FUND PROFILE
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Trustees
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Thomas Crowe, Patrick Hamilton-Russell, Alfred Bester (as nominee on behalf of Maitland
Trust Limited)
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Portfolio Managers
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Thomas Crowe and Patrick Hamilton-Russell
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Lock-up Period
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5 years
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Subscription Frequency
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Quarterly
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Redemption Frequency
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For a period shorter than 5 years, at the discretion of the trustees and , at all
times, subject to the terms of the trust deed
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Redemption Notice
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6 months notice in writing and, at all times, subject to the terms of the trust
deed
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Entry Fee
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None
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Exit Fee
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None
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Management Fee
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2.0% p.a. plus VAT
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Performance Participation
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20% on any increase above a High Water Mark (HWM)
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FUND OBJECTIVE
The objective of the Alpha Capital Trust is to significantly outperform the FTSE/JSE
All Share Index benchmark over the medium and long-term. Ultimately, the rationale
for investing in Private Equity as opposed to Listed Equity must be a function of
a combination of attractive valuations, unique access and the potential for higher
growth rates that reward the investor with a higher return on investment than listed
alternatives.
FUND STRATEGY & PHYLOSOPHY
Alpha Capital's strategy is to invest in, and actively manage, significant shareholdings
in a diverse portfolio of carefully qualified assets. Our investment universe consists
of private and public companies, property and real assets. We do not seek operational
involvement, but prefer to partner with strong management teams who demonstrate
specialised industry knowledge and skills, and who have significant financial exposure
to their own companies. We believe that the best managers think like and are owners.
We do however seek active strategic input in the business, and where possible, will
have an Alpha Capital executive represented at board level. The entry price is a
fundamental consideration as we must have a high conviction that there is significant
scope for good value creation over the medium to long-term. We also recognize that
the deal you don't do, can be as important as the deal you do. This is due to the
high opportunity cost in both capital and time of "getting it wrong". As opposed
to being focused on pure earnings growth, we place a considerably higher emphasis
on the actual cash generation potential of the business within which we invest.
Debt may be employed at an underlying company level to enhance return on equity
to investors.
COMPETITIVE ADVANTAGES
Alpha Capital, due to its smaller size, unique relationship network of portfolio
partners and highly efficient investment process, enjoys an exciting deal flow pipeline
and compelling level entry valuations. The managers of the fund also have a significant
amount of their net worth exposed to the fund, which is consistent with our philosophy
in relation to the managers of our companies at the investment level. Alpha Capital
Trust also supports a distribution policy which will see net income and ad hoc capital
gains distributed to the vested beneficiaries from time to time. From a tax perspective,
all net income and capital gains will be distributed. The managers of the Alpha
Capital Trust have had the benefit of considerable experience in the private equity
arena as both principals as well as managers of third party funds.
LIQUIDITY
Consistent with the perpetuity nature of the structure of the Alpha Capital Trust,
the investment focus is long-term (i.e. 5 years and longer). Investors should be
aware of the liquidity constraints imposed by this long-term investment view.
RISK PROFILE
The risks associated with investing in private companies can be high. However, diversification
across industry and specific company exposure can mitigate the risks to some extent.
The investment process is another critical element to the effective initial and
ongoing risk management of the portfolio companies.
VALUATION INTERNATIONAL BEST PRACTICES
The valuation methods described have been adopted from the guidelines developed
by the Association Française des Investisseurs en Capital (AFIC), the British Venture
Capital Association (BVCA) and the European Private Equity and Venture Capital Association
(EVCA). These guidelines are endorsed by the South African Venture Capital and Private
Equity Association (SAVCA) and 21 other associations worldwide.
For more information:
The objectives of the guidelines is to set out best practices for reporting the
fair value of investment held by the fund and to provide a framework for consistently
determining valuations for investments held by the Alpha Capital Trust.
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"Fair Value is the price that would be received for an asset in a transaction between
knowing market participants"
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Alpha Capital applies the valuation standards consistently and where a change in
valuation methodology has been adopted this is noted. Alpha Capital will endeavor
to report its underlying investments at fair market value using reliable and appropriate
assumptions. Generally, underlying valuations will be crystallised on sale or flotation
of the business.
Alpha Capital will determine fair value using one of the approved valuation methodologies
as set out by the adopted guidelines:
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1.
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Price of Recent Investment;
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2.
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Earnings Multiple;
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3.
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Discounted Earnings;
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4.
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Discounted Cash Flow;
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5.
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Market Price on Exchange;
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6.
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Industry Valuation Benchmarks
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The fair value is estimated using the appropriate methodology and is then adjusted
for surplus assets or unrecorded liabilities. After which an appropriate marketability
discount is applied against the value. Alpha Capital appreciates the capital structure
of a company and to this end will adjust the fair value for the effect that different
financial instruments may have on the company's value.
METHODS OF VALUATION
1. Price of Recent Investment
Alpha Capital will apply this method of valuation to investments that were made
recently. This value may be determined from the cost that the fund has purchased
its stake in the underlying company or a recent transaction that has taken place
into the underlying company by an outside party. Where the price at which a third
party has invested is being considered, Alpha Capital will investigate the circumstances
to the transaction to verify that the price is representative of fair value.
The passage of time will diminish the appropriateness of this methodology. Typically
Alpha Capital will not apply this method for longer than a period of one year.
2. Earnings Multiple
Alpha Capital will apply an earning multiplier to the earnings of the business where
the business has an identifiable continuing stream of earnings. Alpha Capital will
apply this to normalized earnings if a company has negative earnings or by applying
a sustainable profit margin on current revenue. Market based multiples will be used,
using a company/index with similar risk attributes and earnings growth prospect.
The earnings multiple will be reduced for the following:
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If the company is smaller and less diverse;
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If the company is reliant on a smaller number of key individuals;
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If the company is dependent on one product or one customer;
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If the company has high gearing;
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If the company has poor quality earnings;
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3. Discounted Cash Flow / Earnings
Alpha Capital will use this method by calculating the present value of expected
future cash flows or earnings. This method will only be used where the underlying
company affords a high level of financial transparency. A terminal value may be
calculated using an earning multiple approach and discounted back to the present
day value. Alpha Capital will maintain detailed earnings forecasts, apply an appropriate
risk adjusted discount rate and a reliable terminal value where this method is used.
Alpha Capital recognizes the importance of a model’s assumption and the sensitivity
of valuations to these inputs. The discount rate is one variable which may affect
this. Alpha objectively calculates discount rates incorporating and analyzing the
underlying company’s sensitivity to a wide range of economic risk factors. These
include sovereign risk, inflation risk, interest rate risk, IT risk, corporate governance
risk, competition risk, obsolescence risk, resource supply risk and many others.
In special circumstances Alpha Capital may outsource this function to reputable
valuers who adhere to the above principals.
4. Market Price on Exchange
Alpha Capital will value any company that is listed on a recognized exchange at
the bid price on the valuation date or the closing price on the previous day. Alpha
will apply this methodology when there is an active market trading the company’s
equity. As such, no marketability discount will be applied to the value of the investment.
5. Industry Valuation Benchmarks
Where an investment is within an industry that has an industry specific valuation
benchmark, use may be made of these benchmarks. The use of such industry benchmarks
is only likely to be reliable and thus appropriate in limited situations, and is
more likely to be used as a reasonability check of values produced by using other
methodologies. With regard to the property holdings of Alpha Capital, the earnings
yield basis has been used to value these investments.
Applying Marketability Discount
The marketability discount will vary from situation to situation. Typically a discount
in the range of 10% to 30% will be used, depending on the circumstances. In the
case of a six-month lock up period, typically a discount of 20% of the market value
is used at the beginning of the period, reducing to zero at the end of the period.
Other factors influencing the market discount include:
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The closer a realization
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event the lower the discount
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The greater the influence of the private equity fund over the timing of the realization
the lower the discount
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Are the other shareholders like minded?
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Is there an agreed exit strategy?
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What has to be done to make the company salable?
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Stock market conditions, mergers and acquisitions activity level
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PORTFOLIO PARTNERS