unifi alternative investment fund aif... · investor predicament conventional equity •high /...
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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.
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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
610
620
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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