MERCHANT BANKING

Introduction
Crosby's Merchant Banking team has expertise in identifying undervalued assets in niche or out-of-favour sectors, typically, with a focus on small and mid-cap companies. The team then works proactively with funding and operating partners to realise value from these assets, and receives its return through a direct equity participation in the deal rather than a cash fee.

Crosby initiated two major new merchant banking deals during 2006 by leading the offers for Orchard Petroleum Ltd. ("Orchard") and Marathon Resources Ltd. ("Marathon"). Although the focus of the Merchant Banking team is on the new deals, the team also works to maximise the value of Crosby's Investment Portfolio. In this regard, significant work has been undertaken in providing mergers and acquisition, corporate finance and capital raising assistance to IB Daiwa Corporation ("IB Daiwa"), White Energy Company Ltd. ("White Energy") and Upstream Marketing and Communications Inc ("Upstream").

Orchard
In October 2006, Crosby launched an A$0.68 per share bid for Orchard, an Australian Stock Exchange (“ASX”)-listed oil and gas company with a portfolio of interests in California. Crosby had followed the company since May 2005, and after the initial approach Crosby entered into discussions with Orchard’s management. In November 2006, Crosby increased its bid to A$0.81 per share, which was unanimously recommended by Orchard’s directors. At the offer price of A$0.81, Orchard has a market capitalisation of approximately US$130 million.

On 13 March 2007, Crosby announced that, having received acceptances in respect of 90.47% of the issued shares of Orchard, the offer is now fully unconditional.

Orchard has a portfolio of 11 high quality prospects, the majority of which are operated by Orchard. Five of the prospects are in partnership with Aera (Shell – Exxon Mobil JV and California’s largest producer) and another on acreage leased from Occidental Petroleum. Since recommending Crosby’s offer, Orchard’s management have successfully drilled 12 wells of a 20-well drilling programme at South Belridge. All the wells drilled to date have recorded good oil and gas shows, and two wells are now producing. This drilling programme has also been achieved at lower cost than previously forecast due to the utilisation of an improved drilling rig.

The other ten prospects, while not as developed as South Belridge, all offer an attractive upside and give Crosby the potential to generate a return over the coming years.

Marathon
In July 2006, Crosby launched an A$0.68 per share bid for Marathon, an ASX-listed uranium exploration company with prospects in South Australia. Marathon's most advanced project is the Mt. Gee uranium deposit, which (based on current resource estimate) is one of the 25 largest known uranium deposits in the world.

Immediately prior to the bid, Marathon shares were trading at A$0.55 per share, and by the end of 2006 they had risen to A$1.85, a 236% increase. On 9 March 2007, Crosby increased the offer to A$3.52, a 6.7% premium to the previous day’s closing price. At A$3.52 Marathon has a market capitalisation of approximately US$161 million based on a fully diluted number of shares.

ASSET MANAGEMENT

The development of the Asset Management business is an important strategic objective. It provides a stable source of income that ensures that Crosby can withstand the volatility within the Merchant Banking business and the Investment Portfolio, and provides complementary businesses to Merchant Banking.

Crosby Wealth Management
Following the rapid growth of 2005, the assets under management of Crosby Wealth Management ("CWM") continued to accumulate and three relationship managers were added to the team. CWM's business strategy is to build a comparative advantage relative to the wealth management divisions of the major global investment banks and, in doing so, ensure that CWM remains well positioned to benefit from the long-term secular increase in wealth throughout the Asia-Pacific region. CWM's comparative advantage is based on its ability to deliver value to clients through offering independent advice tailored to the individual needs of the client, whilst benefiting from a competitive cost structure and the operating infrastructure of a major global bank with an A+ credit rating.

Crosby Active Opportunities Fund
The Crosby Active Opportunities Fund ("CAOF") was launched in December as the Group's first hedge fund. CAOF focuses on Asian and Australasian event-driven active investment strategies in which the CAOF is engaged as an activist owner rather than as a passive shareholder. Although CAOF utilises a similar approach to identifying and extracting value as the Crosby Merchant Banking team, its business is both complementary and additional to that of the Merchant Banking team as CAOF commits its own capital to initiate a deal. CAOF also benefits from having the first right of refusal (but no obligation) to commit capital to support a deal led by Crosby's Merchant Banking team. CAOF targets an absolute unleveraged return of 25%.

CAOF made its first investment in December 2006 when it agreed to join the consortium financing the Crosby led takeover of Orchard Petroleum (see the Merchant Banking section of the Business Review for further details of the takeover). It is anticipated that CAOF will make a second tranche investment in Orchard as acquisition funding is drawn down from the consortium of strategic and financial investors in order to complete the takeover.

In February 2007, CAOF made its second investment when it purchased a convertible note from Global Structured Finance (“GSF”), a privately-held UK investment company, to enable GSF to purchase a 13.4% stake in Darcy Energy UK Holdings Ltd. (“Darcy”) from IB Daiwa. Darcy is the holding company for the Darcy Group, an oil and gas exploration, development and production company with assets in the Gulf of Mexico, USA.

INVESTMENT PORTFOLIO

Introduction
The Investment Portfolio consists primarily of the equity participations from Merchant Banking transactions. At the end of the year, the two largest positions were Crosby’s 24.02% shareholding in IB Daiwa and an effective economic interest in 7% of Indago Petroleum Ltd. (“Indago”). Further details of the Investment Portfolio can be found in Note 17 to the consolidated financial statements on pages 54 and 55 of the Annual Report.

IB Daiwa
IB Daiwa is a JASDAQ listed oil and gas exploration, development and production company with assets onshore and offshore in Texas and Louisiana, USA. IB Daiwa’s two operating subsidiaries, Lodore US Holdings Inc. (“Lodore”) and Darcy, balance high impact/high risk deep gas exploration (Lodore) and low risk exploration and development.

Darcy
Despite delays to production enhancements at existing wells and in bringing new wells onstream, there was considerable progress at Darcy in 2006. The acquisition, in April, of two lease blocks in the Grand Isle field in the Gulf of Mexico resulted in a 167% increase in independently audited 2P reserves to 64.2bcfe, and a 299% increase in 3P reserves to 163.8 bcfe.

In July 2006, Darcy installed a new platform at the East Cameron Block 318. The B3 well was successfully hooked up to the platform in December. The B4 well at East Cameron Block 318, which completed drilling at the end of the year, discovered commercial quantities of gas and commenced production in February 2007.

During 2006, it was decided to restructure the Darcy Group to facilitate fundraising in the international capital markets. The benefits of this restructuring were realised after the year end. In February 2007, Darcy raised $18 million by issuing new shares that represent 13.4% of the enlarged share capital, valuing Darcy at an enterprise value of $215 million. This fundraising will provide the capital to develop the Grand Isle acquisition and pursue further growth opportunities.

Lodore
In January 2006, Lodore announced the discovery of commercial quantities of gas at the Kami Prospect (onshore Louisiana). Production from the Kami Well commenced in May 2006. Kami has independently audited 2P reserves of 5.2 bcfe. In December 2006, the well encountered problems and was shut-in for repair work. The repair work was completed in late February 2007.

Drilling at the Big Mouth Bayou Prospect started in January 2006. During drilling to the target depth of 19,000 feet hydrocarbon-bearing sands were encountered in several zones. The operator of the well, Pel-Tex Petroleum, is currently examining ways in which to commence commercial production. It is expected to take several months to finalise these plans.

At the Endeavor prospect, drilling commenced in November 2006 and is in progress, having reached a depth of 14,370 feet on 14 March 2007. It is expected that drilling will have reached its target depth of 19,490 feet during May 2007. Planning and preparation for drilling at North West Kaplan will only begin after drilling has been completed at Endeavor.

At Padre Island, drilling at the first well, Plum Deep, started in August 2006. Drilling and testing of the three deepest zones has been completed and determined that the zones are non-commercial. The operator of the well, Golden Gate Petroleum, estimates that testing of the shallowest zone will be completed in the first half of 2007.

Corporate Governance and the Kanri Post
During 2006, IB Daiwa made substantial progress in enhancing its corporate governance, risk management and regulatory reporting regime and hence, towards securing its return to JASDAQ’s ‘main’ list from the restrictions of the Kanri Post.

In September 2006, IB Daiwa recruited an experienced, senior executive officer to oversee relations with JASDAQ, and hired a new auditor with experience of the oil and gas industry, and in November 2006, Japan Asia Securities was appointed as its Shukanji (the equivalent of a nominated advisor for AIM companies). The Shukanji plays an important role in a company’s corporate governance and can be seen as a major step for IB Daiwa to return to the normal post of JASDAQ.

Indago
Crosby owns an effective economic interest of approximately 7% in Indago, an AIM-quoted oil and gas exploration and production company operating in the Middle East. Crosby’s holding stems from the Middle Eastern assets of the Novus transaction. There was considerable progress at Indago during 2006. In May 2006, drilling began at the West Bukha-2 appraisal/development well offshore Oman, and, in November 2006, the company announced that initial tests suggested a significant oil and gas project had been discovered. Further testing has underpinned the commercial viability of the West Bukha-2 well.

In October 2006, Indago commenced drilling the first of three wells at the Izz prospect, onshore Oman. In December 2006, this well recorded two gas shows, but it was considered unlikely that the company could achieve a commercial flow rate. Indago will continue to evaluate this prospect and drill the further two planned wells.

Most significantly for Crosby, in March 2007, Indago announced that it had agreed, subject to shareholder approval, to dispose of 100% of its production and development assets and of approximately 50% of its exploration assets to RAK Petroleum for total cash consideration of £194,235,267, which is the equivalent of 72.5p per share on a fully diluted basis. Following the completion of the sale, Indago also announced that they will declare a special dividend of 60p per share payable in April 2007.

The net effect of this is that, Crosby received net of minority interests in Silk Route Petroleum Limited, approximately US$17.4 million of cash in April 2007, whilst retaining further upside through the still-listed Indago entity that holds the remaining exploration assets plus sufficient cash to undertake its exploration programme.

White Energy
Crosby has been actively involved with White Energy for several years, and has accumulated a relatively small position in White Energy in lieu of fees related to corporate finance advice and deal structuring. In August 2006, Crosby placed A$23 million shares on behalf of White Energy. The company is entering a very exciting phase of significant growth. White Energy owns the worldwide license to a coal briquetting process that increases the energy efficiency of low quality coal. The result is emissions savings and reduced transportation and operational costs. White Energy has already entered into two joint ventures to developing processing facilities in Indonesia and is currently in discussions about further joint venture agreements.

SBI Crosby
SBI Crosby is a joint venture with Softbank E2 Capital. SBI Crosby assists small-to-mid size private enterprises in China to raise growth capital and position them for listing in leading stock exchanges. The joint venture provides Crosby with access to asset management opportunities in Greater China. Over the course of the year, Crosby’s share of the joint venture decreased from 50% to 26.72%.