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Private and Confidential

June 2005

The following sections are now delivered through Astraea. The links below will take you to those sections.

Lord Keynes is quoted as saying, "When the facts change, I change my mind. What do you do, sir?" The success of the Live 8 concerts, which were watched by 3.8 billion people, claims the biggest mandate for change ever assembled in history. It is time for us to change our minds.

Click here to enjoy a tune while you read: Chumbawumba's Not In My Name ... (~4 MB)


Biology is the science of breakthroughs today.  A number of interactions prompt this view, from biomimicry in IT to Intelligence in Nature (Narby), but the shining light is in the field of genetic engineering where recent discoveries have changed our view of DNA  and evolution.  Two discoveries in particular are of note:  Personal characteristics are derived from, not 20 or so bits of DNA as taught till recently, but from several thousand some of which emerge depending on environmental conditions and from the interaction with RNA.  The coding of characteristics has been embedded in DNA for millennia and characteristics emerge depending on evolutionary conditions, not just the genes themselves.  This changing understanding compounds the risk associated with inter-species gene-splicing (i.e. GM food, which has not yet even been proven economically) and suggests that biological and psychological emergence of enlightened humanity could occur in a practical time frame.  The best description of the state of science to day has been Darwin's Watch by Pratchett, Cohen and Stewart.

One of Astraea's founding principles was to focus on education so it is encouraging to see formal attention to education increasing.  It has a long way to go; we know the liabilities of the traditional system, whether public or private, of treating everyone the same, focusing on rote instead of thinking and transferring old science instead of new. But movement is discernible.  In June two big trends were highlighted: the rapid growth of the private education market as parents attempt to remedy the failings of the public system and home life, and the high correlation between wealth and education (coincidentally being addressed by the New York Times and the Wall Street Journal). Education was also raised with us on a micro-scale: We participated in an open space on education, we became involved with two initiatives to bring "big picture" education to main stream executive programmes, my brother launched YouTurn which delivers practical one hour intense courses for homeowners and parents, and in the second week of July we will  deliver a new training course.  While it may be proven that "education works", not everyone buys the rationale.  But what is newly emerging is the extent of institutional recognition of the need to rejuvenate education and the breadth and depth of technology and infrastructure to do so.  And in recognition of the need for poverty alleviation, let's quote PestalozziWorld:  "a trained mind can conquer hunger"!

It appears that professional managers have taken over the role of monarchy in our psyche.  They control the resources we use and get the media attention of kings. In 1974 the top 100 CEOs' pay was 39x the average, today it is over 1,000x the average!  Inequality is desperate.  In 2001 1% of US households earned 20% of the income and owned a third of the assets! For perspective, I recently had the pleasure of sitting next to a 93 year young woman on a plane trip.  She earned $ 2 a day in depression America (like China today!),  and could not afford school.  Her grandchildren are all accomplished today, but we should remember that our perception of our own histories is often conveniently mis-remembered. There were over 50,000 sweat shops in New York.  And today's illusions are not much better - 4,500 out of 7,000 work shops in New York today only pay $ 2 an hour.

Religion keeps appearing on the agenda.  It has been always in the background because of modern wars - Ireland, Middle East, terrorism and recently Iraq.  It was on people's minds with the changing Pope.  But it appears that religion's grasp of political influence has grown beyond expectations.  The principal cause is the increasingly rich and active evangelical movement in America which is influencing government policy, and America influences the world. The southern baptist and evangelical movements have policies and principles founded on unsound doctrine and contrary to scientific fact and prudence (e.g. creationist).  One aspect is healthy - that people are paying more attention to their spiritual practice and ethics.  Unfortunately, politics has infested religion and it appears religion is increasingly intertwined with policy and even process.  It is not surprising that spirituality has a place in American society, after all its native culture was deeply spiritual and many of the first immigrants came to America to experience religious freedom.  However, it is surprising that fundamental doctrine of specific sects is now felt in the administration; because America was founded as a secular nation. It is not one today.


Investment, Finance & V. C.

Two significant transactions hit the headlines in June, both with Chinese companies bidding for US ones. China National Offshore Oil Corporation (CNOOC) has bid $18.5 billion in cash for Unocal, , the ninth-biggest US oil firm, which has large production operations in Asia. It is the biggest takeover offer by a Chinese firm and just after fridge and washing machine maker Haier bid $1.28bn for US domestic appliance group Maytag, the maker of Hoover.

Unocal was committed to an agreed $18 billion merger with Chevron and US lobbying is fighting to prevent the premium bid by CNOOC, although the controversy coincided with comments from Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan, in testimony before the Senate Finance Committee, who recommended that the Bush administration avoid trade sanctions against Chinese goods and manufacturers. The merger of Unocal and CNOOC would be good for all because they have complimentary resources that are easy to integrate, e.g. the gas reserves of Unocal and the distribution capacity of CNOOC. The excuse of energy security is smoke and mirrors, because the US's only practical option for energy security is to develop alternative resource - Hubbert's Peak has peaked! In fact, this rationale would encourage the sale to CNOOC since Unocal (and any oil company) may be considered to be a wasting asset.

There is increasing talk of a housing bubble in the US.  That it exists is not accepted but the evidence is mounting: house prices have spiked in the last three years, the price to earnings for housing is at a 30 year high, mortgage repayment as a percentage of household monthly income is at a 15 year high, sub-prime lending has spiked in the last two years from 8% to 17% of home equity lending, and the percentage of homes bought but not yet under construction is at an all time high (40%).  Home ownership is at 70% so demographics and immigration are not the big demand drivers that they might be in emerging economies.

Insurance giant AIG has seen profits rise by almost a half despite the accounting scandal which forced the departure of its chief executive. The firm said earnings for the three months to March were $3.68bn (£2bn), up 44% from a year earlier. The firm is facing legal action for having overstated its profits by almost $4bn, or 10%, over five years. Maurice "Hank" Greenberg, the firm's chief for 38 years, resigned from all his posts at AIG earlier this year. The figures were boosted by a strong performance in Japan and South East Asia. But analysts pointed out that two key issues - a downgrade by credit rating agencies, making borrowing more expensive, and the leadership changes - both happened in late March, and thus had little effect on performance.

Responsible Investing

In June Novera and Renova Energy, an American company that makes fuel from plants, listed on London's Alternative Investment Market. The two companies join a tiny but growing band of listed small and start-up entrepreneurial companies specialising in technologies that lower emissions of greenhouse gases such as carbon dioxide. So far, the sums raised by the two newly listed companies have been modest - £ 5.3 million for Novera, £ 7 million for Renova - but the growing interest of investors in the field they represent is bringing billions to renewable energy companies the world over.

The worldwide markets for three clean energy types - solar energy using photovoltaic systems which turn light into electricity; wind power; and fuel cells, which turn hydrogen or alcohol into electricity - were worth $ 9.5 billion in 2002 and just over $ 16 billion in 2004. In the UK, regarded as one of the most mature markets for renewable energy, investment in clean technology is growing at 30 per cent a year, according to the Carbon Trust. Last year BT Group, the UK telecommunications company, became the biggest company in the world to commit itself to taking all of its energy from renewable or environmentally sound sources. HSBC followed suit this year and Barclays, the UK banking group, is to run 2,000 of its branches using renewable energy. Starbucks Coffee Company last year decided to buy 5 per cent of its US energy needs from renewable sources.

A report connecting the dots between climate change and investment opportunities coming from the World Resources Institute (WRI), an environmental non-governmental organization (NGO) with market expertise, is not surprising. What is surprising is such a report, entitled Energy Security & Climate Change: Investing in the Clean Car Revolution, being jointly produced with mainstream investment bank Merrill Lynch.

Holistic bodycare and natural medicines specialist Weleda UK reports that sales to independent health food stores are up by a “staggering” 35% on this time last year. The announcement underlines the growing confidence within the health food trade that has been seen over the past 12 months. Weleda, which celebrates its 80th anniversary this year, says that sales across its overall business are also up by a solid 12%. Strong year-on-year growth in recent years has seen total UK sales rise from £3 million in 2000  to £4.2 million in 2004. Internationally, turnover by the Weleda Group is around £100 million.

New York Attorney General Eliot Spitzer suffered his first major defeat in his campaign to clean up big business.  Former Bank of America broker Theodore Sihpol was acquitted by a US court of 29 counts of helping a hedge fund to trade mutual funds illegally. A New York Supreme Court judge also declared a mistrial on four counts on which the jury was deadlocked.

A new study by academics provides evidence that the market value of Hong Kong listed companies is positively and significantly correlated with their corporate governance scores. Click here to download the research paper.

After dismissing electronic waste problems at its annual general meeting, Apple Computers announced it will offer free recycling of iPod music players at its retail stores throughout the US and a 10 percent discount on the same-day purchase of a new iPod. This fulfills the request made by socially responsible investment firm Green Century Capital Management at the AGM; however, the Computer TakeBack Campaign is advocating for Apple to go further, extending its recycling efforts throughout its product lines.

Forest companies received a warning from Time Inc. that their logging practices must meet sustainability criteria, or they won't get the business from the world's largest magazine publisher. David Refkin, director of sustainable development for Time Inc., told the Global Forest and Paper Summit that sustainable development is important to the business world, and it is time for forest companies to stop viewing it as a threat. Time Inc., which buys 650,000 tonnes of paper a year for its publications, does an annual review of its suppliers, evaluating them on a scale of sustainability targets. "Our strategy has been to reward leaders, encourage laggards, and for those who have egregious practices: No business," Refkin said.

Venture Capital

PolyFuel apparently is going to raise £ 12 million, which would give it an enterprise value of around £40 million. It's initial VC funding round provided a post-money valuation of just $13.2 million, while a $15.6 million infusion in 2002 was post-valued at $35 million (according to our VentureXpert database). This is delivering decent returns for first-round backer Mayfield, and later investors like Intel Capital and Chrysalix Energy, and demonstrates that opportunities are attractive in this uncharted line of work.

German Chancellor Gerhard Schroeder recently said he planned to propose strengthening international controls on hedge funds at the G8 summit. Similarly, US Treasury Secretary John Snow has said that US authorities are working on increased monitoring of hedge funds.

Second quarter activity numbers for the US are coming out and it looks like it was good for buyouts though more modest for VC deals.  The strong performance may partly be driven by the volume of capital required to be invested in the coming year.

The Motley Fool has now also weighed in on the US VC overhang, predicting that tech VC will boom over the summer because of the capital overhang that will expire next year - funds must invest capital or lose it. They estimate the overhang at $ 13.5 billion. Thus buyin prices will rise and investors should be wary that their managers do not overpay. It will also be an opportunity for some funds to sell to other funds and potentially get top dollar.

The newly published guide Venture Capital and Private Equity Funds for Development appears to be a useful reference by Holland's International Cooperation and Sustainable Development Committee.  It is fairly priced at € 25 making it accessible to a wide audience. 

Although Africa must be on everyone's mind with the upcoming G8, it is rarely seen as an investment opportunity. But this is now changing fast as it becomes a rapidly emerging market for development VC. Of the billions of dollars of private capital that is circling the globe, looking for a place to land and multiply only 1 per cent of it finds its way to sub-Saharan Africa. This vote of no confidence in Africa on the part of global investors is seen by some as a justification for doubling aid. But this is confounded by the fact that Africa delivers some of the highest returns on investment on the planet. Even more intriguing: despite the misperception that capital shortages are holding back development, banks across east, west and sub-Saharan Africa are actually flush with money. Yet they refuse to lend it to those who can do the most with it: millions of disenfranchised, small-scale African entrepreneurs who could lift Africa out of poverty if given half a chance. the Shell Foundation's recent report Enterprise Solutions to Poverty edited by Kurt Hoffmann offers some guidance on opportunities.

The following note by Thomas Forest Farb, Managing Director of New America Partners, points out why understanding the impact of China is relevant to investing in the US and Europe as well as Asia:

Watch China

Surprisingly, many private equity firms are still making investment decisions without seriously considering the impact of China on their prospective investment. Including an analysis of the impact of China as part of due diligence is now a must. Surprisingly, some firms have not taken the global view, while others formally require that these issues be considered in due diligence.

One of the few mistakes to be made in analyzing China is to underestimate its capabilities. China is now the leading supplier in over 100 product categories. It has achieved the greatest and longest record of economic growth that has been recorded. China cannot be easily discounted - it is likely to succeed as a result of its well educated and disciplined labor force, its high savings rate, low production costs, stable and business-oriented government and massive infrastructure investments. In comparison, while the U.S. is patching its creaky infrastructure, China is boldly initiating major infrastructure projects, although often to the detriment of environmental practices found in other parts of the world. For instance, the Three Gorges Dam project is the largest engineering project in the world, far exceeding Boston's Big Dig, and being brought in a lot closer to budget and schedule.

When conducting its due diligence, there are at least four impacts of China that a private equity firm should consider before making an investment:

  • The U.S. prospective investment's own international sales may be at serious risk - China 's own expertise in Asia is winning Asian markets. There are 56 million ethnic Chinese dispersed in Asia who are not in residence on the mainland. This has given the Chinese the knowledge of each of the Asian markets that allow it to be ferocious competitors. And although the press in the U.S. has focused on the impact of Chinese sourced or manufactured goods in the U.S., one hears little discussion of a related problem - China is not only impacting the U.S. market, but is also competing with U.S. firms in foreign markets such as Europe, Latin Am eric a and Africa.

  • China 's ability to produce goods and services at a significantly lower cost is disrupting the current supply chains - An incredible 55% of the exports of China are related to foreign-owned entities, suggesting all of these products are part of a company's supply chain. This exporting machine is having a significant impact on the structure of many U.S. industries. If ignored, this can devastate a company, if embraced these goods can create an opportunity for a U.S. company to be more competitive, allowing it to build value in other parts of the business. Wage differences can range easily from being 10 to 40 times higher in the U.S. in the manufacturing area. Even financial analysts have compensation approximately five times higher in the U.S.

  • China is having a significant impact on the input costs of many companies - Businesses with inputs that are also in demand in China are potentially vulnerable to not only higher prices but actual scarcity. China is negotiating for commodity after commodity exclusive supply contracts that are turning fungible products into ones that could be unavailable at even greatly higher costs in a shortage situation. China is no longer a marginal player. At the same time that the activity in China has driven up certain natural resource prices, China 's production capability has also put pressure on margins - a double whammy. Maytag, for instance, has suffered from increased cost of steel for its washing machines, while also seeing increased competitive pricing on its products from imports from Haier.

  • Chinese domestic companies are globalizing by developing their own export capability or establishing direct distribution in the U.S. , challenging domestic companies directly - Chinese companies often have very competitive, unconsolidated internal markets running at overcapacity of 20% to 40%. Chinese companies are attempting to achieve scale and operating leverage by exporting and by developing their brand. We already have some significant Chinese brands, including Lenovo, Huawei, Haier, Tsingtao , Giordano, and in the industrial arena, PetroChina and COSCO Shipping.
    There are many product areas where the Chinese supplier can go directly to the U.S. customer of a prospective investment. This will typically occur with products that are lower in technology, closer to commodities rather than brands, do not require much advanced engineering or training, service or ongoing maintenance. Product areas where there is a low end segment may be more vulnerable to a toe hold and then a movement upwards in quality and price. And having higher technology does not necessarily make for a defensible position. Like Japan , Taiwan and Korea , China is quickly climbing the value-added trail.

U.S. private equity firms have to learn to analyze China along at least these four dimensions. They have to be careful not to lose their markets entirely to Made in China . But protectionism won't work, nor will ignoring it, only understanding the opportunity and embracing it will. Unfortunately, understanding how to do business in China is not an easy task for the smaller and mid-sized U.S. firm. It will require some significant expenditure of effort and funds.

Interest Rates and Currencies

As expected US interest rates are continuing to rise and is expected to continue.

Attention on Chinese Yuan revaluation continues, but do not expect anything soon. There are now serious questions about whether or not it is overvalued, even in the US.

Trade and FDI

G8 (the G7 plus Russia) agreed to cancel all the debts that 18 heavily indebted poor countries owe to three multilateral lenders, the World Bank, the International Monetary Fund (IMF) and the African Development Bank (AfDB). The beneficiaries are Guyana, Honduras, Nicaragua, Bolivia and 14 African countries. The debts in question have a face value of about $40 billion, on which an annual average of $1 billion-1.5 billion is paid in debt service. Nine other countries may benefit within a few years, and a further 11 would be eligible if their governments were not so inept and corrupt. One cannot know whether the money promised in London will come in addition to, or instead of, the money they would have given anyway.

Why forgive the debt?  Several personal views available here add colour to our understanding of the inequality of the situation. One follows here ...

My name is Abdul Raufu Mustafa. I'm from Nigeria and I live in Cowley in England. The issue that Nigeria really is bothered about in the conduct of the G8 countries is essentially debt. In the 70s Nigeria borrowed something in the region of 17 billion dollars. Not all of this money got to Nigeria because of collusion between corrupt Nigerian officials and corrupt bankers. But since then Nigeria has paid over 30 billion dollars and still owes another 34 billion dollars in back interest and penalties and the lot. And that has become a major problem for the country because a lot of resources are being diverted just to service the debt. And this is happening in the situation where 7 million Nigerian kids are not having the most basic of primary education. The health system in the country is in dire condition, the universities, the roads, virtually all public infrastructure. That is a situation which is partly contributed to by internal problems but also no doubt by the debt burden. This is an unsustainable debt. And absolutely something has to be done about it at the level of the G8 so that ordinary people in Nigeria can get a look in to the issues of life.

As June draws to a close, the energy focused on the G8 meeting events start to get under way.  Top of the agenda is poverty alleviation and climate change.  Blair, president during this semester, raised the stakes at the end of June by connecting the UK's EU budget with a demand to scrap CAP.  Scrapping CAP would have multiple benefits, even though a few farmers would have to change production practices.  Removing subsidies would raise revenue to emerging economies and would reduce energy consumed by agriculture because emerging economies have more natural production systems.

The Common Agricultural Policy, which swallows more than 40 per cent of Europe's budget for the benefit of just 5 per cent of its population, is a relic of the postwar years, when the predecessor of the Union was founded. As the EU's official history of the CAP, on its website, puts it, 'The memory of postwar food shortages was still vivid and thus agriculture constituted a key element from the outset of the European Community.' Europe is not alone - the farm lobby in the US is also powerful, and Washington subsidises a range of products, from cotton to maize.

The greatest beneficiaries of CAP are the wealthiest landowners! In Britain, European Common Agricultural Policy subsidies are worth £3.5 billion. They are doled out to royalty, the wealthiest of aristocrats, food manufacturers and major agribusinesses. Small rural enterprises, in Britain and in poor countries, go to the wall. Anyone thinking the CAP helps small business should be reminded that last year the Queen received £545,897 for her farms on the Sandringham and Windsor Castle estates. Her eldest son, Prince Charles, did even better. He snaffled £680,835 for his Duchy of Cornwall and Highgrove estates. The CAP handout is now enshrined in the value of rural land. In business parlance, it is capitalised. This is why, as land prices fall in most of the country, farm land has retained its value. It sounds very comforting unless you are a would-be farmer. Peter Hardstaff, head of policy at the World Development Movement, said: 'There are some good reasons to subsidise agriculture in Europe, or anywhere else for that matter. For instance, protecting the environment or supporting small scale local operations. But paying producers or companies to export is a disgrace.' The CAP, far from being redistributive, stifles competition.

Dunce's CAP (from The Observer)

  • The CAP costs the average family in Europe £16 a week in taxes and higher food prices: Europe's food prices are the highest in the world.
  • Each European cow costs taxpayers $2.20 a day, while half the world's population lives on less than $2 a day.
  • Most farmers who receive subsidies earn above the average for their country. The average French farmer earns 60 per cent more than a non-farmer.
  • The 224 largest cereal producers get £47m a year between them - more than the UK spends on aid to Ethiopia.
  • One of the largest recipients of CAP subsidies in the UK is the Duke of Marlborough: more than £1m in the last two years.
  • Europe exports sugar and beef to the developing world at less than half cost price, according to Oxfam.
  • French farmers receive three times more per head from the CAP than Polish farmers.
  • Sugar giant Tate and Lyle received more than £120m in CAP subsidies last year - worth half its profits.
  • Prince Charles received £300,000 in subsidies for his Cornwall estate.
  • EU taxpayers spend almost £3bn a year subsidising powdered milk exports to Jamaica, according to Cafod.
  • Europe exports sugar and beef to the developing world at less than half cost price, according to Oxfam
  • Most farmers who receive subsidies earn above the average for their country. The average French farmer earns 60 per cent more than a non-farmer.
  • Each European cow costs taxpayers $2.20 a day, while half the world's population lives on less than $2 a day

(By the way, we do not accept CAP subsidies at Ballin Temple as a matter of principle - while we can!.)

So it is good to hear that reform of the sugar subsidies is begriming in Europe.  The reforms were necessary after the World Trade Organization last year ruled EU sugar subsidies were illegal following from Brazil - the world's biggest sugar exporter - and Asian producers. By 2009 the price set for white sugar will drop by 39%.  Producers and refiners will be paid to go out of business in beet growing countries.  The reform of sugar subsidies can contribute annually $ 4.9 billion in wealth, much for the benefit of emerging economies that grow cane. We are already seeing the pinch as neighbours growing beet have had to stop and seek alternatives, like contracting. Q&A: EU sugar subsidies

Commodity markets volatility continues to be high because of the role of China.  Raw material prices shot up last year as demand for minerals could not keep pace with demand.  Now, the supply of steel is putting downward pressure on prices and China is delaying delivery of ores.  Global economic conditions will still impact prices, but China's appetite continues to grow and thus we expect the upward trend in prices to continue, with volatility remaining unpredictable and high.  It is likely that prices will rise again within the next couple of quarters.


Activities, Books and Gatherings

June activities focused on finalising our annual returns, final preparations for Astraea Integral - Nurturing Natural Performance and rejuvenating the garden while keeping on top of the weeds! Investment performance was decent.

Extracurricular reading took in Darwin's Watch which can not be recommended highly enough. It offer current science and insights relevant to frontier science (like time travel) and critical issues facing us today (like genetic engineering). Guards, Guards by Pratchett was a great fantasy story with dragons to boot; and it is a prescient parody of the Iraq War - fortunately there is a happy ending!

The PestalozziWorld summer newsletter is now available.  Its a tenth anniversary issue and offers updates on the Asian Village as well as other activities.  The Asian Village will provide accommodation for poor students in North India.  PestalozziWorld supports the education of children in developing economies and has a policy of putting all donations directly to that end, not administration. There is a reception for some Asian Pestalozzians in London on July 19th so if you would like to meet them please contact PestalozziWorld.

We participated in an open space on education, which revealed some great initiatives which are emerging across the country. During the open space I was fortunate to (unintentionally) meet and chat with David Holmgren. David is well grounded and a leading agent of change - for 25 years he has pioneered permaculture design and this is the first occasion upon which he has been persuaded to board a plane to share his views globally (he resists traveling by plane because of the environmental cost). He co-authored the quintessential permaculture text with Bill Mollison. You can find him on the internet at www.holmgren.com.au.




This report has been prepared for information purposes and is not an offer, or an invitation or solicitation to make an offer to buy or sell any securities. This report has not been made with regard to the specific investment objectives, financial situation or the particular needs of any specific persons who may receive this report. It does not purport to be a complete description of the securities, markets or developments or any other material referred to herein. The information on which this report is based, has been obtained from publicly available sources and private sources which may have vested interests in the material referred to herein. Although GRI Equity and the distributors have no specific reasons for believing such information to be false, neither GRI Equity nor the distributors have independently verified such information and no representation or warranty is given that it is up-to-date, accurate and complete. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates and/or their directors, officers and employees may from time to time have a position in the securities mentioned in this report and may buy or sell securities described or recommended in this report. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates may provide investment banking services, or other services, for any company and/or affiliates or subsidiaries of such company whose securities are described or recommended in this report. Neither GRI Equity nor the distributors nor any of their affiliates and/or directors, officers and employees shall in any way be responsible or liable for any losses or damages whatsoever which any person may suffer or incur as a result of acting or otherwise relying upon anything stated or inferred in or omitted from this report.




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