Update of Investment Strategy, Terms of Appointment of Electra Partners

This announcement and the information contained herein is not for release, publication or distribution in whole or in part in or into Canada, Australia or Japan

On 8 June 2006, the Board announced that in order to build on Electra's strong track record of value creation, the Board was undertaking a review of Electra's market, its investment manager and its investment strategy. Under the existing strategy up to one-third of realisation proceeds from the portfolio as at June 2001 are made available for re-investment. 

The results of this review are summarised below:

• The Board considers that Electra has strong potential to continue to create significant value for Shareholders

• The Board is proposing to adopt a new investment strategy whereby Electra returns to full investment of its capital resources in private equity

• The new investment strategy will be complemented by ongoing share buy-backs and the active management of its capital position

• Electra will target a Return on Equity of between 10 and 15 per cent per annum over the long-term

• The Board proposes to appoint Electra Partners as its investment manager as it believes that Electra Partners has the best team to maximise returns on the existing portfolio and to implement the proposed new investment strategy

Sir Brian Williamson, Chairman of Electra Private Equity, said:

"Electra provides Shareholders with liquid and flexible access to the private equity market. By returning to full investment, supplemented by a target Return on Equity of between 10 and 15 per cent per annum over the long term and an active on-market share buy-back programme, the Board believes that Electra will continue to deliver value to Shareholders."

Hugh Mumford, Managing Partner, of Electra Partners, said:

"Private equity is an established and attractive asset class. Electra Partners strong track record and capabilities, coupled with its differentiated approach to private equity investing, has created substantial shareholder value"

This summary should be read in conjunction with the full text of the announcement together with its Appendices. Capitalised terms used in this summary have the meanings given to them in the full announcement.


Lazard & Co., Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for Electra and no one else in connection with the Proposals and will not be responsible to any other person for providing the protections afforded to its clients, nor for providing advice in relation to the Proposals or any other matter referred to or information contained in this document.

This announcement and the information contained herein is not for release, publication or distribution in whole or in part in or into Canada, Australia or Japan

Update of Investment Strategy, Terms of Appointment of Electra Partners
and Related Matters

On 8 June 2006, the Board announced that it was finalising a review of Electra's investment strategy and management arrangements. Having concluded its review the Board is pleased to make the following announcement.

Since the change of investment strategy in April 1999, Electra has created significant value for Shareholders. In the period from 1 April 1999 to 31 August 2006, Electra sold 68 investments realising a total of GBP 2.1 billion, invested GBP 0.6 billion in 52 companies and returned a total of GBP 1.2 billion in cash to Shareholders through tender offers and on-market share buybacks. During this period, Electra's Net Asset Value increased by 89 per cent which compares with a rise in the FTSE All-Share Index of 1 per cent over the same period.

In order to build on this strong track record of value creation, the Board has undertaken a review of Electra's market, its investment manager and its investment strategy. Following this review, the Board considers that Electra has strong potential to continue to create significant value for Shareholders. In order to best achieve this potential, the Board is proposing to adopt a new investment strategy whereby Electra returns to full investment of its capital resources in private equity, complemented by ongoing share buy-backs and the active management of its capital position.

The Board also proposes to appoint Electra Partners as its investment manager. The Board believes that Electra Partners has the best team to maximise returns on the existing portfolio and to implement the proposed new investment strategy.

The existing management arrangements are with EP Private Equity Limited, a limited liability company. If the Proposals are approved, the new management arrangements will be entered into with Electra Partners LLP, a limited liability partnership. From Electra's perspective, this change in corporate form is not material to the substance of the Proposals as the individuals comprising the Senior Management Team who currently manage Electra's assets under the existing arrangements will be responsible for managing those assets under the new arrangements.

Electra's Objective

Following implementation of the Proposals, Electra will target a Return on Equity of between 10 and 15 per cent per annum over the long-term.

Electra will aim to achieve this target Return on Equity by:

• Exploiting a track record of successful private equity investment

• Utilising Electra's inherent competitive advantages as an investor

• Exploiting the proven skills of the Senior Management Team with its strong record of deal flow generation and long-term presence in the private equity market

• Investing in a number of value-creating transactions with a balanced risk profile across a broad range of investment sectors through a variety of financial instruments

• Effecting ongoing on-market share buy-backs to generate shareholder value

• Actively managing its total capital position and gearing, in light of prevailing market conditions

Background to Changes

In making its decision to adopt a revised investment strategy, the Board has had regard to the attractiveness of the private equity market and Electra's ability to exploit the opportunities potentially available in that market, for the benefit of its Shareholders.

In recent years, private equity has become an increasingly popular and established asset class, which has resulted in a substantial increase in the funds being made available for private equity investment opportunities. This increased flow of funds into the private equity market has led to an upturn in the number of transactions financed by private equity groups. The Board strongly believes that in light of these positive market developments, there continues to be a significant role for Electra, which provides investors with liquid and flexible access to the private equity market. Through the Senior Management Team's network and expertise, Electra is able to participate in sizeable transactions alongside other institutions where control of the investment is exercised through the collective holdings of the institutions. Furthermore, unlike many of its competitors who operate within strict investment and realisation mandates and timescales, Electra is able to adopt a more flexible approach to investment including the type of financial instrument in which it invests, its ability to take majority or minority positions in relation to such instruments, and the timing of realisations, which has enabled shareholder value to be maximised by holding investments until the Senior Management Team believes the optimum time for disposal is reached. The Board believes that the benefits of these advantages have been clearly demonstrated by the out performance of Electra's Net Asset Value per Share relative to the FTSE All Share Index over the 15 year period to 31 August 2006.

Investment Strategy and Policy

INVESTMENT STRATEGY

Under the investment strategy approved by Shareholders in June 2001, up to one-third of realisation proceeds from the portfolio as at June 2001 were made available for re-investment. The Board considers that this restriction is no longer appropriate and that shareholder value will be maximised under a strategy whereby all of Electra's capital resources are available for investment in private equity and share buy-backs in proportions that reflect market conditions rather than the fixed proportions described above.

Electra will continue to actively manage its gearing and capital position in light of prevailing market conditions. The Board believes that an on-market share buy-back programme is an important element in generating Shareholder value, and efficiently managing Electra's total capital base and returns. Since July 2004, Electra has repurchased through its on-market share buy-back programme 12.1 million Shares at an average price of GBP 9.28, thereby returning a total of GBP 112.5 million to investors. Since April 1999 Electra has returned a total of GBP 1.2 billion to its Shareholders.

Electra currently has significant net cash resources available on its balance sheet. It is the Board's current intention that Electra will engage in an active on-market share buy-back programme. To this end, a special resolution will be proposed at the EGM to allow Electra to buy up to an additional 14.99 per cent of its Shares. In deciding when to buy-back Shares, the Board will take account of the prospective returns of prevailing investment opportunities and the discount at which the Shares trade to their Net Asset Value. The Directors do not intend to use this authority to purchase Shares unless it is judged at the time that it would result in an increase in Net Asset Value and would be in the best interests of Shareholders generally. Shares purchased under this authority would be cancelled.

Furthermore, the Board will actively manage its total capital position and levels of gearing, subject to prevailing market conditions and to the amounts borrowed by Electra's underlying portfolio companies. 


INVESTMENT POLICY

Consistent with its current investment policy, Electra intends to target private equity opportunities (including direct investment, fund investment and secondary buyouts of portfolios and funds) so that the risks associated with such investments are justified by expected returns. Such investments will be made across a broad range of sectors and types of financial instrument.

Electra will continue to focus principally on Western Europe, with the majority of investments expected to be made in the United Kingdom which continues to be the largest private equity market in Western Europe and where historically Electra has made the majority of its investments. Electra will also continue to invest across all industry sectors, but would expect there to be an emphasis on areas where the Senior Management Team has specific knowledge and expertise. In circumstances where Electra Partners believe that there is merit in gaining exposure to countries and sectors outside Electra Partners' network and expertise, Electra will also consider investing in specific funds managed by a third party with such expertise or co-investing with private equity managers with whom the Senior Management Team has developed a long-standing relationship.

Electra will also continue to invest in a range of financial instruments such as equity, senior equity, convertibles and mezzanine debt.


Electra Partners

APPOINTMENT

Following its review of Electra's investment strategy, the Board has concluded that Electra Partners is the best manager to maximise returns on the existing portfolio and to implement the revised investment strategy and policy. This is supported by the successful track record of the Senior Management Team in managing Electra's assets over the last 15 years as outlined below. Electra Partners will be appointed for an initial period of three years under new arrangements, which are summarised below. Electra Partners regards Electra as its most important client.

Electra Partners is in the process of applying for FSA authorisation and in the event this authorisation is not received prior to the Effective Date, the proposed management agreement will be entered into with EPL for an interim period with such agreement being transferred to Electra Partners once FSA authorisation is received. The existing management agreement will terminate upon the proposed management agreement becoming effective.


TEAM

Electra Partners comprises a team of senior partners supported by investment professionals and administrative staff who together will manage Electra’s business and assets. Following the recruitment of additional investment executives, the team is expected to total at least 35 in number.

The Senior Management Team are:

TRACK RECORD

The members of the Senior Management Team have together built up a strong track record of successful private equity investment over a period of more than 15 years.

Of the 42 UK investments with investment cost greater than GBP 10 million arranged and managed by EPL for Electra over the past 15 years (excluding those made by the Electra European Fund in which Electra has invested but which is managed independently of EPL), 29 investments were led and subsequently managed by the Senior Management Team. In terms of investment value (at cost), these investments amounted to approximately GBP 793 million out of the total investment of GBP 1,075 million. Over the same period, 9 continental investments with investment cost greater than GBP 5 million were overseen by the Senior Management Team. Hugh Mumford has chaired the investment committee of EPL, which approves all investments made by Electra, for the last 17 years.

The investment track record of the Senior Management Team is outlined in the table below.

UK Investments Greater than GBP 10m Attributable to the Senior Management Team*

* Past performance is not indicative of future performance


THE ELECTRA NAME

In 1999, EPL's investment professionals were organised as two separate and distinct teams, one dedicated to managing Electra's assets and the other having responsibility for managing a new European limited partnership private equity fund. The team responsible for managing the European limited partnership private equity fund subsequently left EPL and established a separate and distinct fund management business called Electra Partners Europe LLP. On 31 August 2006, Electra Partners Europe LLP changed its name and removed references to Electra from its business and funds under its management.

In order for Electra Partners to distinguish itself clearly within the private equity sector and to identify its close association with Electra, Electra Partners will be granted a licence to use the Electra name for a period of 5 years from the Effective Date.


Management Arrangements

Electra Partners will be appointed under new arrangements to manage the investments of Electra on a discretionary basis in accordance with Electra’s revised investment strategy. The main commercial terms of the proposed management agreement are summarised below.

PRIORITY PROFIT SHARE

Consistent with the provisions in the current management agreement, Electra Partners will receive an annual payment known as the "priority profit share" equal to 1.5 per cent on the gross value of Electra’s investment portfolio including cash (but excluding any amounts committed to funds established and managed by Electra Partners). The priority profit share is payable quarterly and is calculated on the valuation of investments at the quarter end (as is the current practice).

INCENTIVE ARRANGEMENTS

The current incentive arrangements are structured through a co-investment scheme such that 8 per cent of profits realised on unquoted investments are allocated to former and current executives of EPL on a deal by deal basis. These arrangements will remain in place for the Existing Portfolio, but will be supplemented by the new arrangements, summarised below.

NEW ARRANGEMENTS

Under the proposed incentive arrangements, Direct Investments made in the three financial years to 30 September 2009 will be treated as a separate pool of investments. The members of Electra Partners will receive a carried interest of 18 per cent of net profits (which means profits remaining after deduction of the related priority profit share of 1.5 per cent) on that pool subject to a performance hurdle being achieved and Electra receiving back the aggregate amounts advanced to finance investments in that pool. The performance hurdle requires net profits (as described above) to be not less than a return of 8 per cent per annum compounded annually on the amounts advanced by Electra to finance the acquisition of investments (including related priority profit share) and outstanding from time to time.

Direct Investments made between 1 April 2006 and 30 September 2006 will be deemed to be included in this first three year pool. There are currently 3 assets costing GBP 44 million, in aggregate, in this category.

Similar carried interest arrangements are proposed to be put in place for Fund Investments save that the members of Electra Partners will only be entitled to receive a carried interest of 9 per cent of net profits (as described above).

The Board expects that investment pools will be for periods of three years, although the Board may, from time to time, approve a shorter period in exceptional circumstances. Realisations in respect of investments in each pool may be made during or after expiry of the end of the three year investment pool term.

EXISTING PORTFOLIO

The members of Electra Partners will also be entitled to receive a 10 per cent carried interest on net profits (which means, in respect of the Existing Portfolio, profits remaining after the deduction of the related priority profit share of 1.5 per cent) of the Existing Portfolio subject to Electra receiving back aggregate cash equal to the opening value of the Existing Portfolio (being approximately GBP 160 million at 31 March 2006) and a performance hurdle being achieved. The performance hurdle requires net profits (which means in this instance the profits remaining after deduction of the related priority profit share of 1.5 per cent and payments made under the existing 8 per cent co-investment scheme) to be not less than a return of 15 per cent per annum (compounded annually) on the opening value of the Existing Portfolio including any related priority profit share outstanding from time to time.

MANAGEMENT AGREEMENT TERM AND TERMINATION

The new management agreement will run for an initial three year term commencing as of the Effective Date with a 12 month rolling notice period. Neither party may serve notice to terminate during the first two years of the agreement.

LOAN NOTE

In June 2001, Shareholders approved a transaction between Electra and EPL whereby a GBP 7 million Fixed Rate Unsecured Loan Note ("Loan Note") was issued by Kingsway Holdings Jersey Limited (and guaranteed by EPL) to Electra. The Loan Note does not bear interest and is redeemed over time from the annual priority profit share (in excess of GBP 9 million) paid by Electra to EPL.

Since June 2001, EPL has made GBP 0.5 million in repayments in accordance with the terms of the Loan Note. Given the uncertainty around the quantum and timing of future repayments, the Board has made a series of provisions in Electra's accounts such that by 31 March 2006 the carrying value of the Loan Note had been reduced to zero.

Under the new management agreement, Electra has agreed to cancel the Loan Note in consideration for reducing the amount of priority profit share payable to Electra Partners (the "PPS Reduction") by an amount equal to the amount that would have been payable under the Loan Note to Electra on an annual basis. In addition, Electra has also agreed to grant to Electra Partners an option exercisable at any time after the Effective Date to cancel all future PPS Reductions by paying Electra the equivalent of the net present value of the remaining expected PPS Reductions. This value will be approved by a qualified independent third party.


Board's View of New Management Arrangements

Based on the independent advice provided by MM&K, an independent firm of strategic remuneration consultants with a particular knowledge and focus on the European private equity industry, the Board of Electra considers that the proposed management arrangements are fair and reasonable as they are broadly in-line with management arrangements typically found in private equity fund management. Furthermore, as incentive payments will be linked to the performance of an investment pool as a whole, Electra will be able to offset profits and losses arising from individual investments to determine whether the performance hurdle has been achieved and whether an incentive becomes payable to members of Electra Partners.


Approval and Expected Timetable

The Proposals are subject to approval by Electra's Shareholders. A circular in connection with the Proposals is expected to be despatched on or around 19 September. The EGM is expected to be held on or around 12 October 2006.



Lazard & Co., Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for Electra and no one else in connection with the Proposals and will not be responsible to any other person for providing the protections afforded to its clients, nor for providing advice in relation to the Proposals or any other matter referred to or information contained in this document.



Appendix 1

DEFINITIONS

The following definitions apply throughout this announcement unless the context requires otherwise:

‘‘Board’’ or ‘‘Directors’’ the directors of Electra

"Direct Investments" private equity investments in companies and other entities (excluding Fund Investments) whose securities are not listed or traded on an investment exchange

"Effective Date" the date of the EGM or if the EGM is adjourned, the date on which the EGM is re-convened

‘‘Electra’’ Electra Private Equity PLC

‘‘Electra Partners’’ Electra Partners LLP, a limited liability partnership constituted under the laws of England and Wales, the proposed new investment manager of Electra (registered no. OC320352)

‘‘EPL’’ EP Private Equity Limited (formerly, Electra Partners Limited), a limited liability company incorporated in England and Wales under the Companies Act, the current investment manager of Electra

"Existing Portfolio" the Direct Investments owned by Electra as at 1 April 2006

‘‘Extraordinary General Meeting’’ or ‘‘Meeting’’ or ‘‘EGM’’ the Extraordinary General Meeting of Electra

‘‘IRR’’ Internal rate of return

"FSA" Financial Services Authority

"Fund Investments" investments in funds managed by parties other than Electra Partners including limited partnership funds and collective investment schemes which will comprise no more than 25 per cent of all investments owned by Electra from time to time

‘‘Lazard’’ Lazard & Co., Limited

"MM&K" MM&K Limited, a firm authorised and regulated by the FSA

‘‘Net Asset Value’’ the aggregate value of Electra’s net assets or the value of Electra’s net assets per Share, as the context requires

‘‘Proposals’’ the amendment of Electra’s investment strategy and policy, the authority to make market purchases of Shares and the proposed changes to the management contract and revised management incentive arrangements

‘‘Return on Equity’’ or ‘‘ROE’’ Total ‘Return on Ordinary Activities after Taxation’ divided by opening ‘Total Equity Shareholders Funds’ calculated on an annual basis (as those terms are used in the Report and Accounts for the year ended 30 September 2005)

‘‘Senior Management Team’’ collectively Hugh Mumford, Timothy Syder, David Symondson, Rhian Davies, Philip Dyke, and Stephen Ozin

‘‘Share’’ or ‘‘Shares’’ ordinary shares of 25 pence in Electra

‘‘Shareholder’’ holders of Shares