Edgestone Capital Equity Fund

Dear Boss,

I am enthusiastic about the proposed fund. From macroeconomics perspective, Canadian

economy has entered into a favorable period and the federal budget is in a surplus position,
which means that the federal government will have incentives to prosper economy by, for
instance, paying off public debt, making favorable investment to vitalize economy and
decreasing interest rate and so on. Although there is a severe downturn in the stock market, it
had increased the funding demands for small- and midmarket capitalization public companies
and with the positive economic prospect, the stock market will recover after all and therefore
providing great upside to our exit strategy.

In terms of industry focus, since we have extensive industry expertise mainly in services and
agriculture, it makes sense to start from the industries that we are familiar with, so our
potential portfolio companies will directly benefit from our network, both soft and hard
knowledge and financial benefits. Besides, if we are targeting industries that we are not familiar
with or remain relatively general, it may create additional cost in, for instance, sourcing deals,
communication cost related to the portfolio companies’ management and operation.
Therefore, I think involving actively in our potential portfolio companies will be beneficiary not
only to them but also to us in the long run, because active management creates urgency and
synergy that will further impact the financial position of the operations. In terms of geography, I
would suggest focus on Canadian due to the demand for private equity. Furthermore,
underdeveloped supply and concentrated industry structure would contribute to lower
valuation multiples and more attractive deal structures for private equity transactions. I would
imagine staying opportunistic in terms of industry and geographic focus in the long run is a wise
option since our expertise and network will grow, and if we do well, the opportunities will
emerge.

Hereby, I attached my proposal for the fund:

 Deal sourcing: Rely on our own network and expertise for deal sourcing, if needed, then
rely on NBF’s network. This approach will make our fund raising and sourcing process more
credible and compelling.
 Evaluation of an opportunity:
Deal Characteristics

 Within the Target Industries

 Strong Cash Flow Generation
 Leading and Defensible Market Positions
 Growth Opportunities
 Efficiency Enhancement Opportunities
  Low Capex Requirements
 Strong Asset Base
 Management Team with Strong Track Record

 Structuring, approval and execution of a deal: When we structure the deal, we need to
consider following factors,
o Examine IRR
o Examine returns on the basis of a multiple of cash investment
 Monitoring and value creation for an investment:
o Active involvement to enhance growth, financial and operational efficiency to
increase ROIC
o Increase cash flow generation
 Exit strategy:
o Exit period: 10 years
o The most ideal exit opportunity for us is to realize our return from an IPO. We
should have a strong believe that the current stock market condition will be better
off in future.
o If IPO is not achievable at the end of our exit, we should be opportunistic about
sourcing strategic sale or other potential sponsors

I also attached the capital budgeting plan as follows,

Hypothesis:
 10 deals
 1 VP+1 Associate+2 Analysts

(in Millions ) Ye ar 1 Ye ar 2 Ye ar 3 Ye ar 4 Ye ar 5 Ye ar 6 Ye ar 7 Ye ar 8 Ye ar 9 Ye ar 10
Carried Interest 36
Management Fees 0.36 0.36 0.36 0.36 0.36 0.36 0.36 0.36 0.36 0.36
Expe ns e s
Salaries 0.23 0.23 0.24 0.25 0.25 0.26 0.27 0.28 0.28 0.29
VP 0.10 0.10 0.11 0.11 0.11 0.11 0.12 0.12 0.12 0.12
Growth Rate (%) 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Associate 0.08 0.08 0.08 0.08 0.08 0.08 0.09 0.09 0.09 0.09
Growth Rate (%) 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Analyst 0.05 0.05 0.05 0.06 0.06 0.06 0.07 0.07 0.07 0.074
Growth Rate (%) 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%
Bonus 0.11 0.12 0.12 0.12 0.13 0.13 0.13 0.14 0.14 0.15
VP 0.05 0.05 0.05 0.05 0.06 0.06 0.06 0.06 0.06 0.06
Growth Rate (%) 10% 10% 10% 10% 10% 10% 10% 10% 10%
Associate 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.05 0.05
Growth Rate (%) 10% 10% 10% 10% 10% 10% 10% 10% 10%
Analyst 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.04 0.04
Growth Rate (%) 10% 10% 10% 10% 10% 10% 10% 10% 10%
Due Diligence 0.50
Other Overheads 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Ne t Inc ome (0.98) (0.49) (0.50) (0.51) (0.52) (0.53) (0.54) (0.55) (0.57) 35.42