Unifi Alternative Investment Fund

Preface

Investor Predicament

Conventional Equity

•High / above averagereturn potential

•Accompanied by extremevolatility

Conventional Debt

•Low / below averagevolatility

•Hardly any real returnspost 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 averagereturns (~15%)

•Minimal / below averagevolatility (~12%)

Risk adjusted arbitrageopportunities arising from

• corporate events

• systemic changes

• macro-economic cycles

Overview

Investment Objective

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 & QuarterlyReview

Independent Custodian & Accountant

IL&FS Securities ServicesLtd

Investment Strategy

Event Arbitrage opportunities emergingfrom corporate events, systemic changesand macro-economic cycles

TenureOpen ended; Monthly subscription andredemption

Fees1% fixed and 20% performance abovethe 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 Economic Growth Rate Expectations

Change in Inflation Expectations

Rise

Fall

Rise Fall

Unifi AIF’s core investment strategy is

to exploit corporate event arbitrage

opportunities that inherently have

limited correlation to economic cycles

and market volatility. In the debt

segment, the focus is on high yield

opportunities with an accrual mindset

besides tax efficiency.

0.0%

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GDP VS INFLATIONReal GDP WPI Inflation

Investment Allocation

Strategies Instruments Min – Max Allocation

Event Arbitrage

Debt like arbitrage opportunities inListed Equities arising from open offers,delisting, mergers & de-mergers, IPOs,Cash-Futures

0 – 100%

High Yield Bonds

Commercial Papers, short term bondsand tax efficient Preference Shares ofAlternative NBFCs focusing onAffordable Housing, Mortgage backedSME Financing, CV and Micro Finance.

0 – 80%

Nominal Bonds Conventional AAA & AA bonds of variousIndian Companies

0 – 50%

Selective Directional CallsEquity, G-Secs and AAA debt (durationcalls)

0 – 10%

Investment Strategy

• Emerge from corporate events like acquisition, buyback regulation triggered /voluntary open offers made to the public by controlling shareholders, companydelisting etc.

• The risk- return pay-off in most of such deals is deal-specific and has limitedcorrelation to market cycles.

• Emerge in such cases due to the perceived discount in the pre-event market price inrelation to the open offer / post-event price, occurring largely due to asymmetricinformation distribution, difference in investment objectives and expectation amongstinvestors

Event Arbitrage opportunities

• Also emerge across asset classes including

• Conventional Debt (Wholesale-Retail Arbitrage; Subsidiary-Holding CompanyArbitrage)

• Structured High Yield Debt issuances collateralized with home loan, auto loan, microfinance receivables etc (Asset Liability Management Arbitrage in AlternativeNBFCs )

Debt Arbitrage opportunities

Unifi Event Arbitrage - Track Record

10+ Years

100+ investments (Out of 200+ opportunities reviewed)

1000+ crores deployed successfully

~ 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 perdeal

5%

Average tenure of deals

3 - 4 months -80%

-60%

-40%

-20%

0%

20%

40%

60%

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

% R

etu

rns

Sequential Event Arbitrage Deals

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

Event Arbitrage

In a typical open offer, theprice movement during theperiod between publicannouncement and the offerclosure is largely insulatedfrom market volatility anddelivers a debt like absolutereturn.

Particulars FY15 FY14 FY13 FY12 FY11

Total no. of offers

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

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0

5000

10000

15000

20000

25000

30-Apr-13 15-May-13 30-May-13 14-Jun-13 29-Jun-13

Sto

ck P

rice

Vo

l. (

In T

ho

usa

nd

s)

HUL Open Offer

Volume(In thousands) Stock Price

Payment Date 12th Jul 13Acceptance : 100%Return: 84.12%Annualized Return: 20.62 %Similar to “Debt” Returns

0

20

40

60

80

100

120

Historical No Of Open Offers

AIF Arbitrage Deals - Track record

Date CompanyOffer 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

Investment Strategy - 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 to Retail – 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.

Aggregator of Retail Lots – Provide the much

needed liquidity channel for retail bond

holders at market yields plus spread.

Subsidiary – Holding Company – Focus on 100%

Subsidiaries whose papers are rated lower than their

highly rated Parent companies but offer an higher

yield.

Tactical 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

Structured Papers from Emerging Financial Sectors- 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 HousingSME Financing

backed by Mortgages

Commercial Vehicles Financing

Micro Financing

Debt Investments – Approach and Strategy

Case Study – (SME Finance backed by Property Mortgage)

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 hypothecationof goods across Tamilnadu and Karnataka. Its current net-worth and AUM are 62 crs and 210 crsrespectively. Vistaar is guided by its experienced management (Ex-ICICI) and has several prominentprivate equity shareholders like Lok Capital, Omidyar Network and Elevar Equity. Vistaar’s rating has beenrecently upgraded to A2 indicating strong degree of safety. The contracted yield is 490 bps more thanwhat an equivalent tenor A1+ CP would have provided at the investment time point. Subsequent to ourinvestment , 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) 0

Cumulative Mismatch 12 15 36 66 138 133 0

-

Debt Investments – Approach and Strategy

Case Study – (Commercial Vehicle Finance)

We invested in a 13% yielding 1 year Commercial Paper of Chennai based Equitas Finance, a wellcapitalized 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 andexperienced 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 termcategory indicating strong degree of safety. The contracted yield is 350 bps more than what an equivalenttenor A1+ CP would have provided at the investment time point. Subsequent to our investment , EquitasHoldings (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 – (Micro Finance) – Utkarsh Micro Finance Limited

We invested in a 12% tax free dividend yielding short term (8.5 months) Preference Shares of Delhi basedUtkarsh Micro Finance Limited, a NBFC pursuing micro finance business in North & Central India since2009. 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 surplusThe short term preference shares were primarily done as a bridge capital to shore up its capital adequacyand build its loan book while it awaited another round of private equity funding. In fact, subsequent toour investment in Oct’14, Utkarsh received $21 mn (Rs.132 crs) equity from CDC, IFC and other PEinvestors 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

yearsTotal

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 Mismatch75.39 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-tradeFirm Infrastructure

In-depth bottom-up review of all investment

opportunities 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 createsmore wealth than a one offering high returns at a higher volatility. See the examplebelow –

Even one bad year in a 5 yr time period could significantly bring down the returnsand 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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