Unifi Alternative Investment Fund Pre refac face Investor - - PowerPoint PPT Presentation

Unifi Alternative Investment Fund

Pre refac 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 Object 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. Investment Manager Minimum Commitment INR 1 crore Performance Reporting Monthly NAV & Quarterly Review Independent Custodian & Accountant IL&FS Securities Services Ltd Investment Strategy Event Arbitrage opportunities emerging from corporate events, systemic changes and macro-economic cycles Tenure Open ended; Monthly subscription and redemption Fees 1% fixed and 20% performance above the hurdle rate of 10% per annum Valuation S&P CRISIL

Investment Allocation Approach

Event Arbitrage High Yield Bonds Select Equities Event Arbitrage Nominal Bonds 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 Inflati tion Expectatio tations

Rise Fall 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.

0.0% 5.0% 10.0% 15.0% FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

GDP VS INFLATION

Real GDP WPI Inflation

Investment Allocation

Strategies Instruments Min – Max Allocation Event Arbitrage Debt like arbitrage

• pportunities

in Listed Equities arising from open offers, delisting, mergers & de-mergers, IPOs, Cash-Futures 0 – 100% High Yield Bonds Commercial Papers, short term bonds and tax efficient Preference Shares of Alternative NBFCs focusing

• n

Affordable Housing, Mortgage backed SME Financing, CV and Micro Finance. 0 – 80% Nominal Bonds Conventional AAA & AA bonds of various Indian Companies 0 – 50% Selective Directional Calls Equity, G-Secs and AAA debt (duration calls) 0 – 10%

Investment Strategy

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

voluntary open offers made to the public by controlling shareholders, company delisting 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 Arbitr itrag 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 Arbitra itrage ge opport rtun unities ities

Unifi Event Arbitrage - Track Record

10 10+ Years 100 100+ investments (Out of 200+ opportunities reviewed) 1000+ 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 2015 150 Profitable deals 132 Average returns per deal 5% Average tenure of deals 3 - 4 months

• 80%
• 60%
• 40%
• 20%

0% 20% 40% 60% 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 % Returns Sequential Event Arbitrage Deals

PA on 30th April 13 Purchase Date: 30th April 13 Purchase Price: 582 /- Offer Price: 600 /-

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 FY15 FY14 FY13 FY12 FY11 Total no. of

• ffers

60 60 74 71 101

• No. of offers

participated 9 12 16 11 17 Average offer size (in crs) 287 3941 523 288 184 Largest Offer invested (in crs) 11449 29200 5222 931 4366 Smallest Offer invested (in crs) 251 30 40 27 78

550 560 570 580 590 600 610 620 5000 10000 15000 20000 25000 30-Apr-13 15-May-13 30-May-13 14-Jun-13 29-Jun-13 Stock Price

• Vol. (In Thousands)

HUL Open Offer

Volume(In thousands) Stock Price

Payment Date 12th Jul 13 Acceptance : 100% Return: 84.12% Annualized Return: 20.62 %

Similar to “Debt” Returns

20 40 60 80 100 120

Historical No Of Open Offers

AIF Arbitrage Deals - Track record

Date Company Offer Size (Rs.Crs) Flat Return Days Jul-13 Igarashi Motors India Ltd. 58 16.33% 93 Nov-13 Think Soft Global Services 79 14.94% 105 Feb-14 Sterling Holiday Resorts 230 7.22% 80 Jan-15 NTPC Bonus debentures Arbitrage 10306 7.18% 52 May-14 Mangalore Chemicals Ltd. 211 6.29% 100 Apr-13 Orient Refractories Ltd 134 5.83% 19 Mar-14 Anjani Portland 30 5.66% 124 Aug-13 Hexaware Technologies Ltd. 1057 5.41% 84 Jun-13 CRISIL 1896 5.19% 70 Apr-13 Orient Green Power 221 4.78% 49 Feb-14 Shree Renuka Sugars 532 4.60% 85 Apr-13 HUL 29200 3.79% 73 Jul-14 Prime Focus Ltd. 404 2.88% 191 Dec-13 GSK Pharma 6389 2.52% 85 Feb-14 ICRA 636 2.50% 14 Jun-13 Mahindra Forgings Ltd 198 2.49% 125 Dec-13 Accel Frontline Ltd 35 2.43% 74 Mar-15 Sun- Ranbaxy Merger 36000 1.01% 38 Apr-13 Liberty Phosphate Ltd. 90

• 1.88%

97 Apr-14 United Spirits 11448

• 2.37%

85 20 Offers Average 4.84% 82 Days

Debt Investments – Approach and Strategy

In Inve vestmen stment 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.

Wholesale lesale 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 Subsid idiary iary – 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 Cal Calls ls - 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 dy – (SME Finance backed by by Property rty Mortga gage) ge) We invested in a 14.4% yielding 7 month Commercial Paper of Bangalore based Vistaar Financial Services, a well capitalized NBFC engaged in Small Business Finance against property mortgage and hypothecation

• f goods across Tamilnadu and Karnataka. Its current net-worth and AUM are 62 crs and 210 crs
• respectively. Vistaar is guided by its experienced management (Ex-ICICI) and has several prominent

private equity shareholders like Lok Capital, Omidyar Network and Elevar Equity. Vistaar’s rating has been recently upgraded to A2 indicating strong degree of safety. The contracted yield is 490 bps more than what an equivalent tenor A1+ CP would have provided at the investment time point. Subsequent to our investment , the company raised Rs.160 crs equity from West Bridge Capital in May 2014.

• Rs. in Crore

Favourable Asset Liability Profile at the time of Investment - Mar 2014 1-14 Days 15-30 days 1M - 6M 6M - 1 Year 1 - 3 Years 3-5 Years > 5 years Total Total Assets (a) 16 7 68 73 167 35 4 369 Total Liabilities (b) 4 4 46 42 95 40 137 369 Mismatch (a-b) 12 3 21 30 72 (5) (133) Cumulative Mismatch 12 15 36 66 138 133

Debt Investments – Approach and Strategy Case Study dy – (Comme mmerci rcial al Vehicl cle Finance) We invested in a 13% yielding 1 year Commercial Paper of Chennai based Equitas Finance, a well capitalized NBFC pursuing secured commercial vehicle and SME Finance against Property across 6 states. Its net-worth is about Rs.292 crs while its current AUM is Rs.884 crs. Equitas is run by professional and experienced management (Ex-Cholamandalam ) and has marquee private equity shareholders like IFC, CDC and Sequoia who are also on the board. The CP is rated A2+, third highest rating in the short term category indicating strong degree of safety. The contracted yield is 350 bps more than what an equivalent tenor A1+ CP would have provided at the investment time point. Subsequent to our investment , Equitas Holdings (parent company) raised Rs.325 crs equity from DEG Germany and Creation LLC in Nov 2014.

• Rs. in Crore

Favourable Asset Liability Profile at the time of Investment - Mar 2014 1-14 Days 15-30 days 1M - 6M 6M - 1 Year 1 - 3 Years 3-5 Years > 5 years Total Total Assets (a) 77 7 118 155 444 66 42 908 Total Liabilities (b) 15

• 75

326 159 40 294 908 Mismatch (a-b) 62 7 43 (171) 286 26 (252)

• Cumulative

Mismatch 62 68 111 (60) 226 252

Debt Investments – Approach and Strategy Case Study dy – (Micro ro Finance) – Utkarsh sh Micro Finance Limited We invested in a 12% tax free dividend yielding short term (8.5 months) Preference Shares of Delhi based Utkarsh Micro Finance Limited, a NBFC pursuing micro finance business in North & Central India since

• 2009. Its net-worth is about Rs.80 crs and its present AUM is about Rs.510 crs.
• Run by professional and experienced Management (Ex- ICICI Bank Micro-Credit Head)
• 75+% of the company owned by credible PE and Foreign Institutions – IFC, NMI, Aavishkar Goodwell
• Diversified lender base – 11 banks, 12 NBFCs – successful raising of long term debt
• Profitable operations, ERP driven process, Established origination and collections set-up
• Comfortable Asset Liability Profile with huge surplus

The short term preference shares were primarily done as a bridge capital to shore up its capital adequacy and build its loan book while it awaited another round of private equity funding. In fact, subsequent to

• ur investment in Oct’14, Utkarsh received $21 mn (Rs.132 crs) equity from CDC, IFC and other PE

investors in the last week of Dec’14.

• Rs. in Crore

Favourable Asset Liability Profile at the time of Investment - Sep 2014 <30 days 31 - 60 days 61-90 days 91 - 180 days 181- 365 days 1 -3 years > 3 years Total Total Assets (a) 105.05 36.32 42.81 113.75 194.34 113.86 2.21 608.34 Total Liabilities (b) 29.66 15.64 27.64 72.81 95.47 213.69 153.43 608.34 Mismatch (a-b) 75.39 20.68 15.17 40.94 98.87 (99.83) (151.22)

• Cumulative Mismatch

75.39 96.07 111.24 152.18 251.05 151.22

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 AIF

• Successful 10 year performance record of Event Arbitrage 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

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