify leading early stage hedge fund talent. The second seeks to increase exposure to the performance of Investcorp’s 

SMP over a five year period. Pending investment in SMP, client funds are initially invested in an Investcorp diversified 

strategies fund of hedge funds. 


An innovative structured investment product was also launched during the year which offers exposure to an Investcorp 

diversified strategies fund of hedge funds, with capital protection as well as potential upside from any weakening in 

oil prices. 

Single manager platform 

Following the addition of two managers in the first half of fiscal 2007, WMG Asia and Silverback, the HF team will 

shortly add two new single managers to the program. The first is a US-based distressed and credit manager and the second 

is a London-based macro fund focusing largely on currencies and interest rates in both developed and emerging markets. 

Each manager will be seeded with up to $50 million of capital. The highly selective platform of single managers seeded by 

Investcorp will therefore consist of six hedge fund managers in the near term, giving it sufficient critical mass to facilitate 

product structuring and accelerate asset gathering. 

At the first ever Hedge Funds World Middle East event held in March 2007, Investcorp was a finalist in two categories and 

won the Institutional Manager of the Year award. This is an important recognition for Investcorp and the HF team. 


The table below summarizes the income earned from hedge funds: 

$ millions 2007 2006 Change 

Management fees 41.2 33.7 7.6 

Performance fees 22.9 18.2 4.7 


Expenses and taxes attributable to fee income (54.2) (48.0) (6.2) 

Net fee income 10.0 3.9 6.1 

Investment income 322.5 204.1 118.3 

Expenses attributable to asset-based income (38.8) (26.8) (12.0) 

Interest expense (94.3) (79.5) (14.8) 


Investcorp earned $64.1 million in gross hedge funds fee income, an increase of 24% (FY’06: $51.9 million). Management 

fees increased consistent with higher AUM, as did performance fees on the higher returns for the year. The increase in 

performance fees was slightly dampened in the first half of FY’07 by the need to overcome the high watermark established 

by the muted return environment that prevailed during the second quarter of calendar 2006. The high watermark now has 

been overcome and it therefore allows for more normalized performance fee recognition in the coming periods. 

The table below highlights some of the key indicators for hedge funds: 

$ millions FY 2007 FY 2006 Change % 

Funds of hedge funds AUM 2,963 2,268 31% 

Single managers AUM 137 11 >100% 

Average total client AUM 3,099 2,279 36% 

Management and performance fees 64.1 51.9 24% 

Annualized fee yield 2.1% 2.3% (21 bps) 


INVESTCORP 

MANAGEMENT REVIEW OF OPERATIONS 

The proprietary co-investment mix has not changed and continues to be held in the Investcorp Diversified Strategies 

Fund (DSF), the Investcorp Balanced Fund (IBF) and the single manager platform. The average proprietary coinvestment 

during fiscal 2007 was $1.87 billion, an increase of 5% (FY’06: $1.79 billion) as a result of re-investment 

of performance. Asset-based income increased 58% to $322.5 million (FY’06: $204.1 million). The Company’s 

proprietary co-investment in hedge funds earned a 17.2% return, representing an 11.9% spread over average 

three-month LIBOR, well above Investcorp’s targeted spread of 5-6% on hedge fund co-investments. 

$ millions FY 2007 FY 2006 Change % 

Average proprietary co-investment 1,870 1,786 5% 

Asset-based income 322 204 58% 

Annualized yield 17.2% 11.4% 5.8% 

LIBOR (3-month) 5.4% 4.4% 1.0% 

Spread to LIBOR (3-month) 11.9% 7.0% 4.9% 

The graph and table below show the long-term performance of Investcorp’s co-investments in hedge funds since 

inception in October 1996, versus the S&P 500 and the World Government Bond Index (WGBI): 

Investcorp’s cumulative hedge fund returns vs. stocks, bonds, and cash 

(inception Oct 1996 to June 2007) 

330 

280 

230 

180 

130 

80 

Oct 

’96 

Oct 

’97 

Oct 

’98 

Oct 

’99 

Oct 

’00 

Oct 

’01 

Oct 

’02 

As is evident from the above, over a period of almost 11 years Investcorp has proven its ability to deliver spreads of 5 – 7% 

in excess of LIBOR, with controlled volatility of ≤4%, and as seen below, a low correlation to traditional asset classes. 

Correlation of HF Funds with Stocks, Bonds and Cash as at June 2007: 

Investcorp 

S&P 500 

Salomon WGBI 

US T-Bill 

3 months 

Last five years Since inception 

DSF IBF* DSF* IBF* 

Correlation to S&P 500 Index 0.13 0.25 0.25 0.26 

Correlation to NASDAQ Index 0.05 0.19 0.21 0.27 

Correlation to MSCI World Index 0.25 0.36 0.33 0.32 

Correlation to Salomon WGBI Index (0.01) (0.01) 0.00 0.09 

*DSF returns prior to April 1998 and IBF returns prior to launch in April 2004 are pro forma using actual historical performance of the 

investment vehicles which are substantially similar to those invested in by DSF and IBF respectively. 


Oct 

’03 

Oct 

’04 

Oct 

’05 

Oct 

’06 

Jun 

’07 

Since inception 

Investcorp proprietary returns 

Last three years 

Returns 11.0% 12.1% 

LIBOR Spread 6.9% 7.9% 

Volatility 3.8% 3.7% 

Sharpe 1.88 2.18 

S&P 500 

Returns 9.3% 11.7% 



Sharpe 0.36 1.04 

Salomon WGBI 

Returns 6.1% 4.3% 



Sharpe 0.81 0.12

Outlook 

Investcorp’s investment in the flagship multi-strategy funds will be positioned to reflect its outlook for macro economic 

factors. These are that the US economy will have a soft landing and below-average economic pace and that Europe is 

expected to benefit from corporate restructuring. Japanese growth is expected to pick up again after the recent lull, and 

emerging markets (pan-Asia) will continue to do well. Geopolitical concerns remain an overall risk factor for global 

growth, with a potential pick up in volatility across different asset classes. In particular, US equities should continue to do 

well due to reasonable valuations, high liquidity and corporate deal flow. The general outlook for credit markets is not 

positive, and US housing remains a risk factor with the sub-prime mortgage sector likely to see further deterioration. 

The tactical views for IBF and DSF and the portfolio strategies are, therefore, positive on Hedge Equities Japan/Asia and 

Event Driven, neutral on US and European Hedge Equities, Convertible Arbitrage, Distressed and Macro, and 

moderately negative on Fixed Income/Relative Value. 

REAL ESTATE (RE) ASSET CLASS 


The flow of debt and equity capital into the US property sector remains robust. Continuing a long term trend of year over 

year increases of capital flows into the property sector, total international and domestic investment activity reached nearly 

$400 billion in 2006, while investment activity year to date 2007 suggests that the current year will again see an increase. 

Flows of capital into the sector are supported by a moderate (by historical standards) prevailing interest rate environment 

and positive supply and demand fundamentals. Despite rising valuations for commercial properties, real estate continues 

to offer attractive risk adjusted return opportunities relative to returns available in the bond and equity markets. 

Although US growth has slowed over the course of the last 12 months, the economy remains healthy with increases in 

gross domestic product, job growth and steady business and consumer confidence. The impact of this ongoing economic 

activity has been positive on the US property sector, with improvement across virtually all property types (including office, 

retail, hotels and industrial) in terms of occupancy, rent growth and asset valuations. 

Despite the broadly evidenced positive trend, the US housing sector has slowed in the past year, after many years of 

strong year-on-year growth. The slow down in the US housing market and the market dislocation caused by the fallout in 

sub-prime lending has been fairly well managed so far and underwriting standards for both residential and commercial 

property loans have been tightened. Mortgage spreads have increased in 2007, reflecting upward pressure on interest 

rates. However, long-term mortgage rates remain low by historical standards and expectations are for a return to 

positive historical growth trends over the near term. It should be noted that Investcorp has minimal exposure to the 

housing sector. 


INVESTCORP 


Acquisition and placement activity: 

Original 

equity Transaction 

Property name Location Sector Portfolio ($m) value ($m) 

Four Points by Sheraton Chicago, IL Hotel Diversified VI 10 33 

Southland Mall Miami, FL Retail Diversified VI 42 163 

Equity One (20%) Dallas/Houston/ 

San Antonio, TX Retail Diversified VI 21 83 

Cheshire Distribution Center 

North Haven 

Cheshire, CT Industrial Diversified VII 11 36 

Distribution Center 

Crowne Plaza and Holiday 

North Haven, CT Industrial Diversified VII 15 50 

Inn Express Springfield, IL Hotel US Hotel 12 49 

Westin DFW Irving, TX Hotel US Hotel 32 110 

Marriott Schaumburg Schaumburg, IL Hotel US Hotel 16 56 

Holiday Inn Select Orlando, FL Hotel US Hotel 8 21 

Doubletree Tulsa, OK Hotel US Hotel 16 34 

Marriott Waterford Oklahoma City, OK Hotel US Hotel 13 30 

Marriott Palm Beach Gardens Palm Beach, FL Hotel US Hotel 16 67 

Penn Center East Pittsburgh, PA Office Diversified VII 32 94 

Residence Inn Milwaukee, WI Hotel Diversified VII 9 29 

Bravern Bellevue, WA Opportunistic Bravern 117 893 

Count 15 Total 369 1,748 

In FY’07, the RE team made 15 new investments, deploying $369 million of equity with an aggregate transaction size 

of $1,748 million. Investcorp also successfully closed its first closed-end committed fundraising for a mezzanine fund 

of $108 million, in partnership with TriLyn and with a significant capital commitment from the Bank of Scotland. 

The Fund initially closed in January 2007 with $100 million in capital commitments and has since been increased 

to $108 million based on subsequent investor appetite. 

During fiscal 2007, Investcorp acquired several US hotel properties worth approximately $0.5 billion. The US Hotel 

Portfolio consists of nine full-service hotels in metropolitan markets in Illinois, Texas, Oklahoma, Virginia and Florida 

and comprises hotel brands from four leading global hotel companies: Marriott, InterContinental, Hilton and 

Starwood. Eight hotels were acquired during the year, and the purchase of the ninth hotel closed shortly after fiscal year 

end. The 131-suite Residence Inn by Marriott in Milwaukee was the tenth hotel added in the year, but outside of the US 

Hotel portfolio. 

The acquisition of these hotels was timed to benefit from the strong momentum in the US hotel industry. Continuing 

year-on-year increases in land prices and construction costs, as well as heightened competition for prime hotel sites by 

office and retail developers has resulted in a constricted supply pipeline for new hotels. Demand for hotels also continues 

to increase among business and leisure travellers in concert with ongoing US economic activity. Combined, these trends 

have resulted in increased occupancy and room rates. The acquired hotels have attractive locations and, as a result, have 

high occupancy rates of around 70%. The RE team will continue to look to make additional investments in the hotel 

sector in key markets, including portfolio recaps and purchases, as well as single-asset situations. 

The team also continues actively to pursue opportunities in the retail sector. In January, it acquired the remaining 

20% stake in a portfolio of 29 retail shopping centers located in Texas that it originally purchased in partnership with 

Equity One (NYSE: EQY) in April 2006. The transaction makes Investcorp the sole owner of the portfolio that is now 

optimized at 23 properties after the sale of six properties in fiscal 2007. The portfolio is 93% leased to over 500 tenants, 

including a number of major anchor retailers such as Kohl’s, HEB, Kroger and Randall’s. 


In the same month, the team also acquired Southland Mall, a regional shopping center based in Miami-Dade County, 

Florida and 95% leased to more than 80 high quality national and regional tenants. Originally developed in 1972 and 

renovated in 1993, the property is currently in the final stages of a major redevelopment. 

Just prior to fiscal year end in June, Investcorp entered into a joint venture with Schnitzer West, a leading Seattle area 

real estate development group, to develop a 1.6 million square foot mixed use (office, retail and residential) project in 

Bellevue, Washington, known as The Bravern. Investcorp provided the majority of the project equity while Schnitzer, 

which provided the balance of project equity, will serve as the project’s day-to-day investment developer. 750,000 square 

feet of office space has already been fully leased by a prominent long-term tenant, Microsoft. A further 305,000 square 

feet of luxury retail space will be anchored by a flagship department store, Neiman-Marcus. The total value of the 

transaction is $893 million, comprising total equity of approximately 20% to be invested over FY’07 and FY’08. 

Realization activity 

The RE team exited 15 properties, contributing along with current yield to the $201 million in proceeds for investors and 

the Company. 

Property name Portfolio Sector Location Acquired 

Villages at Clear Springs Apartments Diversified I Residential Dallas, TX Aug-00 

3200 Walnut Street Diversified II Office Boulder, CO Mar-02 

255 Alhambra Commercial IV Office Coral Gables, FL Dec-04 

Airport Plaza Commercial I Office Long Beach, CA Sep-00 

105-107 West 57th Street Opportunistic I Opportunistic New York, NY May-05 

Civica Bellevue Commercial IV Office Bellevue, WA Mar-05 

1685-1775 38th Street Diversified II Office Boulder, CO Mar-02 

Minyards Mall Retail IV Retail Dallas, TX Apr-06 

Bandera Festival Retail IV Retail San Antonio, TX Apr-06 

Barker Cypress Retail IV Retail Houston, TX Apr-06 

Sterling Retail IV Retail Irving, TX Apr-06 

Village Park Retail IV Retail Arlington, TX Apr-06 

Wurzback Retail IV Retail Wurzbach, TX Apr-06 

Cypress Point Commercial IV Retail Clearwater, FL Oct-04 

250 West 39th Street Commercial IV Office New York, NY Apr-05 

Total 15 

Portfolio 

At June 2007, Investcorp’s own RE balance sheet co-investment portfolio totaled $349 million (FY’06: $171 million). 

The increase is due to underwriting of $178 million warehoused for placement with clients in the first half of FY’08, 

of which the Bravern investment is the largest component. 

Region 

(including underwriting) 

East 

21% 

West 

34% Midwest 

7% 

Southwest 

11% 

Southeast 

27% 


INVESTCORP 


The portfolio has minimal exposure to the US housing market, a strategic decision implemented over two years ago. The 

broad diversification of sectors, along with geographic diversification is intended to lower the overall risk profile of this 

asset class in an environment where there is a degree of economic uncertainty ahead. 

Sector 

Opportunistic 

underwriting 

29% 

Opportunistic 

32% 

Hotel 

19% 

The overall portfolio is relatively young, with a minimal exposure to assets acquired further back than 2003. 

Investcorp co-investment by year Transaction 

Carrying 

value as of 

June 30, 

$ millions size 2007 

Vintage FY’03 99.0 0.8 

Vintage FY’04 492.7 2.8 

Vintage FY’05 998.5 83.6 

Vintage FY’06 1,282.6 44.1 

Vintage FY’07 1,855.6 217.7 

Portfolios placed with clients 498.5 40.0 

Underwritten for placement in H1 FY’08 1,357.1 177.7 

Total exposure 4,728.4 349.0 


Industrial 

3% 

Office 

12% 

Residential 

1% 

Retail 

4% 

The table below summarizes the revenue earned from real estate: 


Management fees 5.2 4.0 1.2 

Activity fees 31.2 28.2 3.0 

Performance fees – 3.9 (3.9) 


Expenses and taxes attributable to fee income (22.8) (21.8) (1.0) 

Net fee income 13.6 14.3 (0.7) 

Realized investment income 22.4 10.9 11.5 

Unrealized investment income 1.8 (1.3) 3.1 

Gross asset-based income 24.2 9.5 14.6 

Expenses attributable to asset-based income (5.2) (2.0) (3.2) 

Interest expense (13.8) (7.0) (6.8) 



Overall RE revenues grew by 33% to $60.6 million (FY’06: $45.5 million). Real estate investment income grew as a result 

of larger underwriting to $19.0 million from cash returns earned on new investments during the underwriting period 

prior to placement with clients (FY’06: $7.5 million). Fee revenues were relatively stable at $36.4 million, but the 

underlying mix changed to emphasize acquisition and placement fee income of $30.1 million (FY’06: $26.1 million), as a 

result of increased equity deployment by the real estate team. 

The table below summarizes the key components that drive RE fee income: 


End client AUM — closed fund (mezzanine) 102.5 – – 

End client AUM — deal-by-deal 578.1 477.5 21% 

Average client AUM 579.0 430.9 34% 

Equity deployed (excluding mezzanine debt) 368.7 305.9 21% 

Management fees/client AUM 90 bps 93 bps (3 bps) 

Acquisition and placement fees/equity deployed 8.2% 8.5% (0.4%) 

Average balance sheet co-investment 216.0 159.1 36% 

Yield on co-investments 11.2% 6.0% 5.2% 

Outlook 

Investcorp’s RE investment platform in the US remains well positioned to capture investment opportunities available 

in the market today. 

On July 2, 2007 Investcorp formally opened its West Coast investment office for RE. The office is located in Los Angeles, 

California and is intended to increase access to deal flow in the western US, where historically the group has been active 

but under-represented. The West Coast investment office will leverage off the investment platform the RE team has 

developed over the course of the last decade in New York and facilitate the group’s total equity deployment capabilities 

on a national basis. Two existing senior members from the New York team have relocated to Los Angeles and staffing is 

complete, including local support staff. 

In addition, RE continues to expand its platform to include opportunistic profile investments as well as the group’s 

traditional core-plus and value-add business. As noted earlier, RE successfully closed on the Trilyn-Investcorp 

Mezzanine Fund, providing the group with a dedicated platform for pursuing structured subordinated debt, mezzanine 

debt and preferred equity structured investments, along with its substantial common equity investment activities. 

The Mezzanine Fund is also noteworthy in that it represents a co-investment platform with Bank of Scotland a major, 

non-Gulf financial institution. The RE team now has a broad based platform with which to pursue opportunities 

across multiple property types and investment structures in markets throughout the entire US. 


INVESTCORP 


5. OWNERSHIP STRUCTURE, CORPORATE GOVERNANCE AND REGULATION 

IBBSC is domiciled in Bahrain as a wholesale bank, under the regulatory oversight of the Central Bank of Bahrain 

(CBB), with shares listed and traded on the Bahrain Stock Exchange (BSE) and the London Stock Exchange (LSE), 

represented by GDRs in the case of the LSE listing. Within the Investcorp Group of companies, IBBSC is the 

principal parent entity and owns a 100% economic interest in a Cayman Islands-based subsidiary, Investcorp 

Holdings Limited (IHL). In turn, IHL has two subsidiaries, the principal one of which is Investcorp S.A. (ISA), 

domiciled in Luxembourg as a financial holding company. The principal subsidiaries of the Group are discussed 

in Statement A(iv) of the financial statements of IBBSC. 

Investcorp Bank BSC and its subsidiaries 

The ownership and subsidiary structure of Investcorp is designed to ensure that: 

■ The interests of the strategic shareholder group, comprising Investcorp directors, prominent Gulf individuals and 

institutional shareholders, together with the public shareholders, are closely aligned with management. 

■ Investcorp effectively operates as a management controlled entity. 

■ Substantially all of the Group’s assets and operations are owned and controlled by ISA. As a result, substantially 

all of the Investcorp’s commercial risks are held in Europe. Through this structure, reinforced by the protection 

mechanism described below, Investcorp is treated as a European domiciled risk by both lenders and rating agencies. 

Ownership structure 

The ownership structure of IBBSC is outlined in Statement A of the financial statements of IBBSC. IBBSC is owned 

by public shareholders, management and strategic shareholders. Public shareholders own approximately 38.7% of the 

ordinary shares of IBBSC. Approximately 19.1% of these shares are traded on the BSE and are held by Gulf-based 

nationals or institutions, and approximately 19.6% of these shares are traded on the LSE (represented by GDRs) and 

are held primarily by international institutions. 

Ownership Holdings Limited (OHL), directly and through C.P. Holdings Limited (CPHL), has control of 51.1% 

of the ordinary shares of IBBSC. CPHL is majority owned by OHL which, in turn, is majority owned by SIPCO 

Limited (SIPCO). SIPCO is the company through which IBBSC’s employees beneficially own IBBSC’s ordinary shares. 

Approximately 60 strategic shareholders who are Gulf-based nationals or institutions own the balance of CPHL. 

10% of IBBSC’s shares are held in treasury. 

Investcorp management’s ownership in the Group is implemented through the share ownership program. This provides for 

management to buy their allocated shares for cash. This program is an effective tool for ensuring stakeholder alignment, 

encouraging management to focus on long-term value creation and enable prudent control of balance sheet risks. 


Luxembourg country risk/control of Investcorp Group: creditor protection mechanisms 

Investcorp’s shareholding structure is designed to ensure that its assets are protected against Middle East regional 

risk. Currently, over 99% of the book value of IBBSC’s assets is owned directly or indirectly by ISA, which is whollyowned 

by IHL. In order to separate voting control from economic ownership, IHL has issued both voting shares 

and non-voting shares. 

Currently, approximately 51.4% of the voting shares of IHL are owned directly by two Cayman Islands companies 

that are owned by Investcorp’s management and strategic shareholders. A majority of the Controlling Shareholders 

has voting control of those companies and, therefore, of IHL. IBBSC directly holds 38.6% of the voting shares of 

IHL and 100% of the non-voting shares of IHL. A wholly owned subsidiary of IBBSC owns 10% of the voting shares 

of IHL. The non-voting shares owned by IBBSC give IBBSC 100% economic ownership of IHL and, therefore, of 

Investcorp Group’s consolidated assets. 

Under the articles of association of IHL, in the event of an adverse change in the business or political climate in 

Bahrain that is reasonably likely to materially impair IBBSC’s ability to perform its obligations, prevent it from 

continuing normal business activities or result in a change of control, certain of IBBSC’s senior executive officers 

and members of IBBSC’s Board of Directors (the Designated Representatives) have the power to declare that an 

‘investment protection event’ has occurred. Examples of circumstances that would constitute an ‘investment 

protection event’ include the hostile invasion of Bahrain by the forces of a foreign state, the nationalization of 

IBBSC or interference in the conduct of business that is reasonably likely to result in a material adverse change in 

the business, operations, assets or financial condition of IBBSC. Should the Designated Representatives declare that 

an investment protection event has occurred, IHL will automatically redeem IBBSC’s shares in IHL for nominal 

consideration. If the change in climate is not temporary, IHL will issue shares and cause them to be delivered to the 

shareholders of IBBSC so that each shareholder will own shares directly in IHL that are economically equivalent in 

all respects to the shares that they own in IBBSC, but without voting rights. 

Further, pursuant to an agreement between IBBSC and ISA, following the declaration of an investment protection 

event, all group company indebtedness owed to IBBSC is automatically forgiven, except to the extent that IBBSC is 

required to pay, and has paid, deposit liabilities. As a result, ISA is protected against any claims for the repayment of 

any indebtedness owed to IBBSC, except to the extent that the cash proceeds of the repayment of that indebtedness 

are applied to satisfy the claims of IBBSC’s depositors. 

As a result of certain proxy arrangements and IBBSC’s corporate structure, seven senior members of the Board of 

Directors of IBBSC and management employees of the Investcorp Group (the Controlling Shareholders) controls the 

voting of 61.3% of the ordinary shares of IBBSC. 

Corporate governance 

Investcorp views corporate governance as the manner in which members of the board of directors, shareholders, 

investors, management and employees of Investcorp are organized and how they operate in practice. Good corporate 

governance involves keeping business practice above reproach and thus retaining the trust and confidence of all the 

stakeholders who enable Investcorp to operate, thrive and prosper. 


INVESTCORP 


Investcorp makes large investments in mostly illiquid asset classes such as private equity, real estate and venture capital. 

It places a majority of these investments with clients and retains a portion for its own balance sheet. These investment 

activities operate with above average risk levels and have led to the development of a comprehensive risk management 

infrastructure and strong corporate governance over the past 25 years. Investcorp’s corporate governance practices 

have been structured around the following four principles: 

i. alignment of interests among shareholders, management and clients combined with protection of 

lenders’ interests; 

ii. transparency of reporting and actions plus proactive risk control; 

iii. collective decision-making; and 

iv. institutional mindset. 

i. Alignment of interests 

A central tenet of Investcorp’s philosophy is to ensure that interests among clients, shareholders and management are 

optimally aligned and that lender interests are well protected. The below diagram summarizes the key factors that drive 

this alignment. 

Most shareholders are also clients 

Balance sheet co-invests alongside clients 

Clients 

Independent board of directors 

Management has 40% beneficial ownership 

~2/3 of executive compensation is variable 

Shareholders Management 

Ownership structure and 

creditor protection mechanism 

Lenders 

Management co-invests alongside clients 

Carry-based incentive compensation programs 

Ownership structure and 

creditor protection mechanism 

■ Co-investments 

Clients, shareholders and management all participate in each of Investcorp’s investment products. Investcorp retains 

a stake of between 5 – 20% in each private equity, real estate and venture capital transaction, placing the balance with 

clients. Investcorp also invests a substantial portion of its liquid assets in the hedge funds program. Hence, through 

ownership of Investcorp, shareholders and management indirectly participate in each of the investment products. In 

addition, Investcorp’s employees co-invest alongside clients and Investcorp in all these investment products (further 

described under ‘program for investment participation’ in Note 26 of the financial statements of IBBSC). As a result, 

all three groups are collectively exposed to the same risks and share the same outcomes. This emphasis on co-investment 

ensures that all stakeholders are motivated to grow Investcorp and enhance its value through generation of superior 

risk-adjusted returns in each of the Company’s products. 


■ Performance-based incentive compensation 

Investment professionals, consistent with industry practice, participate in performance-based ‘carry’ programs 

whereby a certain variable portion of exit proceeds due to investors from realization of their investments is shared with 

the investment professionals, provided that a certain pre-established minimum performance objective is exceeded 

on the underlying investment. 

In addition, approximately two-thirds of the overall executive compensation is paid in the form of variable incentive 

compensation that is highly correlated with Investcorp’s net income. Investcorp’s net income is driven by its ability to 

acquire, place, manage and realize investments (franchise value) and realize gains from investments on its balance sheet. 

The franchise value, in turn, depends on management’s ability to provide long-term value to Investcorp’s clients and 

shareholders and protection for its creditors. 

In this manner, Investcorp’s executive compensation programs play a critical role in aligning management’s interests with 

the interests of shareholders, clients and lenders. 

ii. Transparency and risk control 

Transparency at Investcorp involves open and proactive discussion of issues and problems with all stakeholders. The role 

and nature of the board of directors and its committees are vital elements of a group-wide framework for mitigating risks, 

allocating resources and making decisions with full accountability based on all relevant information. 

■ Board of directors 

The Board of Directors of IBBSC is ultimately accountable and responsible for the affairs and performance of IBBSC. 

Entrusted by shareholders, the Board establishes organizational and strategic policies to be implemented day-to-day by 

senior management. 

Since Investcorp’s inception, the Board has been composed of non-executive directors, with the single management 

director being the President and CEO. Also since inception, IBBSC has separated the roles of Chairman of the Board 

of Directors and the President and CEO. 

The Board of Directors has determined that each director other than the President and the CEO is an independent 

non-executive director. In making this determination, the Board of Directors considered whether each director: 

■ Is a ‘controller’ of IBBSC as that term is defined by the CBB, which term includes a person who owns 10% or more 

of the shares of IBBSC; 

■ Is an ‘associate’ (as defined by the CBB) of a director or a member of senior management of IBBSC, which term 

includes a close relative of a director or member of senior management of IBBSC; 

■ Is a professional advisor to IBBSC; 

■ Is a large depositor with or borrower from IBBSC; or 

■ Has a significant contractual or business relationship with IBBSC which could be seen to materially interfere with the 

director’s capacity to act in an independent manner. 

All of the directors own Investcorp shares, in part to satisfy a requirement under the Bahrain Commercial Companies 

Law that each director own shares with an aggregate nominal value of not less than BD 10,000 (approximately $25,526), 

which represents 107 shares. In addition, many of the directors invest in various Investcorp investment products 

(Investcorp Investments). 


INVESTCORP 


With reference to the last of the criteria listed above, in determining director independence, the directors have not 

considered their ownership of Investcorp shares or their Investcorp Investments as factors that could materially interfere 

with a director’s ability to act in an independent manner because their share ownership and Investcorp Investments are 

purely passive in nature. 

The board determined the significance of any other contractual or business relationship that a director has with IBBSC by 

reference to the extent of the relevant director’s other contractual and business relationships and determined that a 

contractual or business relationship with IBBSC that represents 5% or less of a director’s net worth or annual income is 

not significant. 

In the case of any director that does have a significant other contractual or business relationship with IBBSC, the Board of 

Directors determined that a director’s demonstrated independence of character, judgment and integrity during his years 

of service on the Board of Directors are conclusive of that director’s independence. 

The Board of Directors is given open access across the management team. This team provides a regular flow of 

information to the Board through full year forecasts, year-to-date updates and long range plans. All major decisions 

are discussed with the Board, including the rationale behind investment decisions. 

The Board meets at least four times a year. Governance of Investcorp is carried out through the focused activities of three 

Board committees, together named executive committees, each of which meets at least three times a year. 

Administrative 

Policy Committee 

7 Directors 

The administrative policy committee is responsible for making administrative decisions and for oversight of Investcorp’s 

administrative policies. The committee’s principal charter calls for it to: 

■ approve cash bonuses, compensation programs and other incentive plans; 

■ review corporate and administrative policies; 

■ approve annual budgets and dividend policy; and 

Board of Directors 

13 Independent non-executive 

1 Executive (CEO) 

Audit Committee 

6 Directors 

Investment 

Policy Committee 

7 Directors 

■ with effect from December 31, 2007, function as a nominating committee to identify and review candidates to fill 

vacancies on the Board of Directors and evaluate the balance of skills, knowledge and experience on the Board of 

Directors when evaluating potential candidates to fill vacancies on the Board of Directors. 


The audit committee is responsible for the oversight of Investcorp’s internal audit, external audit, risk management 

and compliance activities. Both the head of internal audit and the head of risk management report to the committee. 

The committee’s principal charter calls for it to: 

■ review the integrity of Investcorp’s financial reporting 

■ ensure the independence of Investcorp’s internal audit functions; 

■ review the adequacy and effectiveness of Investcorp’s accounting and financial controls; 

■ oversee the selection and compensation of Investcorp’s external auditor for appointment and approval at each Annual 

General Meeting and ensure the external auditor’s independence; 

■ review the adequacy and effectiveness of Investcorp’s risk management policies and methodologies; and 

■ oversee Investcorp’s compliance with all applicable laws and regulations. 

The investment policy committee is responsible for the oversight of Investcorp’s investment policies. The committee’s 

principal charter calls for it to: 

■ review and approve recommendations for investment strategies and products and services; 

■ set investment and trading limits; 

■ evaluate investment, finance and trading decisions and recommend enhancements; and 

■ approve corporate funding policy and banking relationships. 

In 2003, acting on the recommendation of the CEO, the Board of Directors approved the creation of the post of 

Chief Operating Officer (COO) with full authority, delegated by the CEO, for overall day-to-day management of the 

Investcorp Group. Investcorp’s senior management are committed to providing leadership, accountability and a culture 

of entrepreneurship that continually revitalizes Investcorp. 


INVESTCORP 


To support the CEO and COO in executing the responsibilities delegated to them by the board and in order to limit 

downside risk from ineffective implementation of business strategy, senior members of the management team coordinate 

their functions through the highly consultative oversight of the management committee and coordinators committee, as 

indicated below: 

Buyouts 

Risk Management 

Management Committee 

Technology 

small-cap 

Gulf growth 

capital 

Board of Directors and 

Executive Committees 

Chief Executive Officer 

Chief Operating Officer 

Hedge 

funds 

Internal Audit 

Coordinators Committee 

A Coordinator represents the interests of each of the units shown above on the management committee and the 

coordinators committee. These committees also include the CEO and the COO. This framework is in place to 

mitigate risks, ensure resources are appropriately allocated and that decisions are made with full accountability and 

information flow. 

■ Transparency for other stakeholders 

Investcorp is transparent and open with its shareholders, clients and lenders. Investcorp publishes its unaudited 

financial statements for the first six months of its financial year ( July – December) and a shareholder update for the 

first nine months of its financial year ( July – March). An annual shareholders meeting provides further information 

and an opportunity for interchange of opinions and ideas. Clients have direct, ongoing access to the marketing team 

and investment professionals. Clients are provided with a detailed review of each investment in their portfolio every six 

months, and they regularly meet the marketing team members to discuss their current portfolio and new investment 

opportunities. Periodically, clients have the opportunity to meet the management teams of their portfolio companies. 

Lenders receive semi-annual updates on the health of the business and have direct, ongoing access to the members of 

the corporate finance team. 

iii. Collective decision-making 

At Investcorp, significant decisions are always made by teams, rather than by individuals. No single person at Investcorp 

has a right of veto or is in a position to override another. 

Such collective decision-making is evident in the set of cross-functional committees that fully review and approve all 

investments and asset/liability decisions as described elsewhere in this annual report, including the various investment 

committees, the commitment committee and the FRMC. 

Investcorp acts with a partnership mentality. All business units are accountable to, and have their performance evaluated 

by, their partners within Investcorp. In addition, all employees adhere to the Investcorp Group code of conduct, are 

expected to consider the reputational impact of their actions and to act ethically at all times to protect Investcorp, 

shareholders, lenders and clients. 


Real 

estate 

Placement & 

relationship 

management 

Corporate 

administration 

Corporate 

finance

iv. Institutional mindset 

Investcorp is an institution. It has a strong corporate culture, a highly professional management team, appropriate 

infrastructure and systems, as well as a deep talent base. Supporting this are concrete institutional foundations. Investcorp 

is a publicly listed company and has been licensed and regulated as a bank since inception. 

New CBB corporate governance standards 

In an effort to bring the corporate governance of Bahrain banks more into line with corporate governance standards in 

many other countries, including the UK and the US, the Central Bank of Bahrain (CBB) has adopted a series of 

corporate governance rules. The overall objective of the corporate governance rules is to foster a culture within Bahrain 

banks of more proactive boards of directors that are accountable and responsible for the affairs and performance of 

their banks. 

Certain of the CBB’s corporate governance rules became effective in October 2005, and Investcorp has implemented 

those rules. 

The CBB has adopted additional corporate governance rules that became effective on January 1, 2007. Included among 

these additional rules are requirements that: 

■ boards of banks periodically assess their composition and size and, where appropriate, reconstitute themselves by 

selecting new directors to replace long-standing directors; 

■ no board member hold more than one directorship of bank licensees within the same license category; 

■ boards identify their members in the annual report as executive, non-executive and independent non-executive and 

outline in the annual report their criteria and materiality thresholds for the definition of ‘independence’; 

■ independent non-executive directors be permitted to meet periodically without executive management present; and 

■ boards issue formal letters of appointment both to senior management and board members, outlining their specific 

responsibilities and accountabilities. 

Investcorp is implementing these rules in accordance with a schedule approved by the CBB. 

Regulation 

As a Bahrain based bank, Investcorp is licensed by the CBB, and all of Investcorp’s activities are subject to comprehensive 

regulation by the CBB. In addition, Investcorp’s ordinary shares are listed on the BSE, and Investcorp is subject to the 

regulations of the BSE. 

Investcorp’s shares are also listed on the LSE, in a secondary listing, and Investcorp is subject to those regulations of 

the UK Financial Services Authority (the FSA) and the UK Listing Authority that apply to companies with a secondary 

listing on the LSE. In addition, Investcorp has a UK subsidiary that acts as a corporate finance advisor. This subsidiary 

is registered with and regulated by the FSA. 

In connection with the hedge fund business’ US initiative, Investcorp has one subsidiary that is registered with and 

regulated by the US Securities and Exchange Commission (SEC) and the US National Association of Securities Dealers 

as a broker-dealer. Investcorp also has two subsidiaries that are registered with and regulated by the US Securities and 

Exchange Commission (SEC) as investment advisers. One of these subsidiaries is also registered with and regulated by 

the Cayman Islands Monetary Authority (CIMA). In addition, all of the Funds included in the hedge funds business 

are registered with and regulated by CIMA. 


INVESTCORP 


6. PORTFOLIO REVIEW 

PRIVATE EQUITY — US AND EUROPEAN BUYOUT PORTFOLIO 

Vintage 2005 investments 

Fiscal 2007 acquisitions first, followed by earlier acquisitions (in chronological order): 

All exposure values are as at June 30, 2007. A discussion of acquisitions and realizations is included in the Line of Business Review. 

Berlin Packaging is a leading supplier of rigid packaging in the United States. Through 25 strategic locations throughout 

the US, Berlin Packaging supplies plastic, glass, and metal containers, closures, and dispensing systems to a wide variety of 

customers in the food and beverage, personal care, healthcare/OTC, and chemicals end markets. Chicago-based Berlin 

Packaging also provides value-added services such as packaging design and proprietary mold development, leasing support 

services, and transportation/logistics services — effectively acting as a ‘one stop shop’ for all of the packaging needs of many of 

its customers. The company has annual revenues in excess of $300 million. The transaction closed in August 2007. 

The acquisition of Icopal was signed in June 2007. Headquartered in Denmark, Icopal is a leading European 

manufacturer of waterproofing membranes and the leading flat roof contractor (installation services) across the Nordic 

countries. The company primarily offers its products in the European markets with an increasing focus on Central and 

Eastern Europe. Icopal also operates as the leading flat roof contractor (installation services) and the leading metal roof 

and facade contractor across the Nordic countries. Through its pre-eminent market position, brand value and product 

range, Icopal is recognized as the reference point for decision makers such as architects and building owners across 

Europe when designing and specifying waterproofing solutions. Investcorp views Icopal as an attractive investment 

opportunity given: (i) its leading market position in the roofing and contracting sectors; (ii) its strong regional and 

customer diversification; (iii) stability of Icopal’s core non-residential European flat roofing market; (iv) an opportunity 

to consolidate the highly fragmented European waterproofing products industry; and (v) opportunity to expand through 

the roll-out of new products as well as through expansion into new countries. The transaction closed in July 2007. 

Based in the UK, Moody International is a leading global provider of inspection services and outsourced personnel 

supply to the oil and gas sectors, as well as a leading provider of certification services in certain high growth markets. 

Moody’s range of services includes on-site vendor inspection, expediting, fabrication inspection and maintenance 

inspection services to many of the world’s leading oil and gas companies. Investcorp views the Moody acquisition as an 

attractive investment opportunity given: (i) its leading, niche position as a global service provider to the oil and gas 

sectors; (ii) its strong regional and customer diversification with earnings generated worldwide from a very high quality 

client base; (iii) continuing strong growth in demand for services in the oil and gas sectors, as well as the certification 

markets; (iv) the opportunity to expand the services Moody offers to its existing clients, as well as to grow its presence in 

other sectors (such as power generation, mining and civil engineering); (v) the opportunity to acquire numerous smaller 

regional or local service providers and integrate them into Moody’s global network, thereby consolidating a fragmented 

market; and (vi) the possibility of a strategic combination with another large service provider to significantly develop the 

scale and diversity of Moody’s operations. Moody has responded positively to the strategic initiatives launched since 

acquisition and its performance is in line with expectations. 

The acquisition was closed in 2007. Current exposure: $26.5m 

Each vintage covers a period of four calendar years starting with that year e.g. vintage 2001 covers deals acquired between calendar years 2001 and 2004, both inclusive. This is 

done to conform with industry practice for PE funds that typically get invested over four years. 


Based in Germany, Armacell is a major supplier of engineered foams and expanded rubber products used in automotive, 

industrial, sports, leisure and recreation, packaging, construction and a wide range of custom applications. With a 

network of 20 manufacturing facilities in 13 countries worldwide, the company is in a strong position to service market 

requirements for the broadest range of technical insulation and high-performance specialty foam products. Investcorp 

viewed Armacell as an attractive investment opportunity given: (i) its leading market position in its core activity; 

(ii) a strong regional diversification with sales spread over Europe, North America, Asia Pacific and emerging markets; 

(iii) Armacell’s strong positioning with its fragmented distributor base; (iv) attractive growth in core activities due to 

rising insulation requirements; and (v) identified potential upside from significant growth potential in insulation (in 

markets such as Asia, Central and Eastern Europe, and through expansion of product portfolio into new applications), 

from technical foams (profitability enhancements and attractive growth niches) and from potential add-on acquisitions. 

Since acquisition, Armacell has launched numerous strategic initiatives including a comprehensive review of its vision 

for its technical foams unit in conjunction with strategy consultants. Overall, the company’s performance is meeting 

expectations on most key strategic and operational parameters. 

The transaction was closed in 2007. Current exposure: $33.3m 

Greatwide Logistics is a leading transportation and logistics provider in the United States. The investment thesis 

underpinning the acquisition had several important attributes including (i) position as one of the largest national, 

primarily non asset-based ground transportation capacity providers in North America and the largest third-party 

provider of dedicated transportation services to the less cyclical grocery and food distribution industry; (ii) the success 

and flexibility of the company’s business model; (iii) the diversity of its customer base; (iv) high barriers to entry in the 

market due to high switching costs and the complexity of supply chains; (v) unique product offering; (vi) increased 

outsourcing of transport and supply chain logistics in the United States; and (vii) increased consolidation of the industry. 

Greatwide’s post-acquisition focus has centered on implementation of strategic initiatives to increase top-line growth 

and improve margins. 


TimePartner is a German supplier of temporary staffing services with leading market and customer positions in the 

logistics, engineering and aviation segments. Since its acquisition the company has progressed in line with expectations 

undertaking a number of strategic and operational initiatives to capture the growth potential as contemplated by the 

investment thesis. Specifically, TimePartner recently completed an acquisition of IBB, a company specializing in the 

engineering sector and of EMK Group, a regional provider of temporary staffing with focus on southwest Germany. 

TimePartner has also revamped its management team with the hiring of a new Chief Financial Officer and senior 

executives in marketing, controlling and technology functions. In addition, the company has launched programs to drive 

implementation of best practices across the sales, finance and information technology functions, drive key account 

strategy along with cross-selling initiatives, push new customer acquisition, revamp the compensation framework and 

ramp up international presence as well as continuing to develop the acquisition pipeline. 


FleetPride is the largest independent distributor of aftermarket heavy duty truck and trailer parts in the United States. 

Subsequent to acquisition, the company launched several key initiatives that covered strategic initiatives as well as 

improvement in financial reporting and technology systems. In addition, the company is also looking for small tuck-in 

acquisitions as they arise and in this context recently acquired E&E Parts and Equipment, giving FleetPride added 

customer reach in areas surrounding Sprindales in Arkansas. Going forward, FleetPride intends to focus on developing 

its national sales growth plan, expand market coverage, develop a more focused approach to private brand development, 

as well as initiate operational level changes to reduce or manage costs and improve internal reporting. 



INVESTCORP 


Orefi and AD Industrie are, respectively, the second and third largest distributors of industrial supplies in France, as 

measured by their respective revenues and market shares. Orefi was acquired in June 2006 with the specific intention 

of combining it with AD Industrie (a subsidiary of Autodistribution), a merger which was successfully completed in 

January 2007. The combined entity, renamed Orexad, now forms the largest single industrial supply distributor in 

France with more than 180 outlets and a presence across all regions of France and enjoys a strong competitive advantage 

due to its large customer reach, ability to negotiate with suppliers and broad product offering. In addition, strong synergy 

exists between the two companies due to the complementary nature of their products and customers. With the acquisition 

of AD Industrie, the company intends to further consolidate the French, Dutch and European markets through further 

acquisitions. Orexad has also responded positively to the launch of strategic initiatives and has shown good growth since 

acquisition on a number of fronts. 


Autodistribution, operating through a network of 130 wholesalers with 600 distribution outlets, is the largest 

independent distributor of auto, truck and industrial spare parts in France. The company also supplies products to all 

types of garages including more than 2,600 affiliated garages and body repair shops, as well as to truck repair shops 

and truck carriers, fleet managers and industrial customers. In January 2007, Autodistribution completed the sale of 

its industrial supplies business which will enable Autodistribution to concentrate on its core car and truck parts business. 

In addition, Autodistribution completed its first significant acquisition in January 2007 through the purchase of a truck 

parts distributor in France (Comptoir du Frein), and also signed a definitive agreement to acquire AD Polska which 

closed in July 2007. Management in conjunction with Investcorp are currently fully focused on implementing a number 

of initiatives that should help transform the company’s business model into an integrated distributor and significantly 

improve its operational and financial performance going forward. With the quality and depth of the management team 

that is now in place, it is believed that Autodistribution is well-positioned to pursue a selective add-on acquisition 

strategy in France and in Europe, where the company is currently considering several attractive opportunities. 


CCC is the market leader in the US automotive claims software and information solutions industry with a network that 

includes 350 insurance carriers, in excess of 22,000 repair facilities and information from more than 30 data providers 

that has resulted in the industry’s most comprehensive data warehouse of claims file information. It is estimated that 

approximately 40% of insurance staff adjusters use CCC’s collision estimating products and approximately 55% of annual 

domestic total loss claims utilize information provided via the company’s Valuescope product, making CCC the leading 

solution provider in the core insurance segments. Recently, CCC completed the acquisition of Integrated Collision 

Management, a leading provider of shop management software to the collision industry. The company had earlier 

acquired ProcessClaims, a leading provider of software connectivity and business process solutions. CCC has responded 

well to the ongoing strategic growth plans launched subsequent to acquisition and going forward will continue to focus 

on maximizing benefits from process improvement initiatives, further strategic acquisitions and extracting synergistic 

benefits from the integration of Integrated Collision Management and ProcessClaims. 


Based in The Netherlands, Polyconcept is the European leader in the creation, development, sourcing, marketing 

and distribution of lifestyle and promotional gift products. The Polyconcept and Global Promo Group (‘GPG’) 

management teams continue to work well together following Investcorp’s acquisition of Polyconcept in June 2005 

and Polyconcept’s subsequent acquisition of GPG in July 2005. In August 2006, Polyconcept acquired Bullet Line, 

which in conjunction with an existing unit of Polyconcept, has created the largest US supplier of non-wearable and 

non-calendar promotional products. Management continues to opportunistically consider add-on acquisitions to 

expand its product offering and customer reach. The company has also launched a number of strategic initiatives 

subsequent to acquisition, covering amongst other things improvements in marketing strategy and business model 

re-assessment for certain units. Polyconcept has responded positively to the launch of these initiatives and is 

reporting positive performance on most fronts. 



American Tire Distributors (ATD), the leading national distributor to the replacement tire market in the US, 

has shown positive growth in all key strategic areas since acquisition. The company has completed three strategic 

acquisitions and aggressively expanded its add-on acquisition pipeline. ATD has also been actively pursuing increased 

dealership access alongside an expanded product offering. As part of the plan to improve operating performance, 

ATD has implemented a new information technology platform and continues to focus on improving processes with the 

aim of maintaining its superior logistics capabilities and controlling costs. The future business strategy contemplates 

expansion of the dealership network, distribution channels and product offerings. The company’s near term focus is 

centered on a plan to manage costs through implementation of efficiency measures, management of overtime and 

headcount rationalization. 



Associated Materials is a leading manufacturer and distributor of exterior residential building products based in the 

USA. The large and fragmented remodeling window market presents Associated Materials with considerable opportunity 

to grow market share though the industry as a whole has been suffering from a general slowdown. Notwithstanding the net 

impact of higher input costs, operational problems, and a general increase in the company’s cost structure, Associated 

Materials has maintained its competitive position through expansion of its product offering and geographical reach. The 

company is currently focused on reducing its overall cost structure and is targeting various revenue growth opportunities. 

In this context, the company in conjunction with industry consultants has developed a business plan underpinned by a 

‘lean manufacturing’ initiative aimed at improving manufacturing efficiency. 


SourceMedia, headquartered in the USA, provides market information, including news, analysis, and insight to the 

financial services and related industries such as accounting and technology, through its publications, industry-standard 

data applications, seminars and conferences. Its flagship publications, including American Banker, National Mortgage News, 

The Bond Buyer, and Accounting Today, have helped build SourceMedia’s reputation as the pre-eminent information source in 

its respective markets. Consulting services, software, and data provided through its two divisions, National Regulatory 

Services (NRS) and Accuity, facilitate regulatory compliance, funds registration and data flow among institutions in the 

investment, insurance, and financial service industry. Since acquisition, the company has augmented its management 

team and successfully re-branded a web based product line, which is performing in line with expectations. Overall, the 

company is on track to meet key strategic and operational targets, including revenue generation and EBITDA growth. 


With the completion of the build-out of its two municipal solid waste (MSW) landfills, Big Run and Copper Ridge, 

EnviroSolutions, a provider of solid waste management solutions based in the USA, continued to make progress in 

building an integrated solid waste management business with leading local market positions in attractive markets. The 

company also purchased DART, a permitted but undeveloped MSW landfill transfer and transload site which further 

solidifies the company’s position to bid on waste volumes in the Northeast area and strengthens its ability to rail transload 

waste to its landfills. Management is strongly focused on securing additional waste volumes for the company’s landfills, 

either through acquisition or disposal agreements. In addition, management will focus on finalizing the transportation 

agreements (rail/trucking options) to bring waste volumes to Big Run and Copper Ridge and is moving forward with the 

Lorton Landfill expansion process, as this remains an important driver of value creation for the company. 



INVESTCORP 


PlayPower is a leading manufacturer of commercial playground equipment and floating dock systems headquartered 

in the USA. In 2007 PlayPower’s operations continue to show good growth particularly after the acquisition of Oval 

Limited, the leader in traditional playground equipment and related products in the UK, which provided PlayPower with 

an entry into the attractive UK market. In addition, PlayPower has been able to leverage Oval’s strong steel product line 

to expand sales in continental Europe. Recently, the company completed a balance sheet refinancing that has resulted 

in lower debt pricing and a resetting of amortization payments as well as covenant levels, providing the company with 

additional financial flexibility. Going forward, PlayPower is positioned to increase its operating performance as it 

successfully implements key initiatives aimed at realizing operational improvements, driving market share gains and 

the continued build-up of the European business. 


Aero Products International, based in the US is a leading designer and marketer of high-end air-filled beds, pools and 

other leisure products that utilize Aero’s patented pump and valve technology. Under new management stewardship, Aero 

has undertaken a comprehensive exercise to develop a business plan focused on completion of a market study, improved 

purchase and overhead management, development of a new product and channel management strategy, a revamped 

marketing initiative and a strategy to ensure build-out of the company’s international presence. Notwithstanding these 

initiatives, Aero’s performance continues to fall short of expectations and faces a challenging set of circumstances in the 

near-term as the company is repositioned for growth against a backdrop of difficult internal and external issues. 



TelePacific, based in the USA, continues to maintain a solid growth trajectory both in terms of scale of operations 

and growth of existing business against the background of robust long-term growth prospects for the competitive 

local exchange carrier (CLEC) industry. TelePacific continues to realize year-on-year improvement evidenced by the 

company’s revenue growth, significant customer additions and low customer churn, all among the best in the CLEC 

industry. TelePacific recently acquired Arrival Communications, a small, facilities-based CLEC operating exclusively 

in central California. Arrival Communications is a strong geographic fit for TelePacific which will allow TelePacific 

to accelerate its business plan as well as reduce ‘start-up’ expenses in TelePacific’s plan for the Central Valley market. 

TelePacific’s earlier acquisitions, Pac-West and MPower, are proving to be revenue and margin accretive, resulting in 

an overall positive outlook for TelePacific. 

The acquisition was completed in 2000. Current exposure: $148.1m 

Stratus is a leading provider of continuously available servers headquartered in the USA. Stratus’ recent financial 

performance reflects continued profitability of the company’s core product and services businesses, in addition to the 

impact of cost reduction initiatives implemented despite top-line growth being impacted due to customer attrition 

arising from discontinuation of a core legacy product. Stratus recently announced the acquisition of Emergent Network 

Solutions, an innovator in advanced telecommunication software and services. The company has now consolidated all of 

its Telecommunications operations under Emergent to better target this specific market segment. As the integration of 

Emergent Network progresses, revenue growth from telecommunication providers should increase. Going forward, 

Stratus intends to focus on the realignment of its sales and marketing organization, launch of new products and 

optimization of cash flows. 



Avecia, a leading specialty chemicals group has successfully completed the divestiture of all of its business divisions except 

Biotechnology. Avecia has limited debt remaining with a cash balance that is anticipated to provide sufficient liquidity to 

finance future growth. Importantly, the senior management team has been restructured to reflect the company’s position 

as a pure biotechnology company. While the company is actively focused on improving and attaining further efficiency 

in its product development, manufacturing and delivery processes, Avecia’s future earnings potential and eventual return 

to Avecia’s equity holders is critically dependant on meaningful developments in the Biotechnology markets. 


Following a successful balance sheet restructuring and subsequent refinancing, Welcome Break, a leading operator of 

motorway service areas based in the UK, is operating with a capital structure that is sustainable over the long-term, and 

the company’s operating results reflect a continuing trend of improvement. Welcome Break recently overhauled its 

corporate identity. The company is currently focused on opening new markets and in this context has achieved significant 

success by; (i) winning a tender for a large part of the catering/retail business of Eurotunnel and (ii) opening grocery 

stores and books stores at its outlets for a large supermarket and book store chain. Welcome Break’s focus continues to be 

on increasing forecourt and retail sales growth and margins by using innovative marketing techniques, improved visibility 

of high margin products and implementation of effective cost controls. 

The acquisition was completed in 1997. Current exposure: $38.6m 

PRIVATE EQUITY — TECHNOLOGY SMALL-CAP PORTFOLIO 

Technology Fund I and II current investments by theme: 

Investment theme Name Location Fund 

Investment 

($m) Stage 

Communications infrastructure products Top Layer US I $ 6.0 Mid 

BayPackets US I $ 11.7 Early 

Eicon/Dialogic US II $ 25.0 Late 

Kentrox US II $ 13.7 Mid 

Antares US II $ 17.5 Late 

Mania (a) Europe II $ 19.6 Late 

Digital content enablement Aurora US I $ 4.2 Late 

Magnum US II $ 15.5 Late 

Moneybookers Europe II $ 16.0 Late 

Zustek US II $ 14.0 Late 

Enterprise software and technology outsourcing InfoNXX US II $ 15.0 Late 

Atrenta US I $ 6.0 Mid 

Platform Solutions US I $ 11.8 Early 

Mobile data technologies and applications Vaultus US I $ 12.6 Mid 

Willtek (a) Europe I $ 9.4 Late 

PanGo US II $ 6.9 Early 

Ubicom US II $ 10.0 Mid 

Other investments i-Hatch US I $ 7.3 N.A. 

Total unrealized portfolio 

(a) Publicly listed investments. 

$222.1 


INVESTCORP 


REAL ESTATE PORTFOLIO 

Real estate vintage years coincide with July to June cycle of each fiscal year. 

Geographic Carrying 

Properties Sector location value as of 

Investcorp co-investment by year Transaction original/ (of remaining (of remaining June 30, 

$ millions size current properties) properties) 2007 

Diversified II 99.0 7/3 Office and 

Industrial 

West 0.6 

Residual Portfolios 1 Retail West 0.2 

Vintage FY’03 99.0 0.8 

Office III 273.8 5/1 Office Midwest 1.2 

Diversified IV 76.9 3/2 Residential East 1.5 

Empire Mountain Village 142.0 1/1 Opportunistic West 0.1 

Vintage FY’04 492.7 2.8 

Commercial IV 392.0 12/8 Office East 2.2 

Diversified V 145.0 5/5 Office and East/Midwest 3.8 

Diversified 

W South Beach 344.7 1/1 Opportunistic Southeast 57.9* 

Opportunity I 92.2 3/2 Opportunistic East/Southeast 14.7 

Nassau Lakes 24.6 1/1 Opportunistic Southeast 5.0 

Vintage FY’05 998.5 83.6 

Commercial V 255.8 3/3 Office and Retail East/Southeast 22.9 

Retail IV 406.8 29/23 Retail Southwest 2.2 

Retail III 239.2 8/8 Retail Midwest 2.7 

Opportunity II 96.9 3/3 Opportunistic West/Southeast 7.4 

Opportunity III 284.0 3/3 Opportunistic East/Southeast 9.0 

Vintage FY’06 1,282.6 44.1 

Mezzanine Fund I 108.0 n.a. Residential East 3.0 

Diversified VI 278.6 2/2 Retail and Hotel Southeast/ 

Southwest/ 

Midwest 

10.5 

Diversified VII 208.8 4/4 Industrial/ 

Office/Hotel 

East/Midwest 28.7 

Hotel 367.0 8/8 Hotel Southeast/ 

Southwest/ 

Midwest 

59.5 

Bravern 893.1 1/1 Opportunistic West 116.0 

Total vintage FY’07 1,855.6 217.7 

Total exposure 4,728.4 80 349.0 

*Includes add-on equity of $48 million provided in FY’07, which was substantially repaid in July 2007 through a refinancing of the property.

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