pavilion flow-through limited partnership (2014) 1: flow … · pavilion flow-through limited...

Siddharth Rajeev, B.Tech, MBA, CFA Analyst Daniel Iwata, BA Associate

September 5, 2014

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Pavilion Flow-Through Limited Partnership (2014) 1: Flow-Through Fund Focused on Mining and Oil & Gas Sector/Industry: Investment Management www.accilentcapital.com

Issuer Pavilion Flow-Through L.P. (2014) 1

Securities Offered L.P. units

Offering Minimum: $0.3 million / Maximum: $5 million

Minimum Subscription $10 K (1,000 units)Unit price $10 (minimum 1,000 units) Dissolution date December 31 2019, no later

than March 31, 2020

Management Fee 2.25% of the NAV plus up to $0.1 million administrative and operating expenses per annum

Performance Fees 20% of the NAV in excess of $11.20

Selling Fee and Offering ExpensesUp to 10.75% of the gross proceeds plus 1% EMD fee

Auditor BDO Canda LLP

Offering Summary

- Based on Offering Memorandum dated March 14,2014

FRC Rating

Expected IRR N/A

Rating 4

Risk 4

*see back of report for rating definitions

Investment Highlights Pavilion Flow-Through Limited Partnership (2014) 1 (“LP", “fund”) is

raising a minimum of $0.30 million, and a maximum of $5 million. The funds will be used to form an actively managed portfolio composed of flow-through (“FT”) shares of junior resource companies (private and public).

FT shares are a special type of common shares (usually purchased at a premium) that allows the issuing company to pass along their exploration or development expenses to investors, which they can use as tax deductions. They offer attractive options for investors looking to gain exposure to smaller resource companies, in a tax efficient manner.

Accilent Capital Management Inc. (“Accilent”), the investment manager, was formed in 2002, and provides advisory services for third party and proprietary funds, and structured investments.

In addition to this fund, Accilent currently manages eight other flow-through funds.

The fund will either distribute cash to investors after the sale of securities held by the fund, or roll the LP units into a mutual fund by December 31, 2019, to provide liquidity for investors.

Although Accilent’s first few flow-through funds significantly their outperformed benchmark indices, the overall weakness in the junior resource market since mid 2011 has negatively impacted the performance of most of their recent funds.

The gradual recovery in the junior resource market, we believe, will provide increasing investment options for the fund.

Risks Annual distributions and return of principal are not guaranteed. There is no redemption option until dissolution. The junior resource sector is highly speculative. Due to the recent weakness in the junior resource sector, FT financings

have dropped considerably in recent times. Changes in tax regulations, and the treatment of flow-through shares, may

negatively impact investors. As with most funds, the portfolio manager is crucial to operations, which

exposes investors to key personnel risk. Concentration risks exist as the LP primarily invests in junior resource

issuers. The fund may invest in securities of private companies. Securities of

private companies carry higher liquidity risks.

2014+ Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Background Investment Manager

Pavilion Flow-Through Limited Partnership (2014) 1 is offering investors LP units. Funds from the offering will be invested in flow-through securities. Flow-through investments allow companies to pass their exploration and development expenses to investors. Investors can then use these expenses as tax deductions, while still holding the company’s shares. The LP is planning to raise a minimum of $0.30 million, and a maximum of $5 million from the offering. The minimum subscription amount for this offering is $10,000. The LP plans to primarily invest in flow-through shares of resource issuers engaged in the exploration/ development/production of mineral, oil and gas, and renewable resources. The investment manager is Accilent Capital Management, who has formed and managed 10 flow-through funds since 2008. These funds raised a total of $19 million from investors. The first two funds (formed in 2008) were dissolved in 2013. Accilent Capital Management Inc. is a registered portfolio manager (PM), exempt market dealer (EMD), commodities trading manager (CTM), and investment fund manager (IFM), regulated by the Ontario Securities Commission and Commodity Trading Manager (CTM). Accilent manages a portfolio of flow-through funds as well as other funds in conjunction with other co-managers. These funds have raised a total of $22 million from investors. Accilent is also an exempt market dealer, and may act as sales agent in this offering. Some of the non-flow-through funds managed by Accilent involve a partnership with Anpero Capital Limited (“Anpero”) based in the UK. Management reports that Anpero has assets under management of approximately $75 million and invests in wine portfolios. Anpero does not have any involvement in the flow-through funds managed by Accilent. Management The principal manager of this offering is Dan Pembleton, who is also the President of Accilent. Accilent has five full time employees. Senior management do not have direct technical/geological experience in the resource sector, but have a strong background in investment management. Brief biographies of the senior management team, as provided by Accilent, are presented below: Dan C. Pembleton, MBA, CFA - President of Accilent Capital Management Inc. Mr. Pembleton graduated from Brock University with an Honours BA. He completed his MBA from Western’s Ivey School of Business and received the Chartered Financial Analyst Designation in 1998 from the CFA Institute. Mr. Pembleton has been a trader and portfolio manager for 20 years with nearly 10 years at RBC Dominion Securities where he rose to the level of Vice-President Money Markets. Accilent Capital Management Inc. was founded in 2002 by Dan Pembleton to provide investment advisory services for third party and proprietary funds, individual managed accounts and structured investments. Mr. Pembleton is also a Commodity Trading Manager.


Paul J. Crath, JD - Consulting Senior Manager of Accilent Capital Management Mr. Crath graduated with a Bachelor of Law from the Osgoode Hall Law School at York University and is a member of the New York State Bar Association. Mr. Crath has extensive experience as a principal investor, merchant banking and mergers and acquisitions executive, financier, business development, general counsel and strategic advisor to family investors, chief executive officers, boards and owners of growing companies and fund management companies. In such role Mr. Crath is a senior consultant at Accilent Capital Management Inc.

Mr. Crath is also currently the Managing Director who is actively involved in finance, origination and corporate development for Norvista Resources Corporation., a mining merchant bank formed by mining royalty pioneer and prominent resource investor Gerry McCarvill (who, along with his network, have been early stage investors and drivers of multiple resource companies including without limitation gold, iron-ore, and uranium companies) and who are currently managing a portfolio of pro-active mining investments in private and public companies. Mr. Crath is also currently a Managing Director of Tarra Partners Inc. a merchant bank that acts as investment principal and/or provides certain advisory services in the areas of institutional real estate, infrastructure and private equity and lending transactions. Mr. Crath is a former Vice-President and Principal of Tricaster Capital Corporation, a family investment company and merchant bank he co-founded with the Campbell family of Toronto, and a former Vice-President and Principal of Hexagram & Co. a venture management company. Flow-Through Investments Flow-through investments allow companies to raise capital for exploration and development, and pass on the expenses incurred to investors for tax deduction purposes. Pavilion offers investors the opportunity to invest in a portfolio comprised of either Canadian Exploration Expenses (CEE) or Canadian Development Expenses (CDE) flow-through shares. Flow-through shares typically trade at a premium to a company’s common shares due to the tax advantage. Premiums range from 10% to 30% for CEE, and 0% to 15% for CDE. Institutional investors usually have priority on securing flow-through shares, making this type of investment difficult to access by retail investors. CEE flow-through shares are primarily issued by small and/or early-stage companies that are engaged in exploration. The exploration business is risky, but shares of such companies have potential for high returns due to their inherent risks. Expenses transferred to investors are eligible to be deducted 100% in the year received. CDE flow-through shares are primarily issued by larger junior to medium size companies that are looking to develop resources that have already been identified. These investments are less risky, but also do not have the higher upside potential of CEE investments. CDE investments also provide a 100% deduction; however, the deduction is calculated on an annual 30% p.a. declining balance.


Pavilion may invest in CEE or CDE shares. Management of Pavilion states that their previous flow-through funds have been 100% invested in CEE shares. The following table outlines the key differences between CEE and CDE investments.

CEE CDEUsed for Exploration Development

RiskIs generally riskier, but offers

higher upside potentialLower risk, but lower upside

potential Size of Company Early stage to large juniors Larger juniors to mid size

Price premium relative to common share price

Higher premium because 100% of the deduction can be used in

the year the expense is transferred

Lower premium because deduction is spread over time

Tax deduction100% in the year expenses are

transferred

100% tax deduction based on an annual 30% declining balance

basis An example of the tax benefits from CEE and CDE flow-through shares is shown below. CEE investments provide a 100% deduction in the year expenses are transferred. For example, on a $100 tax deduction, an investor with a 45% marginal tax rate can reduce his/her income by the full $100, and save $45 in taxes. CDE is done on an annual declining balance, which allows the first 30% of the total deduction to be taken when the expense is transferred. The remaining balance can further be used each year (up to 30% of the declining balance). For example, in year one, 30% of the $100 is used leaving a $70 deductible balance the next year. This method allows deductions every year until the full $100 is used up. Both CEE and CDE tax deductions can be carried forward indefinitely. Due to the tax advantages of the flow-through shares, the amount of capital at risk is decreased. Given a $10,000 investment, the following table shows the amount at risk and proceeds needed to break even, with the tax benefit offered by the flow-through shares.

Breakeven Initial investment 10,000.00$ Tax saving (49.5% Ontario's highest rate) 4,950.00$ Investment at risk 5,050.00$ Proceeds needed to breakeven due to capital gain taxes

6,710.96$

* Note - The break even amount varies with region, investor’s tax rate, and purchase premium of FT

Management notes that approximately 75%-80% of their investments also qualify for super-flow through benefits. In addition to the CEE deduction, a super flow through investment gives an additional 15% tax credit. Investments that qualify for super flow-through are grass roots exploration above the surface of the earth, that is done to determine the existence, location, extent or quality of a resource.


Overall, we believe flow-through shares offer attractive options for those looking to gain exposure to smaller resource companies, and take advantage of the tax benefits offered by these investments.

Track Record

Prior to this fund, the investment manager has formed ten flow-through focused LPs since 2008. The total amount of funds raised by the manager from 2008 - 2013 was about $18.97 million. A summary of the previous flow through limited partnerships (“FTLP”) is shown below.

Number Name of the fund Date of inception Maximum

offering amount (Million)

Amount raised (Million) Closing date

1 Pavilion Flow-Through LP (2008)-1 September 1, 2008 10.00$ 0.53$ June 30, 20082 Pavilion Flow-Through LP (2008)-2 January 2, 2008 3.00$ 0.30$ December 15, 20083 Pavilion Flow-Through LP (2009)-1 September 1, 2009 5.00$ 0.95$ December 15, 20094 Pavilion Flow-Through LP (2010)-1 September 1, 2010 5.00$ 2.81$ December 15, 20105 Pavilion Flow-Through LP (2011)-1 January 24, 2011 5.00$ 1.65$ December 15, 20116 Pavilion Flow-Through LP (2011)-2 August 29, 2011 10.00$ 2.60$ December 15, 20117 Pavilion Flow-Through LP (2012)-1 January 4, 2012 10.00$ 1.98$ May 31, 20128 Pavilion Flow-Through LP (2012)-2 May 9, 2012 20.00$ 4.52$ November 23, 20129 Pavilion Flow-Through LP (2013)-1 January 3, 2013 5.00$ 0.99$ March 31, 2013

10 Pavilion Flow-Through LP (2013)-2 August 1, 2013 20.00$ 2.64$ November 30, 2013Total 18.97$

Source: Audited Financial Statements and Management The general exit strategy of these funds is to roll over their LP units into a mutual fund to provide investors liquidity options. For the 2008 flow-through LPs, management distributed funds to investors after selling the securities in the portfolios. We have reviewed audited financial statements showing that a majority of the assets were distributed to investors by the end of 2012. Management states the remaining assets were liquidated and distributed in 2013. In addition to the flow through funds, the investment manager has managed four non flow-through LPs shown below. They include three funds that invested in wine, and one fund that invested in U.S. real state. The total amount raised for these funds by the manager from 2008 - 2013 was approximately $3.1 million. Management states they are no longer raising capital for these funds. The table below shows a summary of these funds.

Number Name of the fund Date of inception Maximum offering

Amount raised (Million)

Closing date Dissolution

1 Panurban 112W Limited Partnership October 2, 2008 5.00$ 1.31$ July 15, 2009 December 2016

2 Wine Investment Fund of Canada (2008 Bin1) Growth Limited Partnership February 1, 2008 10.00$ 0.70$ July 15, 2008 January 2014

3 Wine Investment Fund of Canada (2008 Bin1) Income and Growth Limited Partnership February 1, 2008 10.00$ 0.55$ July 15, 2008 January 2014

4 Wine Investment Fund of Canada (2011 Bin1) Growth Limited Partnership

February 24, 2011 15.00$ 0.52$ December 31, 2011 December 2016 Source: Management / unaudited financials of the wine funds & audited financials of Panurban

As for the two funds that were set to be dissolved in January 2014, management indicated to


us that the wine in the portfolios have been sold, and they are awaiting payment, which will be distributed to investors. The wine funds do not have audited financial statements. Therefore, we have not been able to verify their performance. The following shows returns of the non-flow-through funds, provided by management. Although the real estate fund has so far generated strong returns, the three wine funds generated negative returns for investors.

Wine Investment Fund Canada (2008 Bin 1) Income and Growth L.P. had a total return of negative 20% since inception.

Wine Investment Fund Canada (2008 Bin 1) Growth L.P. had a total return of

negative 18% since inception.

Wine Investment Fund Canada (2011 Bin 1) Income and Growth L.P. had a total return of negative 8% since inception.

The Panurban 112°W L.P, which offered investors an opportunity to invest in

distressed real estate housing in Arizona, has had a total return of positive 33%. We have reviewed the audited financials for this fund, and feel the stated return is reasonable.

In the next section, we present a summary of the performance of Accilent’s flow-through funds. Our analysis was based on the following:

We have chosen the TSXV composite as the benchmark as we believe it is the closest benchmark to the funds’ investment style. Approximately 50% of the TSXV is comprised of equities of mining companies. The composite is comprised of a much more diverse universe of stocks, and has far more holdings than the fund, so the standard deviation (“SD”) is understandably much lower for the composite compared to the fund. We have also calculated the correlations of the funds’ returns with respect to the monthly returns of the TSXV exchange.

Although units were issued at $10 per unit, we used the break-even NAV of $6.71 per unit for return calculations to account for tax benefits. Note that the break-even amount varies with region, investors’ tax rate and the premium on FT acquisition.

The returns data include distributions to unit holders. Net Asset Value (NAV) data was provided by management, and verified by us based

on audited financial statements for periods until December 31, 2013. Below we present charts of monthly returns of Pavilion’s Flow Through Limited Partnerships’ (“FTLP”) units and the TSXV composite. We have also presented the returns, standard deviation (“SD”), Sharpe ratio, and correlation of their monthly returns. The Sharpe ratio indicates the risk adjusted performance of a fund. It is calculated as the excess returns above the risk free rate, divided by standard deviation of the fund’s returns.


Pavilion’s 2008 funds, which have the longest track record of all Accilent flow-through funds, largely outperformed the TSXV. The two funds were liquidated in September 2013 (Fund 2008-1) and March 2013 (Fund 2008-2). Their performance charts and tables are presented below:

Note - The mean, SD, correlation and Sharpe ratios are calculated for the period from January 2009 –

December 2011 as a significant portion of the funds’ assets were distributed to investors in 2011.

Source: Capital IQ, Management, FRC and Bank of Canada As shown above, the total return on the 2008-1 and 2008-2 funds, from inception to dissolution date, was 164.4% and 253.0%, respectively. The TSXV had a return of 17.9% and 20.7%, respectively, over the same period. The SD of the index was less than the funds. The funds’ monthly returns and the index’s monthly returns had low correlation (-0.07 to 0.04), implying the funds provided diversification benefits. Both funds’ Sharpe ratios were higher than the index indicating that the funds’ risk adjusted returns were better than the index. Pavilion Flow-Through 2009 and 2010’s performance charts and tables are presented on the next page.


Source: Management, Capital IQ, FRC and Bank of Canada

FTLP 2009, between December 2009 and December 2013, had a similar trend as the index. The 2009 fund had a total return of negative 42.3%, versus the TSXV’s negative 36.4% over the same period. The 2010 fund returned negative 42.5% versus the index’s negative 55.8%. Pavilion Flow-Through 2011-1 and 2011-2 performance charts and tables are presented below.

Source: Management, Capital IQ, FRC and Bank of Canada

The 2011 funds underperformed the index by a huge margin. FTLP 2011-1 dropped by 63.3% (since inception) versus the TSXV’s negative 33.6%. FTLP 2011-2 dropped by


56.5% compared to TSXV’s negative 37.9%. Pavilion Flow- Through 2012-1 and 2012-2 funds raised about $6.5 million. FTLP 2012-2 raised the majority of those funds ($4.5 million), and is Accilent’s largest flow-through fund by assets. Their performance is shown in the charts below.

Mean Standard Deviation

Correlation

TSX.V 0.51% 11.19% 0.392012-1 FTLP after distribution -4.48% 7.71%

Monthly Return

Mean Standard Deviation

Correlation

TSX.V 9.76% 11.19% 0.892012-2 FTLP 2- After Distribution -2.11% 11.85%

Monthly Return

As shown above, both fund have so far experienced negative returns. We have reviewed the financial statements for funds started in 2013. The funds were only invested for part of the year and we feel there are too few data points to compare results with the index’s performance. Management has provided NAVs of all their flow-through funds up until March 31, 2014. All the funds were up YTD as of March 31, 2014. The TSXV was up 6.7% from January 1 to March 31, 2014.

NAV return January 1, 2014 to

March 31, 2014NAV return since

inception to March 20142013-2 FTLP 18.78% 62.15%2013-1 FTLP 10.33% 30.55%2012-2 FTLP 22.25% -12.37%2012-1 FTLP 43.65% -10.73%2011-2 FTLP 20.89% -47.39%2011-1 FTLP 21.14% -55.59%2010 FTLP 5.96% -39.05%2009 FTLP 4.18% -40.54%

Note: The NAV returns since inception include tax benefits.


Strategy Accilent uses the following key guidelines when making their investment decisions:

The LP will have no more than 85% invested in private companies, and have at least 15% of the net assets invested in TSXV or TSX listed resource issuers.

The LP will not allocate more than 20% of net assets to any one publicly traded resource issuer. The LP may invest up to 25% in a private resource issuer and/or a reporting issuer whose common shares are listed on an exchange other than the TSXV or TSX.

The LP will not invest in securities of resource issuers if after investment, the LP would own more than 19.9%, of any publicly traded issuer, and 30% of any private/non-TSXV or TSX listed issuer.

Although management uses independent engineering or geological technical reports for their due diligence, they do not make such reports a mandatory requirement in order to make an investment decision.

The LP will only invest in securities of issuers that are independent to the investment manager. However, the LP may own securities that are also owned by the investment manager. In certain cases, companies pay due diligence / commission / placement fees to the investment manager in return for the LP’s investment in their securities. We believe this has the potential to create a conflict of interest for management offset by management’s incentive to pick winners for the fund (the manager receives 20% of the NAV above $11.20 per unit).

The LP may borrow up to 10% of the total value of the fund. Management has not used debt in any of their funds, but we believe that using leverage to invest in securities of junior resource issuers is highly risky.

Management has held an average of about 12% of a portfolio in private equities in their previous funds. The primary exit strategy of securities of a private company is when the company goes public through an IPO (initial public offering) or a RTO (reverse takeover). If this does not happen, the fund would look at selling their shares through a private transaction. If the fund is unable, or otherwise believes the terms of the transaction are not favorable, the shares may be distributed “in-kind” on a pro-rata basis to investors. In their previous funds, the manager invested in 23 private companies, of which, 11 (48%) went public; which we believe is a reasonably strong track record and shows management’s ability to identify investments with viable exit options. Accilent uses a top-down approach to portfolio construction. The investment manager looks at key macroeconomic factors (such as global Gross Domestic Product growth, the demand and supply of commodities, etc.) and the implications it will have on commodity prices and the Canadian capital markets, to determine an investment strategy for the fund. At this time, management’s desired allocation is: uranium 30%; energy 20%; base metals 20%; and precious metals 30%.


Management’s goal is to have 100% of the LP’s funds invested in FT shares. However, the manager does have the option of purchasing non flow-through shares of resource companies, or money market funds, in the event of a shortage of good flow-through investment opportunities. The number of flow-through financings has declined over the past few years due to the weakness in the junior resource sector. Although the decline in financings reduces available investment options for flow-through funds, management believes it has little impact, as the size of their funds is relatively small. The TSXV is up 9% YTD. It was down 23% last year, and 17% in 2012. The stronger YTD performance of the TSXV, and an overall improvement in the sentiment on the junior resource sector, we believe, will give the fund increasing opportunities over the next 6 - 12 months. The following chart shows the performance of the TSXV over the past decade. Since September 2004, the index has dropped by 34%.

Source: The Globe and Mail

However, prices of the two most important and common commodities in capital markets, gold and copper, are up 2-4 times since 2004. Copper is up from US$1.30/lb in 2004, to the current price of US$3.10/lb. Gold is up from US$400/oz, to US$1,270/oz. We believe the key reasons why resource equities have not kept up with commodity prices are the following: a significant increase in operating and production costs, and capital spending on exploration/development projects over the past decade. Despite the strong improvement in commodity prices, the sector experienced a decline in free cash flows as a result of higher spending and production costs. The decline in free cash flows negatively impacted the valuation of resource equities. As a result, most of the resource companies have recently made major reductions in their exploration and development spending, which is the major reason why financings have decreased over the past few years. Based on the expected gradual growth in global GDP, high production cost of commodities, and the reduction in exploration/development spending (which will impact the long-term supply of commodities), we maintain a positive long-term outlook on the resource sector. Oil and gas also has a positive long-term outlook. The consensus oil and gas price forecasts


through 2022 are shown below.

Oil (WTI Cushing Oklahoma)

Source: GLJ and Sproule

Natural Gas (Henry Hub - US$/mmbtu)

Source: GLJ and Sproule

Based on consensus forecasts, WTI prices are expected to range between US$90/bbl and US103/bbl, between 2014, and 2022. The henry hub spot price is expected to range between US$4.3/mmbtu and US$5.6/mmbtu, between 2014, and 2022. The portfolio turnover varies depending on a few variables. The entire process, from a flow-through financing to completion of an exploration program, and transfer of expenses to investors, usually takes about a year. If the results of the exploration program are favourable, the fund will revaluate if there is still upside potential to be realized, and make a decision to hold/sell the investment. If the results are not favourable, instead of selling the shares at a low (due to the drop after unfavorable results), the fund will generally wait for another drilling season. If results still do not improve, the manager will then begin to liquidate their position. Investors should note that many publicly traded junior mining stocks have relatively less liquidity. As such, the fund may encounter situations where it may find difficulty selling securities without depressing the market price or conversely, buying securities without inflating them. Structure The fund is structured as a limited partnership. The General Partner (“GP”) is PRF Management Ltd. The officers, directors and controlling owners of the GP are Dan Pembleton and Paul J. Crath. The chart below shows the structure of the LP:


Investors

Pavilion Flow-Through Limited Partnership (2014) 1

Investment Manager and Sales agent - Accilent

Capital Management Inc.

General Partner (the "GP")-PRF Management Limited

The following table shows all the fees and expenses associated with the offering:

Management Fee 2.25% of the NAV per annum

Administrative and Operating Expenses

Up to $0.1 million per annum

Performance Fees 20% of the NAV in excess of $11.25 per unit

Selling Fee Up to 10% of the gross proceeds

Offering Expenses Up to 0.75% of the gross

proceeds plus 1% distribution fee

Fees and Expences

We believe the offering’s management fee of 2.25% of the NAV plus annual administration and operating expenses of $0.10 million (2% p.a. assuming maximum offering) is high relative to comparable offerings. However, management notes that the annual operating expenses of $0.10 million are the maximum, and that the expense of their previous funds have been lower. We have confirmed this with the financial statement of the previous funds. Selling fees, and the offering expenses of up to 11.75% of the gross


proceeds, are also high relative to comparables offerings. The table below shows the available funds:

Total Funds $300,000 $5,000,000

Selling Fees $30,000 $500,000

Offering Expenses $5,250 $87,500

Available Funds $264,750 $4,412,500

Minimum Offering Maximum Offering

The intention of the manager is to make cash distributions to investors from funds received from sale of an investment. The investment manager has the option to reinvest all or part of exited investments. BDO Canada LLP, located in Mississauga, Ontario, is the auditor of the fund. The NAV of the LP will be calculated at the last business day of each calendar month, and will be audited independently on December 31st of every year by BDO. Accilent is responsible for the net asset value calculations. For publicly traded shares, the market closing price or the average of the closing bid price and ask price on the last trading day of the month, is used to value the shares. For private shares, valuation is done at cost or the most recent arms-length sale of comparable securities. As mentioned earlier, the LP assets maybe rolled over into a mutual fund. If the LP is not rolled-over, the LP will be terminated/liquidated and the net assets returned to investors no later than March 31, 2020. None of Accilent’s previous dissolved flow-through funds have been rolled over into a mutual fund. Risks The following, we believe, are few of the key risks of the offering:

Annual distributions and return of principal are not guaranteed. There is no redemption option until dissolution. The junior resource sector is highly speculative. Due to the recent weakness in the junior resource sector, FT financings have dropped

considerably in recent times. Changes in tax regulations, and the treatment of flow-through shares, may negatively

impact investors. As with most funds, the portfolio manager is crucial to operations, which exposes

investors to key personnel risk.


Concentration risks exist as the LP primarily invests in junior resource issuers. The fund may invest in securities of private companies. Securities of private

companies carry higher liquidity risks. The company may invest in equities and money market funds that may have no tax

benefits. Rating We feel that the Pavilion Flow-Through Limited Partnership (2014) 1 offers benefits to investors in the higher tax brackets seeking alternative tax planning strategies. The tax benefits provide some downside protection to investors. Overall, we have a positive long-term outlook on the mining (especially gold and copper), and oil & gas sectors. However, investors have to always keep in mind that the underlying assets are shares issued by companies that are highly speculative, as highlighted by the volatile historical returns. We assign an overall rating of 4, and a risk rating of 4.

FRC Rating

Expected IRR N/A

Rating 4

Risk 4


Fundamental Research Corp. Rating Scale: Rating – 1: Excellent Return to Risk Ratio Rating – 2: Very Good Return to Risk Ratio Rating – 3: Good Return to Risk Ratio Rating – 4: Average Return to Risk Ratio Rating – 5: Weak Return to Risk Ratio Rating – 6: Very Weak Return to Risk Ratio Rating – 7: Poor Return to Risk Ratio A “+” indicates the rating is in the top third of the category, A “-“ indicates the lower third and no “+” or “-“ indicates the middle third of the category. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) 2 (Below Average Risk) 3 (Average Risk) 4 (Speculative) 5 (Highly Speculative)

Rating - 1 0% Risk - 1 0%Rating - 2 23% Risk - 2 2%Rating - 3 47% Risk - 3 30%Rating - 4 10% Risk - 4 43%Rating - 5 6% Risk - 5 9%Rating - 6 1% Suspended 17%Rating - 7 0%Suspended 13%

FRC Distribution of Ratings

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