OLD MUTUAL MULTI-MANAGER PRIVATE EQUITY FUND 2

Paul Boynton Head of Alternative Investments

Old Mutual is pleased to once again be offering limited access to the exciting Private Equity asset class. Our new Multi-Manager Private Equity Fund 2

Mark Gevers

offers exposure to several of South

Head of Private Equity

Africa’s most experienced private equity fund managers, all with proven track records for outperformance.

Ismail Matthews Portfolio Manager

The new fund is modelled on our landmark Multi-Manager Private Equity Fund 1, and replicates the structures that helped make the first fund such an attractive

Garth Solomon

investment proposition. Compared to

Portfolio Manager

traditional private equity investing, our Multi-Manager Private Equity Funds offer:

Jacci Myburgh Portfolio Manager

Enhanced investor liquidity More transparency and certainty of underlying

Quinton Dicks Portfolio Manager

investments Greater investor accessibility thanks to a lower

Lance Grayson Portfolio Manager

minimum investment requirement Private equity returns from day one, through immediate exposure to

Farhad Khan Analyst

active investments Use of leverage to increase immediate exposure to private

Chumani Kula

equity, and to

Analyst

potentially enhance returns

Wayne Jacobs CFO Alternative Investments

Mohsin Cajee Fund Accountant Alternative Investments

Private equity investments are long term and high risk. As a consequence, the potential returns are higher than the returns available from traditional asset classes. However, investors should be aware that no guarantees are provided, and there is a risk of capital loss.

WHAT IS PRIVATE EQUITY?

Private equity is an asset class that has historically given the investor higher returns than the conventional equity market over the long term, while also lowering portfolio risk through improved asset class diversification. Private equity provides equity or quasiequity capital to enterprises that are generally not quoted on a public stock exchange. The main uses of private equity funding by companies typically include: Management buyouts or buy-ins Leveraged buyouts Delistings Black economic empowerment transactions Working or expansion capital Companies using private equity funding often need capital for rapid expansion and growth, and thereby offer potentially higher future returns to investors than their public counterparts. In addition, because privately owned companies are not widely scrutinised by analysts due 2

to their unlisted status, the likelihood of expert private equity fund managers identifying companies offering excellent value is greater. At the same time, private equity funding can unlock company value and provide a base for accelerated earnings growth through strategic business assistance from new shareholders or directly incentivised management participation, as well as optimally structured balance sheets. In South Africa, black-owned companies are availing themselves of private equity funding to buy into companies that need black ownership. This often creates opportunities for private equity investors to partner with BEE companies in such investments on attractive terms. Private equity funding is generally raised by private equity funds, whose managers identify suitable investment opportunities over a period of several years. Worldwide it has proven to be an increasingly popular investment amongst pension funds, endowments and high net worth individuals. 3

THE GROWING POPULARITY OF PRIVATE EQUITY

Research shows that globally, institutions and high net worth individuals have increased their exposure to private equity substantially in recent years. The Capgemini Merrill Lynch World Wealth Reports (2005 – 2007) show that wealthy individuals increased their allocations to alternative investments (including private equity) from 3% of their portfolios in 2000 to 10% in 2006, and in the last three years private equity has been the main driver of the high allocation to alternatives. Studies further demonstrate that the private equity boom among large institutional investors continues apace. As shown in the graph, institutional allocations to this asset class have increased over the last three years and by the end of 2007 are projected to stand at 7.6% in North America, 6.1% in Europe, 6.9% in Australia and 4.5% in Japan. In South Africa, 2006 proved to be a spectacular growth year for the local private equity industry. Investors, mainly large local and offshore institutions, 4

poured over R11bn into private equity funds in 2006, with total assets under management rising an impressive 32% to R56.2bn, according to the South African Venture Capital Association (SAVCA). Industry assets have increased at a compound annual rate of 10% between 2000 and 2006.

Institutional portfolio allocation to Private Equity 2005 - 2007 10% 2005

8%

2006 7.6%

7.5%

2007

7.0%

6.9% 6.1%

6%

5.0% 4.5%

4.7%

4.5%

4.0%

4%

2.4%

2%

1.8%

0% North America

Europe

Australia

Japan

Source: 2005-2006 Russel Survey on Alternative Investing – current and forecast mean strategic allocations to Alternative Investments (2007 forecast)

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WHY SHOULD YOU INVEST IN PRIVATE EQUITY?

Long-term historical outperformance Investors can potentially be rewarded with higher returns from private equity than the traditional asset classes. Research conducted both locally and overseas has shown that private equity funds have historically outperformed listed equity markets over the long term, as demonstrated below.

US Private Equity Performance Index Performance as at 31.12.06 24% Private Equity NASDAQ

20%

20%

S&P 500

16%

17%

16%

12%

11%

10%

9%

8%

8% 5%

6%

6%

9%

7%

4% 4%

4% 1%

0% 1 year

3 years

5 years

10 years

20 years

Source: Thomson Financial/National Venture Capital Association Survey to Dec 2006 (Net of management fees).

UK Private Equity Performance Index Performance as at 31.12.06 35% Total UK Private Equity

31.3%

FTSE All Share

30%

Outperformance

25% 20.9%

20%

18.7%

18.7%

17.2%

15% 12.4% 10.8%

10%

7.9%

5%

3.5%

0% 3 years (% p.a.)

5 years (% p.a.)

10 years (% p.a.)

Source: BVCA Private Equity and Venture Capital Performance Measurement Survey 2006

In South Africa, a recent study* of

of up to 10% of assets improves the

11 private equity funds over a 13-year

efficiency of an investment portfolio

period found that the funds recorded an

and contributes to meeting real return

average return of 35% per year. This

investment objectives. Importantly, it

represented an outperformance of 18%

showed that in South Africa the correlation

(before costs) over the FTSE/JSE Africa

of private equity’s performance with that

All Share Index over the period, and

of conventional asset classes was very

outperformance of 12% after costs.

low – in the order of 0.1 to both general equity and small cap equities. It also

Portfolio diversification The historical returns generated by private equity have in many cases been shown to have a low correlation with those delivered by other asset classes. This means that adding private equity to a portfolio should improve overall portfolio diversification, lowering risk for any given level of return and thus providing enhanced risk-adjusted returns. The study of South African private equity fund performance* found that, in theory, an allocation by local retirement funds

displayed a higher Sharpe ratio than conventional assets, implying more return per unit of risk (or better risk-adjusted performance). However, in practice, South African regulations limit private equity investments by pension funds to a maximum of 5% of their portfolio, so local pension funds cannot take full advantage of this research. *

I. Missankov, R. van Dyk, A. van Biljon, M. Hayes and W. van der Veen, “Is Private Equity a Suitable Investment for South African Pension Funds?” (paper presented at the Convention of the Actuarial Society of South Africa, October 2006).

7

WHY INVEST WITH OLD MUTUAL INVESTMENT GROUP SA?

OMIGSA has over three decades of experience in private equity, conducting in-depth research and investing in this alternative asset class ever since it began managing an unquoted portfolio on behalf of the Old Mutual Group in the 1970s. Since 2001, the Private Equity team within OMIGSA’s Alternative Investments boutique has grown into a dedicated and dynamic professional investment team of nine investment professionals with 68 years’ combined private equity experience. Our strengths lie in our ability to meticulously structure and negotiate complex deals, a commitment to investment partnerships and a substantial origination network – giving us an advantage in identifying and executing private equity investments that display a strong potential for value creation. The Private Equity team has the ability to swiftly implement a disciplined, best-of-breed private equity process. As of August 2007 it had over R6.7bn actively invested in the asset class, 8

making it one of South Africa’s largest

this fund has produced an annualised

private equity managers.

return of 68% (before tax but after

The OMIGSA Private Equity Funds 1 and 2 have both achieved excellent returns to date, substantially outperforming

manager fees) up to its most recent quarterly valuation at the end of June 2007*.

their investment benchmark of

This first multi-manager fund has

CPIX + 10%.

generated keen investor interest and has

Contributing to the robust returns of OMIGSA Private Equity Fund 1 have been investments in several high-profile and high-return corporate deals in the last few years, including the buyouts and delistings of Pepkor, Life Healthcare, Foodcorp and Savcio.

more than R500 million in investments and commitments deployed across three funds managed by some of South Africa’s most experienced private equity managers – OMIGSA Private Equity, Ethos Private Equity and Brait Private Equity.

OMIGSA Private Equity Fund 2’s strong returns can be partially attributed to investments in the buyout and delisting of Consol, the funding of Khathuma Investments II (Worldwide Africa) and Shanduka Resources, and the purchase of a stake in Nigeria’s Oceanic Bank International. The most impressive returns have been enjoyed by the unique and innovative Multi-Manager Private Equity Fund 1. Launched in May 2006,

* Source: OMIGSA. The after-tax return has been 61% for individuals and 54% for companies. Please note that the track record of the first Multi-Manager Private Equity Fund in the short period of time since its launch is not an indication of the likely future returns on either the first fund or its successor.

OLD MUTUAL MULTIMANAGER PRIVATE EQUITY FUND 2

The new Multi-Manager Private Equity Fund 2 is modelled directly on our MultiManager Private Equity Fund 1. While we would caution that the first fund’s exceptional performance to date may prove difficult to repeat, we believe the structural advantages and access provided to premier underlying private equity fund managers make this followon fund a similarly attractive investment proposition. Wide Portfolio of Underlying Investments The fund is designed to have exposure to a broad range of underlying private equity funds, thus maximising the diversification benefits and limiting exposure to any one private equity deal or fund. We anticipate investing in a total of between six and eight underlying private equity funds, with each fund having a targeted allocation ranging from 10% to 25% of the gross portfolio on a committed capital basis. The new fund is expected to have exposure to between 30 and 50 different underlying investments over its lifetime.

Old Mutual has, on behalf of the fund,

Brait and Ethos – These

already acquired limited private equity

specialised investment houses are

capacity in five underlying funds

among the largest independent

managed by some of South Africa’s

managers of private equity funds

most successful and experienced private equity fund managers. These allocations will ultimately represent approximately 70% of the fund’s total anticipated commitments. OMIGSA Private Equity Fund 1 OMIGSA Private Equity Fund 2 Brait Private Equity Fund 4 Ethos Private Equity Fund 5 Lereko-Metier Capital Growth Fund With the remaining 30% of the fund portfolio allocation the manager intends to secure some exposure to offshore private equity funds. No more than 20%

in South Africa. Since 1984, Ethos has invested over R2.5bn in more than 85 private equity investments. Brait manages R4.0bn (by market value) in funds invested in over 50 private equity investments since 1991. Lereko-Metier Capital Growth Fund – The fund’s principals have a robust track record of outstanding performance in private equity over the last two decades. To date, over 20% of the R1.3 billion fund has been successfully invested into 4 transactions. The OMIGSA, Ethos, Brait and Lereko-Metier teams all boast track records, extending over the

of the total portfolio commitments will

past two decades, of delivering

be invested offshore, of which at least

annualised investment returns

5% are anticipated to be allocated to

in excess of 30% (before taxes

Africa.

and fees.) Source: OMIGSA 11

OLD MUTUAL MULTIMANAGER PRIVATE EQUITY FUND 2 CONT...

Enhanced private equity exposure through leverage The Multi-Manager Private Equity Fund 2 will use leverage to optimise exposure to drawn down private equity investments over the life of the fund. The ability to use leverage, combined with access to fully invested underlying private equity funds, will allow the fund to gain meaningful exposure to private equity returns from day one. This helps to prevent the returns from being dragged down initially while the fund managers look for investment opportunities – a common problem with traditional private equity investment. The gearing effect of leverage also has the potential to enhance the returns on the fund if the underlying investments perform well. Of course, the gearing effect can work both ways – it will also magnify any losses if the investments perform poorly. The potential for enhanced returns from leverage goes hand in hand with increased risk. 12

Fund leverage will be targeted to remain

Multi-Manager Private Equity Fund 2,

below 50% of the value of the underlying

however, comprises several underlying

assets at all times. A leverage charge,

funds in which the investments are

equal to the prevailing prime interest rate,

already well known and generating

will be levied on the borrowed funds. It

attractive private equity returns. As a

should be noted that the leverage charge

result, investors have reasonable certainty

cannot be offset against any taxable

as to which underlying investments a

income arising in the fund.

large proportion of their funds are being

Enhanced liquidity While typical private equity funds lock in investors for long periods of time, the Multi-Manager Private Equity Fund 2 allows investor-elected disinvestments

allocated towards, as well as deriving comfort that deal execution risk has been removed in respect of a significant part of the targeted fund size. This makes the fund more transparent than is usual for a private equity fund of funds.

on a quarterly basis, subject to a disinvestment charge of 5%. Note,

Further transparency is achieved from

however, that withdrawals from the life

regular quarterly valuations, which

wrapper may be subject to restrictions

are conducted on a consistent basis

imposed by legislation.

using strict guidelines advocated by the European Venture Capital Association

Greater transparency and lower execution risk Typical private equity funds must wait until the manager has identified suitable deals in which to participate. Thus, investors in new funds generally do not know the underlying private equity deals the manager will choose to invest in.

and endorsed by SAVCA.

WHO SHOULD INVEST IN THE FUND?

Private equity is best suited to sophisticated investors who have an understanding of the key characteristics of the asset class. High Risk – Both the nature of the underlying investments and the ability to use leverage make this an aggressive investment, with a maximum risk rating of 5 on the Old Mutual risk rating scale of 1-5. No investment guarantees are offered and there is a risk of capital loss. Long Term – Although the Multi-Manager Private Equity Fund 2 offers investors the option to exit the fund on a quarterly basis, this comes at a cost of 5% of the current valuation. By its nature private equity is a long term investment, and investors are encouraged to participate on that basis. The real returns in private equity are unlocked when the underlying investments are sold, typically after a holding period of at least five years. Like any asset class, it is not desirable for an investor to have a large proportion of their investment portfolio concentrated in private equity. The recommended level of exposure to private equity depends on the investor’s own unique circumstances. It is advisable to consult a qualified financial adviser. 14

HOW TO INVEST IN THE FUND

THE MULTI-MANAGER PRIVATE

opened at the beginning of subsequent

EQUITY FUND 2 WILL ONLY BE OPEN

calendar months, and closed at the end

FOR A LIMITED TIME PERIOD.

of the calendar month.

Investment Vehicle

All investments will initially be placed

The fund is available through a life wrapper from Old Mutual.

in an early subscription fund until the relevant month-end tranche closing date. The early subscription fund will

Individuals, companies, trusts and taxexempt institutions can access the fund via selected products in Fairbairn Capital’s Investment Frontiers range. Lifewrapped contracts such as those offered by Investment Frontiers are potentially tax-efficient investment options for some individuals. Retirement funds can invest in the fund via a fund policy contract with Old Mutual. Subscription Period

earn interest at the same rate as Old Mutual’s SA Money Market Fund. At the month-end tranche closing date, the funds (including interest earned in the early subscription fund) will be switched into the Multi-Manager Private Equity Fund 2 at the prevailing month-end unit price. Minimum investment R100 000 Maximum Investment

Investment into the fund will occur in

Because of limited capacity, a limit of

monthly tranches, with each tranche

R200 million per investor will be placed

having a defined opening and closing date.

on investments into the fund (subject

The first tranche will open on 7 September

to manager discretion). All investment

2007 and close on 28 September 2007.

inflows shall be prioritised on a first-come

Thereafter, depending on the capacity

first-served basis, until the available

remaining, further tranches will be

capacity is fully absorbed.

INVESTMENT DETAILS

Fund Benchmark CPIX + 10% p.a. (The fund aims to aggressively outperform inflation) Fund risk rating 5 (Aggressive) Fees, costs and carried interest* Adviser fees** Initial and/or annual adviser fees may be payable. These fees are fully negotiable between the client and the adviser. Administration fees** Initial and annual administration fees are payable on a sliding scale depending on the investment size. Underlying private equity funds The underlying managers charge management fees, earn carried interest*, and their funds incur organisational and transactional costs. Old Mutual Multi-Management fee and carried interest

16

Old Mutual will charge a multi-

Disinvestments

management fee of 0.75% p.a. of

Private equity investments are normally

the market value of the underlying

long term, with no option to disinvest

private equity assets, and will earn

during the investment term. Investors

carried interest of 10% of the net

in the Multi-Manager Private Equity

returns after all underlying private

Fund 2 are encouraged to participate

equity fund fees and the base multi-

on this long-term basis. However, for

management fee. The carried interest

clients urgently needing to access their

is only earned if this net return

investment, a liquidity facility has been

exceeds the fund’s benchmark of

provided.

CPIX + 10%. Disinvestments from the fund can be Investment Term and Form of

effected at the end of each calendar

Returns

quarter, at the unit price prevailing on

As the underlying investments are realised by the fund managers over time, distributions or repayments will be

the last business day of the quarter, but subject to a disinvestment charge of 5% of the amount withdrawn. The charge is

made to investors via a money market fund within the Old Mutual contract wrapper. Distributions are not expected to be made before the end of the fifth year since the fund’s inception. The investment will end once all underlying investments are realised, at which time the fund will fully pay out and then close. This will be at the latest on 31 December 2017.

*

Carried interest is a commonly used term in the private equity industry. It is a share of the net returns earned in a fund that accrue to the manager. Carried interest is only payable once all costs have been recovered, the relevant minimum hurdle rate of return has been achieved, and the underlying investments have been realised and the cash proceeds returned to investors.

** For details of the adviser and administration fees payable, refer to the Investment Frontiers “fees and commission” page at www.fairbairncapital.com, or consult your financial adviser.

INVESTMENT DETAILS CONT...

to allow for the fact that the underlying unlisted investments are difficult to sell during their investment terms. Investors who withdraw money will also miss out on any future growth that the underlying investments deliver. Old Mutual requires advance notice of investors’ intention to disinvest from the fund. The notice period is two days for withdrawals of less than R10 million, up to a maximum of one month for very large amounts. Note that although quarterly disinvestments can be made from the fund, there may be legislative restrictions on withdrawals from the life-wrapped contract. Valuation and pricing The underlying private equity investments are valued in depth on a quarterly basis. These valuations are based on the European Venture Capital Association’s valuation guidelines as endorsed by the SA Venture Capital Association. In some cases, the Multi-Manager Private Equity Fund 2 will acquire interests in early-stage underlying funds from

Old Mutual at Old Mutual’s cost, rolled up at prime to the date of acquisition. During the limited period during which the Multi-Manager Private Equity Fund 2 remains open for new investment, the value of the underlying assets in the fund will be based on the cost of acquiring additional interests in the assets from Old Mutual. While the fund is open for new investment, intra-quarter unit prices will be calculated based on the value of the underlying private equity investments as at the previous quarter-end, rolled up at prime since the quarter-end, and updated in respect of net portfolio cash holdings and accruals for tax, fees and carried interest. On month-ends coinciding with calendar quarter-ends, the monthend unit price will reflect the updated quarterly valuation of the underlying private equity assets. On intra-quarter month-ends, the price will reflect the previous quarter-end values rolled up at prime.

19

REGULATORY INFORMATION

The investment described in this guide is available through a long-term insurance policy underwritten by Old Mutual Life Assurance Company (South Africa), a Licensed Financial Services Provider. The investments are managed by Old Mutual Investment Group (South Africa) (Pty) Limited, a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group and Old Mutual Life Assurance Company (South Africa) are wholly owned subsidiaries of Old Mutual South Africa Limited, Registration No 1993/003023/07. The information and opinions contained in this guide are made in good faith and are based on sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. The opinions expressed herein are not intended to serve as authoritative investment advice and should not be used in substitution for the exercise of own judgement. The price of shares/units and any income from them may fall as well as rise. Past performance or fund benchmark performance is not necessarily a guide to the future and investors may not get back the full amount invested. When a subscription involves a foreign exchange transaction, it may be subject to the fluctuations of currency values. Exchange rates may also cause the value of underlying overseas investments to go down or up. It should be noted that investments within the fund may not be readily marketable. It may therefore be difficult for an investor to withdraw from the fund or to obtain reliable information about its value and the extent of the risks to which it is exposed.

20

CONTACT DETAILS Old Mutual Investment Group: P.O. Box 878, Cape Town 8000. Tel: +27 (0)21 509 4098 Fax: +27 (0)21 509 4663 www.omigsa.com Fairbairn Capital: Tel: +27 (0)860 300 000 Fax: +27 (0)860 400 000 [email protected] www.fairbairncapital.com