Unifi Alternative Investment Fund Prefac face Investor Predicament - - PowerPoint PPT Presentation

Unifi Alternative Investment Fund

Prefac face

Investor Predicament

Conventional Equity

• High

/ above average return potential

• Accompanied by extreme

volatility Conventional Debt

• Low

/ below average volatility

• Hardly any real returns

post tax and inflation Cyclicality of asset values combined with misconstructed risk-return expectations push investors to either

• settle for sub-par returns (or)
• bear volatility beyond one’s temperament leading to

capital loss

Unifi AIF Proposition

Event Arbitrage

• Consistent above average

returns (~15%)

• Minimal / below average

volatility (~12%) Risk adjusted arbitrage

• pportunities arising from
• corporate events
• systemic changes
• macro-economic cycles

Overview

Inves estme ment nt Objecti ctive Unifi High Yield AIF is a discretionary fund focusing on event arbitrage and structured investment opportunities across multiple asset classes with an objective to generate absolute returns of 15% p.a with a standard deviation of 12% or less. The endeavor is to consistently generate superior compounded annual returns than conventional fixed income instruments with uncompromising emphasis on capital preservation.

Unifi Capital Pvt. Ltd. Fund Manager

Min Investment INR 1 crore Performance Reporting Monthly NAV & Quarterly Review Independent Custodian & Accountant IL&FS Securities Services Ltd Lock in period None Tenure Open ended; Monthly subscription and redemption Fees 1% per annum fixed and 20% performance

• ver hurdle rate (Monthly Chargeable)

Valuation S&P CRISIL Launch Date 04-Apr-2013. AUM (INR Crs) INR 409 crores Hurdle Rate Non cumulative pre tax return of 10% per annum Setup Fees None

Investment Allocation Approach

Rise Fall

Unifi AIF’s core investment strategy is to exploit corporate event arbitrage

• pportunities

that inherently have limited correlation to economic cycles and market volatility. In the debt segment, the focus is on high yield

• pportunities with an accrual mindset

besides tax efficiency. Event Arbitrage Nominal Bonds High Yield Bonds Select Equities Event Arbitrage High Yield Bonds Select Equities Event Arbitrage Floating rate notes Gold ETFs Event Arbitrage - 100% acceptance Nominal Bonds

Change in Economi mic c Growth th Rate Expectatio tations Change in I Inflation Expectatio tations Rise Fall

• 5.0
• 5.0

10.0 15.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Real GDP WPI Inflation

Rise Fall Rise Fall

Investment Allocation

Strategies Instruments Indicative Allocation Avg Allocation CY 2017 Avg Allocation CY 2016 Avg Allocation CY 2015 Event Arbitrage Arbitrage opportunities in Listed Equities arising from open offers, delisting, mergers & de-mergers, IPOs, Cash-Futures

0 – 100% 24% 20.0% 19.5%

Nominal Bonds Conventional AAA & AA bonds of various Indian Companies – Typically HTM

0 – 50% 22% 22.3% 21.8%

Structured & High yield Debt Structured Secured Corporate Debt, Commercial Papers, short term bonds and tax efficient Preference Shares

• f

NBFCs focusing on Housing, SME , CV, Agri and Micro Finance.

0 – 75% 47% 46% 50%

Directional Calls Equity, G-Secs and AAA debt (duration calls)

0 – 10% 1% 2.1% 1.7%

Cash / Liquid For liquidity purposes/ temporary parking of funds.

6% 7.3% 9.7%

Investment Strategy

• Emerge from corporate events like acquisition, buyback regulation triggered /

voluntary open offers made to the public by controlling shareholders, company delisting, merger of two listed companies etc.

• The risk- return pay-off in most of such deals is deal-specific and has limited

correlation to market cycles.

• Emerge in such cases due to the perceived discount in the pre-event market price in

relation to the open offer / post-event price, occurring largely due to asymmetric information distribution, difference in investment objectives and expectation amongst investors

Event nt Arbitrag age opport rtuni nities ies

• Also emerge across asset classes including
• Conventional Debt (Wholesale-Retail Arbitrage; Subsidiary-Holding Company

Arbitrage)

• Structured High Yield Debt issuances collateralized with home loan, auto loan, micro

finance receivables etc (Asset Liability Management Arbitrage in Alternative NBFCs )

Debt t Arbitr trage ge opport rtuni nities ties

Unifi Event Arbitrage - Track Record

15 15+ Years 150 150+ investments (Out of 200+ opportunities reviewed) 1500 1500+ crores deployed successfully ~ 15 15% CAGR returns with a standard deviation of ~ 7% (Adjusted for Cash) Synopsis of past performance Total no. of deals till Jan 2018 183 Profitable deals 161 Average returns per deal 6% Average tenure of deals 3 - 4 months

• 30.00%
• 20.00%
• 10.00%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 20 40 60 80 100 120 140 160

% Returns Sequential Event Arbitrage Deals

Event Arbitrage

In a typical open offer, the price movement during the period between public announcement and the offer closure is largely insulated from market volatility and delivers a debt like absolute return.

Particulars FY17 FY16 FY15 FY14 FY13 FY12 Total no. of

• ffers

51 73 60 60 74 71

• No. of offers

participated 2 7 9 12 16 11 Average offer size (in crs) 186 161 287 3941 523 288 Largest Offer invested (in crs) 415 1621 11449 29200 5222 931 Smallest Offer invested (in crs) 115 26 251 30 40 27

175 185 195 205 215 225 10000 20000 30000 40000 14/07/2015 14/08/2015 14/09/2015 14/10/2015 14/11/2015 14/12/2015 Share Price Volume (in 00's)

IIFL Open Offer

Volumes (in 00's) Share Price

Similar to Debt Returns PA Date: 14 Jul 2015 Purchase Date: 25 Aug 2015 Purchase Date: 185 Offer Price: 195 Payment Date: 8th Dec 2015 Acceptance: 100% Return: 5.40% Annualized Returns: 18.79%

20 40 60 80 100 120 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Historical No of Open Offers

Merger Arbitrage Case Study – (HCL – Geometric ric Merger) HCL-Geometric merger was announced in Apr 2016 wherein for every 43 shares of Geometric, its shareholder would get 10 shares of HCL Tech and 43 preference shares of 3DL PLM (7% redeemable) with a face value of Rs.68 each. We started tracking the spreads and entered into the trade in April 2016 where we reckoned that we could make 14% per annum. We bought shares of Geometric and sold HCL Tech in the futures market. HCL Tech being a highly liquid F&O scrip enabled us to hedge our Geometric exposure completely and lock-in the desired spreads. All the deal related approvals were obtained by Jan 2017 and the spreads had also narrowed to 8% p.a by then. As we had realized the intended holding period return

• f 14% p.a, we exited the trade during February month just before the record date for share swap and

moved into another opportunity with better yield. . Below is the timeline of approvals and respective spreads.

Event Date Annualized return Merger Announcement date 1-Apr-16 25.22% Unifi Entered the trade 4-Apr-16 14.97% NOC approval from exchange 8-Jun-16 13.61% CCI Approval 21-Aug-16 14.10% Shareholders approval 4-Oct-16 16.50% High Court Approval 14-Dec-16 11.55% Copy of High court approval submitted to exchange 18-Jan-17 12.05% Unifi Exit prior to record date of 15-03-17 28-Feb-17 7.83%

80.00 90.00 100.00 110.00 120.00 130.00 140.00

HCL - Geometric Price Movement

HCL Tech Geometric

Debt Investments – Approach and Strategy

In Investment vestment Str Strat ategy egy

• The focus would be on opportunities in the AA to Investment Grade

segment to optimize after tax yields while balancing risks. Typically, all debt investments are made with Hold to Maturity (HTM) mindset but some of it could be traded opportunistically to maximize capital appreciation or minimize risk. Arbitrage opportunities emerging from the following possibilities will be actively pursued to enhance the overall portfolio yields.

Wholesa lesale le to to Retail ail – Bulk Buying from Bank Treasuries / Primary Issuances at finer rates and selling in smaller lots with a mark-up to HNIs / Private Provident Fund Treasuries. Aggr Aggregat egator of

• f Ret

etail ail Lo Lots ts – Provide the much needed liquidity channel for retail bond holders at market yields plus spread. Sub Subsidiary ary – Hold lding ng Co Compa pany ny – Focus on 100% Subsidiaries whose papers are rated lower than their highly rated Parent companies but offer an higher yield. Ta Tactic tical al Call Calls - Consider macro-economy driven opportunities like softening of Yield Curve (duration play) due to fall in Interest Rates and conducive Rating Upgrades cycle resulting in capital gains.

Debt Investments – Approach and Strategy Stru Structure ctured Pap apers ers from from Em Emerg erging Financ ncia ial Se Sectors ctors- Consider high yield opportunities arising from well-capitalized and professionally managed Alternative NBFCs focusing on The following criteria is firmly applied for selection of investment opportunities in this segment -

• Fundamentally sound and profitable business model
• Management with proven track record
• Robust process for credit evaluation, security creation, operations control and collections
• Presence of seasoned Private Equity investors in the board
• Recent round of promoter / private equity infusion strengthening the capital adequacy
• Short Term Maturity and being in the top quadrant of the Company’s Liability

Repayment profile thereby placing our exposure in a positive Asset Liability bucket.

Affordable Housing SME Financing backed by Mortgages Commercial Vehicles Financing Micro Financing

Debt Investments – Approach and Strategy Case Study – (SME Finance) – Capital Float We invested in a 13.85% interest yielding medium term (2 years) Non-convertible debentures of Bengaluru based Capital Float, an NBFC pursuing SME finance business with the support of fintech. Its current net-worth is about Rs.460 crs and its present AUM is about Rs.617 crs.

• Run by professional and experienced Management (Ex- Bajaj Finance, Ex-Deutsche Bank)
• 50+% of the company owned by credible PE and Foreign Institutions – Sequioa, SAIF, Creations
• Diversified lender base – 9 Banks & NBFCs – successful raising of long term debt
• Well capitalized NBFC tapping the SME market with innovative products like Cash advances against POS

bills, Taxi loans , etc.,

• Comfortable Asset Liability Profile with huge surplus

The NCDs were issued to the company to enable it to expand its AUM and leverage its balance sheet. We had put a covenant to limit the leverage at 3x of equity. Subsequent to the NCD issue in Dec 2016, the management was able to expand its AUM and attracted further equity of Rs 293 Cr in Aug 2017.

• Rs. in Crore

Favourable Asset Liability Profile at the time of Investment - Dec 2016 <30 days 31 - 60 days 61-90 days 91 - 365 days 1 -2 years 2-3 years > 3 years Total Total Assets (a) 119.84 21.55 13.88 103.26 58.05 23.58 4.99 345.15 Total Liabilities (b) 37.70 5.44 7.47 47.87 30.96 0.00 215.71 345.15 Mismatch (a-b) 82.14 16.11 6.41 55.39 27.09 23.58 (210.72)

• Cumulative Mismatch

82.14 98.25 104.66 160.05 187.14 210.72

Ratings Migration

Financial Year Name of the Company Upgrade / Downgrade From To FY 2018 Cholamandalam Upgrade AA AA+ FY 2017 Zee Entertainment Preference Shares Upgrade AA+ AAA FY 2017 IDBI Downgrade AA- BBB FY 2017 Aspire Home Finance Upgrade A+ AA- FY 2017 Equitas Small Finance Bank Upgrade A A+ FY 2017 Grama Vidiyal (due to Merger with IDFC Bank) Upgrade BBB AAA FY 2016 IKF Finance Upgrade A- A FY 2016 Five Star Business Fin Ltd Upgrade BBB- BBB FY 2016 Utkarsh Micro Finance Upgrade BBB BBB+ FY 2015 Satin Credit Care Upgrade BBB BBB+ FY 2015 IFMR Capital Upgrade A- A+ FY 2015 Vistaar Financial Services Upgrade A3 A2 Observations :

• Total Upgrades – 11, Total Downgrades – 1 , Defaults – 0
• Since inception of the fund, there has been only one rating downgrade - IDBI perpetual bonds from AA- to BBB
• Three of the investee companies have been awarded Small Finance Bank Licences (Suryoday micro finance, Equitas Holdings,

....Ujjivan Micro finance)

Latest Holdings – Key Attributes

Average Exposure in Feb 2018 Event Arbitrage 7.1% Fixed Income (Debt) 79.0% Directional Calls 0.4% Cash / (Leverage) 13.5% Debt Quants as on Feb 2018 Weighted Average Maturity 1.94 Yrs Carry Yield 11.50%

Ratings Exposure of Fixed Income as on Feb 2018

Rating wise Modified duration As on Feb 2018 AAA 1.03 Yrs AA 1.24 Yrs A 1.45 Yrs BBB 1.49 Yrs Overall Debt 1.36 Yrs AAA Rated, 8% AA Rated, 30% A Rated, 35% BBB Rated, 26% MF & REIT, 1%

AIF Performance

Monthly Performance in (%) Year Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Annual

FY14

0.92% 1.56%

• 0.70%

1.60% 1.02% 0.87% 1.18% 1.07% 2.84% 0.79% 2.20% 0.95% 14.40%

FY15

1.15% 1.43% 1.22% 1.44% 1.13% 1.20% 1.14% 1.36% 1.48% 1.28% 1.38% 1.83% 16.82%

FY16

0.92% 1.14% 0.75% 1.58% 1.26% 0.87% 1.24% 0.82% 1.31% 1.12% 0.59% 2.51% 14.67%

FY17

1.00% 1.14% 0.83% 1.24% 1.10% 1.38% 0.79% 1.28% 0.77% 0.90% 0.80% 1.97% 13.70%

FY18

1.60% 0.32% 1.00% 1.15% 1.42% 2.25% 0.90% 1.40% 0..80% 0.63% 0.81% 12.74% Returns

UNIFI AIF Birla Sh. Opp. Fund(G) Fran. Corp. Bond fund(G) BSL Dynamic Bond Fund(G) Reliance Dynamic Bond(G)

Average Monthly Return

1.19% 0.77% 0.80% 0.72% 0.69%

CAGR

14.94% 9.56% 10.04% 8.82% 8.48%

Cumulative Returns

100.23% 56.68% 60.04% 51.51% 49.20%

Largest Monthly Gain

2.84% 2.34% 3.06% 4.85% 4.28%

Largest Monthly Loss

• 0.70%
• 1.17%
• 2.10%
• 3.63%
• 3.81%

% of positive Months

98.31% 93.22% 94.92% 76.27% 72.88% Risk

Standard Deviation (Annualised)

1.81% 2.15% 2.26% 4.76% 4.97%

UNIFI AIF Vs Debt Fund's

• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 50 70 90 110 130 150 170 190 210 Apr/13 May/13 Jul/13 Sep/13 Nov/13 Jan/14 Mar/14 May/14 Jul/14 Sep/14 Nov/14 Jan/15 Mar/15 May/15 Jul/15 Sep/15 Nov/15 Jan/16 Mar/16 May/16 Jul/16 Sep/16 Nov/16 Jan/17 Mar/17 May/17 Jul/17 Sep/17 Nov/17 Jan/18 Monthly Returns Value of Rs.100 Invested

Monthly Returns UNIFI AIF Birla Sh. Term Opp. Fund Fran Temp Corp. Bond BSL Dynamic Bond Fund(G) Reliance Dynamic Bond(G)

Investment Allocation & Returns Attribution

4.93% 1.27% 3.40% 2.98% 4.02% 8.26% 14.05% 10.50% 9.29% 5.83%

• 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

FY 2014 FY 2015 FY 2016 FY 2017 FYTD 2018*(Till Feb'18) Event Arbitrage Fixed Income Directional Calls Liquid Funds / (Leverage) 14.40% 16.82%

14.67%

13.70%

12.74%

Returns Attribution Investment Allocation

16.42% 10.22% 15.77% 26.04% 22.05% 70.92% 85.29% 75.61% 69.68% 70.03% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%

FY 2014 FY 2015 FY 2016 FY 2017 FYTD 2018*(Till Feb'18) Event Arbitrage Fixed Income Directional Calls Liquid Funds / (Leverage)

Investment Process

Idea Origination Opportunity validation, review and evaluation of risk / return scenarios Investment Committee Review Initiation of Investment

Unifi Capital (P) Ltd – Fund Manager to the Trust

Post Investment Monitoring and Risk Management

CIO, Head-Research and Head-Relationship AIF Trustees Internal Review Statutory Auditors

Portfolio Parameters

Pre-trade

Ongoing Surveillance

Post-trade

Firm Infrastructure

In-depth bottom-up review of all investment

• pportunities by documented and well

seasoned evaluation process Sensible Exposure Limits:

• Theme Specific
• Company Specific (not more than 10%)

‘Marketable Liquidity’ Assessment Rigorous due-diligence on structure and security w.r.t debt investment opportunities Maximum Leverage limit including derivative exposures capped at 1.5 times the fund corpus Daily Mark-to-Market assessment including detailed review of extreme movements Real-time monitoring of economic developments, corporate communications to stock exchanges and methodical tracking of economy and company specific developments Periodical meeting / calls with management of all the investment companies to measure progress, review results and revalidate assumptions Opportunistic hedging/tactical trading to respond to short-term, counter-theme market moves Best-in-class IT infrastructure with back-up Documented Process Flow Reputed Trustees, Custodian, Valuer etc Research Access to premium databases capturing economic, sector and company specific trends Periodical Internal Review and Statutory Audit

Risk Management Framework

Why Unifi High Yield Fund

• Successful 5 year performance record of Unifi High Yield Fund
• Stable and Experienced Investment Management Team that co-founded

the company in 2001

• Focus on result oriented unique investment themes; even willing to

sacrifice scale (AUM growth) in favor of desired risk adjusted returns

• Scope for consistent compound returns with low volatility
• Robust risk management and operational risk controls

P . S . - The Power of Compounding

The power of compounding is the eight wonder of the world – Einstein. A portfolio with consistent above average compounded returns over years creates more wealth than a one offering high returns at a higher volatility . See the example below – Even one bad year in a 5 yr time period could significantly bring down the returns and dilute the power of compounding.

Year 1 Year 2 Year 3 Year 4 Year 5 Portfolio A 100 18% 16% 17% 19% 15% 219 Portfolio B 100 40% 27%

• 38%

24% 22% 167

For further information visit:

www.unificap.com

CHENNAI: 11, Kakani Towers 15 Khader Nawaz Khan Road Nungambakkam High Road Chennai - 600 006. INDIA Ph: +91-44-3022 4466 +91-44-2833 1556 Fax: +91-44-2833 2732 BANGALORE: 511, Barton Centre 84, M.G. Road Bangalore - 560 001. INDIA Ph: +91-80-255 9418/19 HYDERABAD: H No. 6-3-346/1, Road No. 1 Banjara Hills Scotia Bank Building Hyderabad – 500 034. INDIA Ph: +91-40-6675 2622/23 MUMBAI: Shiv Sagar Estate, A Block, 8th Floor,

• Dr. Annie Besant Road,

Worli, Mumbai – 400018. Ph: +91-22-24927671 +91-22-24925319 Fax: +91-22-24950580

Thank You

DELHI: No.818, International Trade Tower, Nehru Place , Delhi – 110 019. Ph: +91-8800333799