fund pr<strong>of</strong>ile: auroraExpanding your investmenthorizons with Aurora RussiaThe proposal is presented to theboard <strong>of</strong> Aurora Investment Advisorsand subsequently AuroraRussia Limited. If there are anymajor concerns raised by eitherboard, these are addressed at thisstage. Once we have addressed anyconcerns the board members mayhave, we begin our formal duediligenceprocess, hiring advisersfor forensic due diligence, one <strong>of</strong>the Big Four for financial due diligenceand a reputable law firm isinstructed to represent us in legaldue diligence.A final recommendation is madeto the board based on the respectivedue-diligence findings, our ownfindings and the deal that we havenegotiated. The transaction is thenapproved at board level.Could you explain the experience <strong>of</strong>your team?James Cook and I are the foundersand directors <strong>of</strong> Aurora Russia.James has over 13 years’ experienceadvising, founding and managingcompanies in consumer finance,residential mortgage lending andleasing sectors in Russia.James is a former executivevice-president <strong>of</strong> Delta Capital andChairman <strong>of</strong> Delta Financial ServicesGroup.He was also the founder,chairman, and chief executive<strong>of</strong>ficer <strong>of</strong> DeltaCredit Bank and theco-founder and chairman <strong>of</strong> DeltaLeasing.James served as chairman andchief executive <strong>of</strong>ficer <strong>of</strong> DeltaBankand most recently as chairman andchief executive <strong>of</strong>ficer <strong>of</strong> GE ConsumerFinance Russia following thesale <strong>of</strong> DeltaBank to GE ConsumerFinance in 2004.I have spent the last 11 yearsworking in Russia. Prior to settingup Aurora Russia, I worked as acorporate financier, having advisedapproximately 40 clients in Russia ona variety <strong>of</strong> transactions includingfundraising for private equity funds,equity private placements andmergers and acquisitions.In 1998, I set up Altium Capital’scorporate finance business inRussia and ran the business until2003, when I accepted the positionto lead the corporate financeadvisory business <strong>of</strong> Deloitte &Touche in Moscow and build up ateam to advise mid-sized Russiancompanies in raising capital andadvising foreign strategic investorson making acquisitions in Russia.We are supported by two investment<strong>of</strong>ficers, Oleg Bystranov andAndrey Gurin, and a team <strong>of</strong> twostaff. Oleg’s experience includesNorthstar Corporate Finance, ABNAmro Corporate Finance and theUS Russia Investment Fund, currentlyknown as Delta Capital.Andrey is the former manager <strong>of</strong>finance for GE Medical Systems forfirstly Eastern Europe and latterlyMiddle East & Africa.He was later appointed manager<strong>of</strong> finance for GE Oil & Gasservices operations in the globalheadquarters and, most recently,financial controller and treasurerfor DeltaBank after it was acquiredby GE Consumer Finance Russia.Which companies are you investedin presently?Aurora Russia has committed investmentinto three companies.In July, we invested £5.1m for a40.31% stake in the holding company<strong>of</strong> the OSG Records Managementgroup <strong>of</strong> companies, the marketleader in records-management inRussia, Ukraine and Kazakhstan.We have also provided OSG witha convertible working capital facility<strong>of</strong> $5m <strong>of</strong> which $1.6m has so farbeen drawn down. In September,Aurora committed to invest £12.5mto launch Kreditmart, a mortgageand consumer-finance brokerage.In November, Aurora RussiaLtd signed an agreement to invest£10.4m for a 26% stake in UnistreamBank, one <strong>of</strong> the leading moneytransfercompanies in Russia.What is the capacity <strong>of</strong> the fund?Aurora Russia raised £75m onadmission to AIM last March. Sincelisting, we have made three investmentsand committed a total <strong>of</strong>approximately £30.1m.We would like to be fully investedby the end <strong>of</strong> September 2007.“Financially, Russia is in a goodposition at the moment. Themacroeconomic environmenthas stabilised and the economycontinues to experiencestrong growth.”john mcroberts, aurora russia limitedFUNDAMENTALSCould you discuss the topic <strong>of</strong> corporategovernance in private companiesin Russia?In my view, corporate governance isa vital ingredient in any early stagegrowth investment, irrespective <strong>of</strong>the market in which the company isoperating.My experience having worked atDeloitte and James at GE, has givenus exposure to and a good understanding<strong>of</strong> some <strong>of</strong> the key corporate-governanceissues which faceprivate companies in Russia. I thereforebelieve that we are in a goodposition to help establish corporategovernanceprocesses in our investeecompanies and ultimately increasethe value <strong>of</strong> these companies.How many companies will you aimto be invested in on at capacity?We now have three investments andintend to invest in three or four morecompanies.Why did you list Aurora on London’sAlternative Investment Market?We came to market last March. Webelieved that there was a strongappetite from listed-company investorsfor Russian companies andbelieved that Aurora would be wellreceived by the market.Could you comment on investmentvaluations, the standards you willuse and who the third-party valuationagent is?Investment valuations are made byan internal valuation committee asopposed to a third-party valuationagent. The committee conductsa comparable company analysis,evaluating the performance <strong>of</strong>the company under considerationalongside a number <strong>of</strong> other listedcompanies. The committee alsolooks at comparable transactions inthe market and uses the net-presentvaluemethod.Name <strong>of</strong> manager:Aurora Investment Advisors LimitedFull name <strong>of</strong> fund:Aurora Russia LimitedAddress <strong>of</strong> manager:Investec House, La Plaiderie,St. Peter Port, Guernsey GYI 3RPPhone contact for further info: +44 (0) 20 7839 7112Launch date <strong>of</strong> fund: IPO 24 March 2006Size <strong>of</strong> portfolio:(Market cap) £67.9mOpen or closed to <strong>new</strong> investors? Closed-ended fund but available tosecondary marketGeographic focus:RussiaAdministrator:Investec Administration Services LimitedAuditor:Deloitte & ToucheInitial fee:2% carry, 20% carryAnnual fee: 2%Is there a high watermark for the performance fee? NoIs the fund listed:Yes, AimDomicile:GuernseyShare classes/currencies: One chare class – commonMinimum investment:£5.1mEnvisioned capacity before s<strong>of</strong>t and/or hard close: £75m
fund pr<strong>of</strong>ile: asset alliance eastern european fundAn Eastern European assetAsset Alliance’s Eastern European Fund<strong>of</strong> Funds is designed to protect on thedownside and capture on the upside asDaniel Axmer (pictured), senior analyston the portfolio at the London group,explains to David Walker...You note five macro features <strong>of</strong>importance in Russia: oil, politicalstability, fiscal strength, WTO negotiationsand market valuations. Couldyou comment on each <strong>of</strong> these?Of course. Oil: Russia is the world’ssecond-largest oil producer and thehigh oil price in recent years hasbeen a very important underpinningfor the resurgence <strong>of</strong> the Russianeconomy. The oil wealth has enabledthe development <strong>of</strong> a domesticeconomy that has led to diversificationand the emergence <strong>of</strong> <strong>new</strong>investable industries.Political stability: PresidentPutin is very popular among Russiansand has been instrumental inimplementing structural reformsfacilitating growth and stability.That said, with presidential electionsdue this year, we anticipate someincrease in market uncertainty.Fiscal strength: FX reservesand the current account and haveimproved tremendously due to acombination <strong>of</strong> high energy andcommodity prices, with fiscal prudence.The central bank reservesare roughly $300bn and the currentaccount is 6% <strong>of</strong> GDP.WTO negotiations: Russia finalisednegotiations with the US at theend <strong>of</strong> last year, and as Russia wasthe largest economy outside theWTO, entry could give the countrythe same boost as China had when itentered in 2001.Market Valuations: Domesticmacro fundamentals and localmarket liquidity are still lookingstrong. Sectors geared towardsdomestic expansion like financials,telecom, utilities and domestic industrialsare especially attractive.What are the main drivers <strong>of</strong> reformand economic growth in EasternEurope?The accession to the EU and eventualadoption <strong>of</strong> the euro by manyEastern European countries hascreated a favourable market environment.Economic convergence in theregion has played a very importantrole. Falling interest rates, lowerinflation and currency stabilisationover the past decade all have createdeconomic stability – leading tohigher consumer and corporate confidence,expansion <strong>of</strong> credit growthand decreases in the cost <strong>of</strong> capital.Lower tax rates, high industrialproductivity growth and cheaplabour costs have increased capitalflows into the region tremendouslyduring the past years. Companiesare becoming more transparentand open to investors – and there’sincreasing investor demand, moreIPOs, and greater M&A activity.Why establish a FoHF focusing onhedge funds in Eastern Europe?The markets are still inefficient comparedto developedmarkets so activemanagers have manyopportunities, plus themarket is now matureenough to implementhedge fund strategiesefficiently. Theinherent volatility <strong>of</strong>local markets benefitsabsolute-return strategies.The increasein stock borrowing,IPOs, ADR/GDRs andM&A activity havecreated a whole <strong>new</strong>dimension in terms <strong>of</strong> the range <strong>of</strong>trades that can be undertaken.Over the past couple <strong>of</strong> years, thehedge fund market has grown exponentiallyand the diversity <strong>of</strong> themanagers in terms <strong>of</strong> quality haswidened, increasing the need forgreater scrutiny.How many funds are in your universe,and how many have you met?The universe has grown considerablyin last two years and nowthere are roughly 100 funds that weconsider investable. The universe isquite young since many <strong>of</strong> the marketswere only established in thelast decade or so. We have met witharound 90% <strong>of</strong> the managers.Do you believe Eastern Europeanmanagers should be based there?No, there isn’t any evidence thatmanagers based locally outperformmanagers based outside the region.Most <strong>of</strong> our managers have multicountrymandates and trade acrossthe entire region so there’s no disadvantageto sit in London comparedto Moscow. However, when runninga country-specific fund or a strategythat requires close contact with localmarkets, we would prefer that themanager has people on the ground.You note M&A activity in EasternEurope is a driver <strong>of</strong> returns. Whatare some <strong>of</strong> the recent deals?Both global and Western Europeancompanies expand operations intoEastern Europe by buying regionalassets. Recently, Unicredito acquiredHVB, the rationale <strong>of</strong> which waspartly driven by HVB’s exposure inEastern Europe. Mittal Steel boughtKryvorizhstal in Ukraine after atough bidding war with Arcelor.The government <strong>of</strong> the CzechRepublic sold its 51% stake inCesky Telecom to Spanish firmTelefónica, Fortis acquired Turkishbank Disbank and in RussiaGazprom bought Sibneft. It is evidentthat mergers and acquisitionsare occurring across multiple sectorsinvolving all types <strong>of</strong> sellersand buyers.Could you give some flavour<strong>of</strong> the breakdown<strong>of</strong> strategies pursued inthe fund <strong>of</strong> funds?There are currentlyfour broad strategiesthat Eastern Europeanhedge funds follow;credit, equity hedge,event-driven and multistrategy.As the regionmatures and develops,we are confident thatmore strategies willappear.How do you cope with volatility andhow does the region’s volatility compareto that <strong>of</strong>, say Western Europe?Volatility is part <strong>of</strong> the attraction <strong>of</strong>the region as it creates opportunitiesfor active managers.Part <strong>of</strong> the argument for investingin the region via hedge funds is thatthey can preserve capital and generatereturns from the volatility.Compared to Western Europe, wherehistorical equity volatility has beenaround 15%, in Eastern Europe ithas been around 30%.Do you find many <strong>of</strong> your underlyingmanagers using <strong>derivatives</strong>?Yes, increasingly so. The fixedincome and currency markets havehad liquid instruments for sometime. The recent developments havemostly been on the equity <strong>derivatives</strong>ide with single-stock options, syntheticsingle-equity swaps, basketproducts, and so on.Most <strong>of</strong> the <strong>derivatives</strong> tradingexecuted in the region still takesplace over the counter.How have you performed in limitingdownside in comparison to some <strong>of</strong>your peers?Since the fund’s launch in April 2006,there have been four down monthsin the region, measured by MSCIEmerging Europe. In three <strong>of</strong> thesemonths, we’ve been either flat orpositive. The start <strong>of</strong> this year wastough for Eastern European equitymarkets, which on average lost 5%during January and February. Overthat period, our FoFs were up roughly2%. In terms <strong>of</strong> peer group, it’s hardto find suitable comparisons sincethere is no other dedicated EasternEuropean FoFs that we know <strong>of</strong>.What diversification and risk-controlprocedures do you employ?On a monthly basis, we have astrategy meeting where we discussEastern European markets to formulatea top-down view. This thentransfers into target strategy allocations.We are fairly active in terms <strong>of</strong>re-balancing between strategies asit is a key component in generatingreturns in this region. The individualmangers we’re invested withhave a high level <strong>of</strong> transparency,so we aggregate exposures on asset,country, sector, and instrumentlevel. We also perform a wide range<strong>of</strong> quantitative analysis like stresstests, liquidity tests, up/down beta,correlations, PCA, cluster analysis,and so on.What liquidity do you have at theunderlying fund level and what doyou <strong>of</strong>fer at the FoF level?The underlying liquidity variesdepending on strategy. Event-drivenmanagers tend to be the least liquid.We have not so far invested in anymanagers with hard lock-ups orliquidity worse than quarterly.We decided early on that wewould have a flexible, liquidproduct, so right now, only two managers<strong>of</strong> 15 have quarterly liquidity– the rest is monthly or better. Onthe FoFs level, we provide monthlyliquidity with 60 days’ notice.What experience have you in theregion?We have been monitoring the hedgefund development in the regionsince 2001 and made the first investmentin 2002 when we launchedour first fund <strong>of</strong> funds. Since then,we’ve made numerous allocationsfrom our fund <strong>of</strong> funds to managersinvesting in the region.What is the biggest threat to yourstrategy’s success?Like any fund <strong>of</strong> funds, strong directionalityin underlying markets withlow volatility would not benefit thestrategy.