Private and Confidential

August 2006

Perspective
Investment, finance & VC * Interest rates and currencies * Trade & FDI
Activities and Media

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Perspective

In August, the embarrassment of Lebanon and the drama of terror suspect arrests in connection with flights at UK airports drew attention once again to the interconnected nature of our world. Globalisation of humanity is a natural progression as we grow in prosperity and intelligence. But that is surely being tested by our willingness to wage war.

What is the cost of war? It seems that the investment in arms and training, the damage to prosperity locally, the deaths and the devastation must result in some benefit. It is not the alleviation of terror - that increases as we hype ourselves into melodramatic trauma. It is not democracy - that may not even be what some states want and the role models are tarnished. Is it freedom? Or just the opportunity to join the modern world? Perhaps so, but there are small groups that benefit. As well as a general economic vitalisation being a common side effect of waging war, war enriches some. Defence spending has doubled in 5 years, having hardly grown in the previous 10. Oil companies are raking in the cash. Especially if you're winning; hearts at least. Doesn't that mean the country that sues for war is obliged to a higher moral standard? The conflict of interest demands that war can only be in self-defence. Once you move beyond your borders, people of good character demand an extraordinary ethic. It is not good enough simply to know better, to be "right". Parents and teachers always know better, yet the good ones nurture using experience as a tool, but safely. And the bad ones are those conjured up by Charles Dickens, The Wall (Pink Floyd) and, unfortunately, ourselves today in the Middle East.

It seems that America needs our support, even our love. It is emotionally torn between loyalty and pride, virtue and hubris. It is a beautiful country with an important history and a diverse culture. It has been born from the pains of liberty from Independence to Emancipation, but now needs to go all the way. It is great for business, but failing on politics and ethics, despite the love of the people. It has allowed the world to operate with two sets of rules; one for America and one for everyone else. That is not right. The culture of competitiveness must give way to one of cooperation soon. It is not appropriate to "win". America must instead "do it right".

Where is the common sense? We keep talking about war - a war on terrorism. Yet we perpetuate terror in fighting terrorists, as the Israeli debacle in Lebanon showed most recently. We must change the language of politics. We must sue for peace not war. A Peace on Terrorism doesn't fit well in one's mouth, but it sits comfortably in one's mind for that is what we truly want: peace. And we need to reduce terror by bringing peace, not war. War is a vicious spiral of degradation. Peace is a virtuous spiral of well-being. Our world today can only survive in peace.

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Investment, Finance & VC

According to Q2 numbers, Europe's economy is growing faster than the US or Japan. Growth across the 25 members of the European Union (and the 12-nation euro currency group) was 0.9% in the quarter, up from 0.8% in the first quarter and representing 2.8% over the year. Comparable growth figures for the US and Japan were 0.7% and 0.2%. However,Europe is lagging behind its economic rivals when it comes to creating new jobs. During Q2, unemployment across the EU was unchanged at 8%, some distance behind the US with 4.8% unemployment or Japan at 4.1%. But much of this is in the recently joined emerging economies. Poland has the highest jobless rate in the EU, with a 15% jobless toll. Slovakia is second in the unemployment league, with 14% out of work. European inflationary concerns persist and the European Central Bank has been signalled the likelihood of further interest rate rises in order to curb inflation.

France's economic growth in the second quarter of 2006 was praised as "exceptional" at 1.1% expansion. France's GDP had grown by 0.5% in the first three months of 2006 and is expected to grow by 1.9% for 2006 as a whole. France's economy has been slowly turning around, and the government has made it a priority to boost growth and cut the unemployment rate.

The US domestic scene is dominated by a precarious economy. Balanced between a large trade deficit and waning influence over global oil. The nation faces an economy that has been bolstered by regional housing bubbles, if not a national one, yet continues to experience inflation buoyed by consumer sentiment. US consumer spending rose by the largest amount for six months in July, a sign that the slowdown in the economy may not be happening. The Commerce Department said that spending rose by 0.8% in July, the best figure since January, and double the 0.4% gain in June. Yet separate figures showed that inflation remains a problem; non-food, non-energy annual consumer price inflation hit 2.4% in July. This is the largest figure in four years and above the US Federal Reserve's preferred range of 1% to 2%.

The housing market in the US is certainly deflating. Sales of new-built homes in the US fell in July by 4.3% from June, their biggest drop since February, to 1.07 million units. Sales of existing homes fell to their lowest level since the start of 2004. The number of houses available on the market reached a ten-year high. Part of the dampening is due to a string of interest rate rises in the US that has made potential home buyers nervous. The average price of a new home fell to $ 230,000 in July, from $ 233,000 in June, just above the $229,200 recorded in July 2005.

Housing had bolstered consumer spending, stock markets and employment. The downturn will be bad for all. The following reports by John Mauldin paint a foreboding picture. The first is a chart from David Rosenberg, North American economist for Merrill Lynch. Quoting:

"The chart below is rather intriguing - the NAHB homebuilders index leads the S&P 500 by 12 months and with a near-80% correlation - a correlation that over time has actually strengthened, owing to the growing influence that the real estate market has exerted on the overall economic and financial landscape over the past five years. In fact, we can trace almost two-percentage points of the 3 1/2% average annual rate in real GDP over that time frame to the boom in housing construction and home prices - the direct impact on homebuilding, the spin-offs to other sectors like real estate services, architecture, engineering, legal, etc and the multiplier impact from the 'wealth effect' on consumer spending, especially on home improvements and household furnishings."

Further analysis in Barron's on housing, Lon Witter argues that there has not been a housing bubble but a lending bubble. Look at this data:

32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000;
43% of first-time home buyers in 2005 put no money down;
15.2% of 2005 buyers owe at least 10% more than their home is worth (negative equity);
10% of all home owners with mortgages have no equity in their homes (zero equity);
$2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.

Russia, an oil rich country, on the other hand has finished paying off its $ 22.5 billion Soviet-era debt to the Paris Club of international sovereign creditors ahead of schedule. Its huge oil and gas wealth has allowed it to fast-track the repayments, and this has saved $ 7.7 billion servicing costs. Russia even agreed to pay a $ 1 billion premium to certain creditors in compensation for lost interest. Some, including Germany, had objected to Russia repaying its debt in one lump sum because they would miss out. The move will cut the debt burden inherited by Russia from the Soviet Union by more than 90% to $ 3 billion. The Paris Club consists of 19 members including the US, UK, France and Japan. Russia has come a long way since a default on the debt, built up during the life of the Soviet Union, triggered a Russian financial crisis in 1998. The early repayment could boost Russia's sovereign credit rating, which would help attract inward investment. The turnaround in fortunes parallels the trajectory of the price of oil.

As Thomas Friedman articulated in recent articles in ForeignPolicy and the Ecologist, Russia, Iran and others are demonstrating the law of petropolitics: the more free money the government gets from oil, the less it needs worry what others think and tends to reduce government integrity and transparency. These characteristics can even be seen in the good ol' USA where fear reigns beneath the surface and personal freedoms are invaded by an executive without integrity.

Oil companies are raking in the cash with impunity too as shown by BP's ability to withstand the media debacle that has resulted from the company's neglect of a primary feed pipeline in Alaska. Top executives at BP are facing legal action brought by shareholders accusing them of knowing about corrosion which shut a pipeline in the Prudhoe Bay oilfield in Alaska, the US's largest oilfield which accounts for 8% of US production. The investors say they have been let down by failures to repair the pipe , which has been partially closed after a leak, drastically cutting the field's 400,000 barrels per day output. Documents filed with the court accuse BP executives of being aware of the problem of corrosion but alleges they took "no substantial steps to remedy the situation". A congressional committee is set to examine BP's management of the site. It is unclear how this cost will be shared between BP - which owns a quarter of Prudhoe's output - and ConocoPhillips and ExxonMobil, who own the rest. The threat to this supply comes as conflict in the Middle East and worries over supplies from Nigeria have prompted oil prices to hit record highs recently.

Other commodities continue to be buoyed by strong demand from emerging nations such as China and India at a time when supplies are tight. The world's largest mining firm, BHP Billiton, has posted record profits - buoyed by high metals and oil prices. Net profits for the year to 30 June surged 63% to $ 10.45 billion. The massive profits came despite a strike at a Chilean mine, responsible for 8% of the world's copper, where BHP is the majority owner.

Japan's recovery continues as unemployment fell in July to 4.1%, down from 4.2% the previous month. The steady improvement in the labour market should help to lift the economy. However, household spending fell in July 1.3% from a year earlier, cool and rainy weather being blamed. This was the seventh month in a row that there has been a year-on-year decline, and worse than analysts' predictions of a 0.8% drop.

Germany continued its stable recovery showing the best quarterly growth figures since 2001, with the economy growing by 0.9% in Q2. The unemployment rate dropped for the fourth month in a row in July with a better than expected fall of 84,000 and German unemployment is now running at a rate of 8.2%, down from 9.5% at the start of this year. Reductions in the budget deficit and an upturn in the world economy helped to cut unemployment and boost growth. Germany had laboured under slow growth and high unemployment till a couple of years ago. Now increased domestic demand is helping to change the picture. Investment in the construction sector was a major factor in fuelling growth. The World Cup also played a part in helping to lift growth. Merkel plans to raise taxes, a move that may be unpopular and counterproductive if not effectively applied.

The global development report, issued by the UN Conference on Trade and Development, said Japan and Germany need to do more to help stimulate the world economy because the US was having to shoulder too much of the burden of sustaining worldwide demand for goods and services and any big downturn in the US could have serious global repercussions. UNCTAD said that both countries should start buying more imports. Their rationale does not ring true and further reinforces the need to measure economic wellbeing, as well as general national wellbeing, with more constructive tools than GDP. GDP accounts positively for all the weapons sent to the Middle East and the bombs dropped in Iraq and Lebanon, but does not account for the destruction of infrastructure or loss of life. Other measures like Quality of Life Indicators, even Gross National Happiness, are more transparent. The impending downturn also would not look as bad if the measure of success was more balanced.

China's 500 largest companies saw combined profits rise by more than a fifth to 642.8 billion yuan ($ 80.4 billion) last year. Profits rose 23%, according to the China Enterprise Confederation, while combined sales totalled $1.8 trillion. China's red-hot economic growth has been driven by growth in the energy, chemicals, steel and banking sectors. Oil firm Sinopec is China's most profitable, with returns of $ 2.8 billion in 2005. This represented a 108% increase on Sinopec's earnings compared with the previous year, as profits were boosted by oil prices that surged to record highs. China's four other most profitable firms were electricity supplier State Power Grid, China National Petroleum Corporation, the Industrial and Commercial Bank of China and China Mobile. Energy firms have benefited from dominant positions in the marketplace while reforms to laws governing foreign investment in finance firms have boosted bank returns. Of the 500 companies included in the list, 349 are state owned.

Unfortunately success has also spread inequality. The sales of the top 500 accounted for 78% of China's total gross domestic product last year, up from 74% in 2004 and 56% in 2001. Despite the overall growth in returns, the survey revealed that many Chinese firms are struggling to boost profitability. The top 85 companies accounted for 85% of overall profits.

As readers know the banking sector in China has attracted much foreign interest and large public and private equity deal have been done this year. Now foreign banks eager to do business with Chinese retail customers are reviewing new rules that may force them to incorporate in China, put down 1 billion yuan ($125 million) in additional capital and pay higher taxes. China's regulators are finalising details of the rules. The draft rules say authorities will "encourage and guide" overseas banks which want access to the retail market to set up onshore entities with registered capital of 1 billion yuan. That would come on top of the money needed to open branches. The move appears aimed at aligning the rules for foreign and major nationwide domestic lenders, which need to cough up 1 billion yuan to secure banking licenses, as the domestic banking market opens in accordance with pledges made when Beijing joined the World Trade Organisation in 2001.

James Montier of DKW, who has shown good evidence that tested models beat experts in a wide range of fields from medical diagnosis to fund management, will be intrigued by Kaburobos. 10 Kaburobos, or robot fund managers, developed by Trade Science and Monex Beans from Japan will be available from next year. Each offers a different investment strategy built on algorithms back tested 15 years. Koichi Kato, Trade Science CEO, asks "which are you going to choose - a fund manager you don't know or a robot with a clear track record?" The business of fund management is going to get tough soon.

A new study "Its All About Me" by Arijit Chatterjee and Donald Hambrick examines narcissism in the executive ranks of 105 IT firms. The found that narcissistic bosses tend to make bigger decisions with more volatile consequences. This is not a good leadership quality although it may be appropriate in certain circumstances. If you've been wondering about the narcissistic tendencies of your company's CEO, here's what to look for:

The prominence of the CEO's photo in the annual report
The CEO's prominence in company press releases
The length of the CEO's "Who's Who" entry
The frequency of the CEO's use of the first person singular in interviews
The ratio of the CEO's cash compensation to that of the firm's second-highest paid executive
The ratio of the CEO's non-cash compensation to that of the firm's second-highest paid executive

Responsible Investing

China is also revising corporate law. It has passed a new bankruptcy law that will address not only state but also private firms for the first time. The Corporate Bankruptcy Law is aimed at increasing investor confidence. The legislation, which gives greater protection to creditors, will apply to foreign and domestic firms alike. The former law provided no obvious way to liquidate a firm or share the assets between creditors and workers. This new legislation will give creditors greater protection if a firm is bankrupt, whereas in the past redundant workers were paid off first. The move brings China more in line with market-based countries, where it is standard practice to pay creditors first. The bill will also permit firms that are struggling financially to request reorganisation.

The Thompson Extel, UKSIF and Extra-Financial Survey 2006 has some interesting charts. Key issues are outlined. To quote:

"...Alongside the continuing growth of SRI lie two key issues: Firstly, it is apparent from our wider research while that SRI is dismissed in some quarters as a "fad", a way elements of the market are seeking to manufacture business opportunities, and not really a genuine issue for investors, we would refute that strongly, and see the output from the Survey very clearly s u p p o rting our view, it is interesting how the rapid rise in SRI and oil & gas prices over the last year has worked through to influence investor sentiment in SRI terms. Resource efficiency and cost of carbon are both areas with a far higher profile this year than last In a way, this is encouraging, as both are very pertinent to financial performance of companies, and it has long been the case that SRI has been dismissed as "soft", and something intangible, not exactly related to balance sheets. However, the crux of SRI is long-term sustainability - which companies are operating and set up to continue to deliver value over the longer term, based on their business practices and their understanding of the wider implications of what they do, and the environment in which they operate. The 2006 focus on oil and carbon, while it can be argued shows concern on the long-term issues around oil reserves and availability, seems to us more a short-term reaction.

Secondly, and this comes to the heart of niche vs. mainstream. SRI, and SRI research, quite definitely continues to grow. The numbers in the Survey demonstrates that clearly. Yet investors are frustrated that analysts and brokers continue, by and large, to treat SRI as a separate discipline. It is clear they want it more integrated into all research and analysis, and to be an integral element of such analysis. That is both to support SRI funds, and the decision process the buyside take here, and to support the mainstream. We do see SRI becoming mainstream, in part as the issues around SRI become mainstream themselves, and the oil price would be an example of that. However it is still partial and uncertain progress - on both sides of the investment community. Very much part of this, and a reflection of the flux in the market, is the question of what extra-financial research/SRI investing is. Does it cover ESG, SEE, Intangibles, Value -Added, Corporate Governance, etc? The lack of consensus on terminology hampers the mainstream uptake, and in some regards is, we feel, an arid debate. However delineated, these issues are financial, and of directrelevance in valuing stocks and managing port folios."

There is some evidence that micro lending is not the panaceae that some hope it might be. There is an issue about whether borrowers should be borrowing in the first place. There are many successes, but as in any country it is possible that some people make financially unhealthy decisions because of unawareness or inexperience. This is reduced as general levels of education, particularly literacy, rise.

Also, a report by The Economist concludes that microlending has helped reveal that moneylenders are not as bad as their reputation indicates because they do serve a group on terms that are being legitimised in some respects by microcredit. And by one measure moneylenders supply 30% of microcredit business in one MFI.

Coca-Cola Enterprises, the world's largest beverage company, released its first company-wide Corporate Responsibility and Sustainability Review detailing the company's impacts on communities around the world. We are sceptical of the company's authenticity, having seen the top executives of Coke lecture audiences on the community benefits of the company against the backdrop of photos of students playing sports and drinking a high sugar, carbonated, branded drink. The report was released at a time when the company is facing growing protests in India, where activists say its products contain high levels of pesticides and its operations are depleting limited water supplies, and in Colombia, where it has also been targeted for labour practices.

These allegations against Coca-Cola not only harm the company's reputation and brand image, but have a financial impact through reduced sales. The Indian market, a key area for many global firms, has been threatened by these developments, and negative sentiment can also transfer to primary markets in North America and Europe. In Colombia, company efforts to block the formation of a union led to abusive tactics that included murder and employee intimidation, say human rights activists. Although the company declares that an independent audit showed that the workplace environment was not abusive, the allegations led to Coca-Cola products being removed from many university campuses in the United States.

Coca-Cola's situation epitomises two aspects of global business that are becoming increasingly important. Local communities are becoming more aware of the impacts such corporations have on their lives, and companies in turn are developing a better understanding of how to minimise those impacts that are perceived as negative. The situations often are complex, however, and obtaining the correct facts is difficult.

Greenpeace has launched a "Guide to Greener Electronics" which ranks companies on their use of harmful chemicals and electronic waste recycling. The environmental group says it hopes the guide will be used "to create demand for toxic-free electronics which can be safely recycled, by informing consumers about company performance on these two issues." The scorecard ranks the 14 top computer producers and currently all fail to get a green ranking. Nokia and Dell share the top spot in the ranking. They believe that as producers they should bear individual responsibility for taking back and reusing or recycling their own-brand discarded products. Nokia leads the way on eliminating toxic chemicals, since the end of 2005 all new models of mobiles are free of polyvinyl chloride (PVC) and all new components to be free of brominated flame retardants from the start of 2007. Dell has also set ambitious targets for eliminating these harmful substances from their products. Third place goes to HP, followed by Sony Ericsson (4th), Samsung (5th), Sony (6th), LG Electronics (7th), Panasonic (8th), Toshiba (9th), Fujitsu Siemens Computers (10th), Apple (11th), Acer (12th) and Motorola (13th). Lenovo is in bottom position. It earns points for chemicals management and providing some voluntary product take back programs, but it needs to do better on all criteria.

The European Union this week unveiled a proposed "action plan" that would boost sustainable chemistry, industrial biotechnology and chemical engineering research, development, and innovation in Europe. The European Technology Platform for Sustainable Chemistry (download here - 17.4 MB), or SusChem, seeks to foster and focus European research in these areas and "offers an unique opportunity to focus European spending in chemical R&D towards the most promising areas in respect of their impact on the overall goal of sustainability and a high level of competitiveness,” says the report. The report emphasizes that "Sustainable chemistry is a key driver for innovation in many technologies and disciplines, providing the knowledge to improve the benefits of traditional technologies and combine them with nano- and biotechnologies, leading to new and improved products.”

Other technologies described in the report range from renewables (solar, wind, biofuels), hydrogen fuel cells, “plants for the future,” nanomedicine, photovoltaics, and zero emission fossil fuel power plants.

The current three-year hot streak of energy stocks places ethical investors in a bit of a bind - most traditional energy technologies significantly degrade the environment, while most clean energy technologies are still nascent, and hence carry substantial risk and volatility. Investment research analyst Rich Williams of Phaethon has teamed up with investment advisor Bill Cunningham of Creative Investment Research to make a case for hydropower as a means of gaining exposure to the bullish energy market through a clean energy technology that helps address climate change, notwithstanding some negative environmental impact. From a universe of ten US and Canadian companies with significant commitments to hydro, the pair has created a model portfolio of six companies that are best positioned to perform well financially. The portfolio includes Avista ( AVA), Brookfield Asset Management (BAM), Idacorp (IDA), PG&E (PCG), Portland General (PGB), and TransCanada (TRP).

At World Water Week in Stockholm at the end of August, businesses and governments were encouraged to urgently recognise the essential economic value of water in their strategies and policies, according to two new reports published by industry and environmentalists. In the first, the World Business Council for Sustainable Development says water shortages pose potentially as serious a challenge as climate change.It explores three future scenarios to understand how businesses can contribute to sustainable water management, including an analysis of innovation in water efficiency, security of water supply and water rights. The second report, from WWF, echoes sentiments in the first. Its authors show that water crises are no longer a problem restricted to the developing world. James Cameron, vice-chairman of Climate Change Capital, a UK bank focused on low-carbon projects, says: “Managing water will be a premium business to be in.” These issues are elaborated in Risk and Terror where the development of hydrological warfare is introduced and in Holonics/Environment where the tensions on the environment are discussed.

Venture Capital

Private equity returns improved in the short term and showed continued stability in the long term for the period ending March 31st 2006, according to Thomson Financial and the National Venture Capital Association. At the end of the first quarter, the one, three and five year returns improved for both venture capital and buyout funds compared to Q4 2005 and the same period one year ago. Long term performance remained steady and continued to outperform both the S&P 500 and NASDAQ for the ten and twenty year horizons. Short term performance showed an increase with the one year venture capital returns posting a 19.8% return for Q1 2006 up from 13.3% in Q4 2005. Five year returns improved, but remained in negative territory at -4.4% up from -6.7% in Q4 2005. This negative return continues to reflect the aftermath of the tech bubble burst. Ten and twenty year returns remained steady at 22.7% and 16.5% respectively. One year buyout returns saw a very slight increase posting 25.5% for Q1 2006 compared to 25.3% for Q4 2005. Ten and twenty year buyout returns were relatively steady at 8.9% and 13.3% respectively.

We've had conversations and read views that suggest there is an emphasis on large transactions in the major markets globally - private equity is booming but venture capital is more difficult. Data coming out in the coming quarters will confirm or deny this observation.

Global private equity investment in clean energy has soared to more than $ 2 billion in the second quarter of 2006, according to figures from New Energy Finance. The London-based analysts said this was 3x the amount of venture capital and equity investment in the first quarter of 2006, and 2x the figure for the same period last year. In the first half of 2006, $ 19.3 billion was invested in the sector, of which $3.8bn was venture capital or private equity money. The number of deals also increased to 88, against 66 in the first quarter and 78 in the second quarter of 2005. The average deal size also grew, suggesting that investors remain confident about the sector as it grows. NEF said the surge in private investment in public equity (PIPE) was particularly noteworthy. Traditionally, private investors have been a last resort for publicly-listed companies raising funds, but this year they have taken centre stage in the clean energy sector. PIPE investments reached $556 million in Q2, compared to just $21 million in Q1 and $28 million in the same period of 2005. NEF forecasts that total venture capital and private equity deal value between 2006 and 2012 in the sector will be just over $100 billion.

BusinessWeek published a special report on clean energy in mid-August Wall Street's New Love Affair - Why some of the world's smartest investors are betting billions on clean energy. And the FT reckons that investors have never had a greater range of opportunities to put money into clean technology - from funding a couple of academics with nothing but a lab and a good idea to buying into funds that invest in public companies. Returns can be good too. Merrill Lynch New Energy Technology is up 202% over three years while Impax Environmental Markets is up 138% over three years. The sector is strengthened by a number of powerful factors, including: growing acceptance of the realities of climate change and the need to do something about it; regulatory pressures resulting from that knowledge; the high oil price and fears over energy security.

Its not just clean energy that is a focus of interest, private equity players are also interested in China and India. There, the ongoing war for the hearts, minds and money of private equity and venture capital investors is turning into a rout. Trends in Asia for the first seven months of the year show that India is raising 4x the funds that are being raised in China. The reasons revolve around an industry reorganisation in China and a large welcome mat in India. In China, which is preparing to enact stricter regulations for private equity and venture capital activity, the government is in the early stages of completely re-organizing its approach and control over foreign private equity investments in this country. China's State Administration for Industry and Commerce, Ministry of Commerce, General Administration of Customs and the State Administration of Foreign Exchange have issued their joint opinions for China's latest venture capital regulations. (See the announcement on the MOFCOM website.) In the long-term, having a single policy created and enforced by a half dozen regulatory agencies is no doubt good for the industry and China alike, in the short scheme of things, the introduction of another series of regulations and approvals means more delays.

China's reorganisation of the financial sector is necessary but painful. Yet another Chinese private equity buyout deal, completed months ago, has disappeared into the black hole of bureaucracy, otherwise known as China's regulatory approval process. CVC Asia Pacific´s deal to buy a portion Shandong Chenming Paper for $623 million is now being declared dead. This is the latest buyout effort to fail after Chinese government regulators and officials announced a policy change in which foreign investors are no longer allowed to acquire majority control of companies in designated Chinese industries. The paper or pulp industry was not specifically included in earlier statements. Private equity in China may come back on track, once the government has reset the investment landscape more to their advantage. Meanwhile, everyone agrees that PE activity in India continues to build momentum.

In India, on the other hand, the government has put out the “open for business” sign in large print. For example, the government approved KKR’s half-billion dollar acquisition of Flextronics’ software development arm in India. It was a resounding affirmation that India welcomes the investments of overseas private equity and venture firms. Meanwhile, a flurry of new VC and PE funds have been announced for India, including vehicles from Sequoia, Matrix, NEA and Helion, among others. More importantly there are deals galore as the investment pace in India is on the increase. New funds include a $700 million Henderson India Fund and a $300 million Apax India Fund. The CDC announced three new fund investments in India, bringing the total number of its commitments there to seven funds. Evolvence has acknowledged it has committed to six new funds in India. But of note in India are not just the new funds and ventures deals. There are an increasing number of spinouts in India by corporate and family groups seeking pre-IPO capital. Tata, for instance, was one of three group’s announcing plans to “unlock value” in captive operations through spinouts. Overall, a dozen or so such pre-IPO financings have appeared in the last three months. When all is said and done, India is set to fulfill predictions of overtaking China this year.

Waste Remedies, a St. Louis-based corporate consulting firm focused on waste management, has raised $8.5 million in VC funding from Advantage Capital Partners, Southwest Bank of St. Louis and company management.

Chrysalix Energy, a Vancouver-based VC firm focused on clean-tech, closed its second fund with C$ 70 million in capital commitments. Limited partners include Robeco, Saristar Enterprises, Citigroup Venture Capital International, Teachers’ Private Capital, West LB Mellon Asset Management, Delta Lloyd, Kuwait Petroleum Corp, Essent, Mitsubishi Corp., BASF Venture Capital and Shell Hydrogen.

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Interest Rates and Currencies

Interest rates in Europe rose in early August while those in the US paused. The ECB put rates up to 3% and the UK put rates at 4.75%. All economies are acutely sensitive to inflationary pressure.

Although the US economy has shown signs of slowing, especially the housing sector, prices and wages have not slowed. The Fed's rate decisions remain tough, though pragmatism suggests it will rise before year end. If the housing market crashes, it will be very difficult to raise rates, in fact there will be strong incentive to lower rates. But this will reduce incentives to save, which Americans need to do more of, and be dangerous if inflation continues. It is time to save the old fashioned way - by spending less.

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Trade and FDI

"World Investment Prospects to 2010: Boom or Backlash?" was released by EIU and Columbia Business School. It principally discusses FDI with forecasts to 2010 and useful for economists, global investors and business planners/developers. A Special Edition of the report is here or the full report can be purchased at http://store.eiu.com.

WTO Doha round talks remain stymied. Although a number of well meaning attempts to reinvigorate them have been made the biggest players are not setting a good example. US Federal Reserve chief Ben Bernanke warned of the threat posed to world economic growth by protectionism. Speaking at an economic conference, Mr Bernanke said "economic growth should not be taken for granted" and that protectionism, while a "natural reaction" to globalisation, was not desirable. This is a more positive stance than the protection of agricultural commodity markets and policies that contributed to the stalling of WTO Doha talks last month.

Japan has suspended US long-grain rice imports after supplies were found to contain a genetically engineered variety that is unapproved for sale. The European Commission is also moving to block imports of US rice to avoid further contamination. "Trace amounts" of the experimental rice variety were detected in US commercial supplies by the German company Bayer CropScience. Bayer then notified US officials about the positive test. The genetically engineered rice variety, LLRICE 601, possesses bacterial DNA that makes the rice plants resistant to a weedkiller. The strain is not approved for sale in the US, but two other strains of rice with the same genetically engineered protein are. This sad situation is made more ironic by the US's WTO actions aimed at forcing Europe to open markets to GMO. The contamination could damage the U.S. $1 billion rice export market. ( More in Holonics/Environment.) Last year, Japan and the EU banned US corn imports as a result of yet another GM contamination scandal.

The government of the Indian state of Kerala banned the sale and production of Coke, Pepsi, Sprite and other drinks. Four other states have already banned the drinks from schools, colleges and government offices. The action has been sparked by a research group in New Delhi that last week claimed the drinks contained pesticide residue. Pepsi coincidentally has just named Indra Nooyi, an American with Indian roots, as new CEO to replace Steve Reinemund.

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Activities and Media

Harvest season is in full swing so we are racing to crop, share and preserve the garden output. Courgette, tomatoes, beetroots, lettuce, carrots and more are ready. It is a wonderful bounty. But it is also fragile - inclement weather can cause quick damage and we are reminded of the fragility of nature as well as its bounty. We are looking forward to Autumn in the northern hemisphere after a hot summer.

The World Future Society annual gathering which took place in July has put papers online here. There are always thought provoking and educational views expressed by this society, particularly useful for business owners, strategists, long term investors and asset managers.

There has been heightened discussion of the role of philanthropy in our world since Buffett gave billions to Gates to manage. We raised concerns about this laissez-faire approach, notwithstanding that the high profile gift needs to be emulated. The irony is that private giving in the US is greater than anywhere else in the world, but public aid is so limited that the combination of the two leaves the US lagging far behind its peers. Scandinavian countries top the list of giving per person. For those of you in a position to consider significant giving we strongly recommend the conference Executive Philanthropy in London on 10 October. This interactive one day London conference will examine cutting edge practice for mutually beneficial relationships that corporates and charities can form. The conference looks at philanthropy from many perspectives, focusing particularly on innovative ways organisations have achieved corporate value through philanthropic activities, as well as the best practice gleaned from inspiring entrepreneurial pace setters. Charles Handy, the leading business guru, who has recently released The Philanthropists, will play a key role in the conference.

We also recommend a new blog launched by The Asymetric Threats Contingency Alliance and Deepak Chopra's Intent Blog. ATCA is populated by 5,000 invited leaders of business and government and offers insightful views on topical issues by leaders in fields of government, research and industry. The blog is launched with a series of 11 Open ATCA Socratic Dialogues at IntentBlog on The Hydrogen Economy, Climate Chaos, Einstein-Russell, New Orleans, Buddha, Blended Value, Iran, Advaita, Social Entrepreneurship, Unity and Non-Violence. ATCA conducts collective Socratic dialogue on global opportunities and threats and is worth a browse.

I took another Pratchett detour reading The Carpet People - his first novel but the rewritten, published version. This might also be suitable for younger readers, though his invigorating satire remains.

I also enjoyed One World by Peter Singer. Singer is one of my favourite authors because of his deeply reasoned and well balanced thought. He uses illustrations that hit home and raises issues that are often hidden. One World discusses the necessity of rapidly improving global governance because many of the issues that impact our communities are without national boundaries. It is strongly recommended for strategists, international lawyers, government related groups and long term investors.

Peace One Day is a website which promotes a film on peace and celebrates World Peace Day on September 21.

Please forward this publication to family and friends, place it on websites, print it, duplicate it and post it freely. Knowledge is power!
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