Ann: Explanatory Memorandum, page-50

Thank you Following my cash analysis, more thoughts, and anger!

Wishful thinking

The only (apparently) attractive aspect of the proposal is theability to sell at NAV, albeit after a 15 month wait. However, as others have noted,this is an illusion. There will be a rush for the exit and only a few will beable to sell. The amount of stock for sale will vastly overwhelm the buyingdemand. E&P’s proposal rests on alot of wishful thinking. For example:

Why would new investors be attracted to buy at NAV post delisting,when they could buy now, or before delisting, much more cheaply and the REitself believes that the discounts will persist?

The Merged Fund will conduct an on-market buyback for up to10% of the units before it delists. Why does E&P think that this is a good useof cash, when they acknowledge that the CD1 and 2 buybacks were only a “moderatesuccess’?

P11 and Kroll 3.5.9 say that the Merged Fund, being “largerand with an indefinite term”, mayattract institutional investors. Perhaps, but I doubt it. The Merged Fund willhave gross assets of $650m, which is quite small for an institution to investin, and it has a very expensive retail fee structure when the fees of the underlyingfunds are taken into account. In the PE sector, as opposed to other assetclasses, institutional investment is almost entirely for the long term. Institutionswould prefer to invest in an exclusive structure which is open only to wholesaleinvestors with minimum holdings of say $10m and total fees that are perhaps 1.5/2%pa lower than here. Moreover, institutionalPE investors would be more likely to want to invest from the beginning of afund, rather than come in several years after inception, thereby missing the earlyyears when the strongest gains can be achieved. Global institutional PE is a trilliondollar sector with compelling offerings run by extremely capable managers, and evenin Australiais huge. Why would institutions (other than perhaps a few opportunistic smallcap funds) bother with this feeble and expensive compromise? They would alsoinsist on better governance.

E&P lament that ASX trading from mid 2018 was at ever-wideningdiscounts to NAVs of the three listed CD funds, and even they say that the discountsare likely to persist. E&P do not reflect on why the discounts have happened:they should look in the mirror. The expert report helpfully states seven times that it’s probable that the [scandaland outrage surrounding the USMasters fund-URF “for which E&P is the responsible entity”] is a cause ofthis. I.e. that the CD funds have been tainted by the scandal of the Dixon group’smis-selling of URF and the fee depredations that it inflicted for years onURF. This is blindingly obvious, but it’sgood that Kroll said so. This is presumably the main reason for E&Pexpecting the discounts to persist, even though it can’t bring itself to say so:i.e. that its reputation (even after dropping the Dixon name from Evans Dixon,and then changing to E&P) has been so tainted by the URF scandal, ASIC penaltiesetc that investors are tarring the CD funds (albeit unfairly) with the samebrush. This taint will last forever, and cannot be magicked away by reinventingthe fund or changing its name.

Other objections

Following delisting, it will be much harder to replace theRE because the threshold will then be an extraordinary resolution.

We won’t know the committed capital of the Evergreen LPuntil after May 2023, nor who its GP will be. [P65] gives some salient warnings“Unlike previous funds in the CDPrivate Equity Fund Series, Cordish Private Ventures will not be a limitedpartner in the Evergreen LP and there is a risk that the investment decisionsmade and outcomes of the Fund are different to the previous funds in the CDPrivate Equity Fund Series. As an example, this may include underlying US PEfunds not facilitating the Merged Fund’s investment as CEP or Cordish PrivateVentures are not a limited partner in the Evergreen LP”.

I agree with others who make the crucial point- we investedin CD funds 1- 3 in the full knowledge that they would self-liquidate, over aperiod of about 10 years. That is commonfor PE funds- indeed probably more common than evergreen investment. Their gradual runoff is not a weakness ordisappointment- it was exactly what we intended to buy. I have appreciated thelarger cash distributions in the last two years as the assets were harvested, andlooked forward to increasing cash payouts. It is absurd for E&P to claimthat that is a defect. Under the existing,amortising structure of the listed funds, investors are not “forced to liquidateover time”: they can top up their investments in CD1-3 by buying more on market,if they wish. Also, as others havenoted, merging the funds will cause a big deferral in the average asset harvesting, because Fund 4 is “young” and largerelative to the others. This causes aduration shift and risk transfer that holders of funds 1 to 3 did not seek, andwon’t be compensated for. If we hadwanted this, we would have invested in Fund 4 already.

The EM holds out the prospect of scale benefits and cost savings,yet it admits that the cost savings will be tiny. In fact the purported scale benefits are not justifiedin the EM, although the diversification might be beneficial (Kroll 3.5.8)

Targeting a 10% cash balance is a bad idea; it will dilutereturns and the merged fund would incur commitment and management fees- atleast at the GP level- on the whole of the capital, including the cash.

E&P have clearly been working on this proposal for a longtime- but without any discussions with investors- to undertake the legal workand the preparation and completion of the expert’s report and the EM by 7 October. The August update- issued on 14 September-wasthe first public reference to it, but I expect that they had been working on itwell before then. It is disgusting that – without our consent- they have alreadywasted $1.4m of our money on this deluded idea, and we will pay theiradvisor another $1m if it proceeds.

Once this terrible proposal has been voted down, as I am convincedit will be, E+P should immediately resign as RE of the funds. It must accept that its reputation is fatallytarnished and will never be redeemed.

I am not lawyer, but it would be interesting to hear viewson whether E+P may have breached the Corporations Act, ASIC Act or the ListingRules in this affair

As with my other posts, this is not advice and DYOR.