How to invest in Eastern European frontier markets. Jacob Grapengiesser, Senior Advisor and Partner East Capital

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1 How to invest in Eastern European frontier markets Jacob Grapengiesser, Senior Advisor and Partner East Capital

2 East Capital Eastern Europe Frontier funds East Capital Balkan fund East Capital Baltic fund East Capital New Market fund East Capital Deep Value fund

3 European frontiers Baltics & Ukraine Estonia Latvia Lithuania Balkans Romania Bulgaria Croatia Serbia Bosnia & Herzegovina Macedonia Slovenia Montenegro Markets & Economies GDP: USD 1.3tr Population: 150m people (largest Ukraine & Romania) Market cap: USD 50bn Low debt levels (both public and private) Best equity performers in Europe YTD (Romania and Baltics ) Rich on natural resources (Kazakhstan, Ukraine & Turkmenistan) Underpenetrated consumer market, large infrastructure investment needs CIS, Caucasus & Central Asia Ukraine Armenia Azerbaijan Georgia Kazakhstan Kirghizstan Tajikistan Turkmenistan Uzbekistan Inaccessible markets Belarus Moldova Albania Kosovo

4 The New Markets and Deep Value Funds New Markets Fund Deep Value Fund Investment focus Return objective Investment style European frontier market all cap public equity To outperform European frontier markets Fundamental propriety research and selective activism Small and mid cap public equity and selected private equity in Emerging Europe Re-valuation and in many cases seek exit above market price Activism, involvement and deal sourcing Portfolio concentration Concentrated Diversified Liquidity Liquid holdings Less liquid special situations Holding characteristics Attractive valuations Distressed-like valuations Portfolio characteristics European frontier market correlation bias Overall expected low correlation to markets

5 New Markets and Deep Value Funds cont d Performance overview 100% 80% 60% 40% 20% 0% -20% -40% East Capital New Markets Fund East Capital Deep Value Fund MSCI CEE + CIS (European Frontiers) MSCI EM Europe Source: Bloomberg and East Capital estimates, as per Performance for New Markets and Deep Value Funds corresponding to the return of a buy & hold basket that has been rebalanced monthly based on the ingoing market value of each included holding in each month. Performance is gross of fees and excluding cash.

6 New Markets and Deep Value Funds cont d Performance overview 2% 0% -2% -4% -6% -8% -10% East Capital Deep Value Fund MSCI FM CEE + CIS (European Frontiers) Source: Bloomberg and East Capital estimates, as per East Capital New Markets Fund MSCI EM Emerging Europe

7 East Capital New Markets Fund

8 Investment process Eastern European frontiers more primitive markets than investors expect Focus on relatively few stocks on investors radar screen Eastern European frontier markets - manual approach Deal sourcing Frequent company visits Lack of information/research Key investment criteria Critical size typically top ten companies/market Needs to be on investors radar screen Attractive valuation and growth potential Strong management High corporate governance standards Concentrated fund need to cherry pick in large universe Capitalising on efforts of a large team Selective activism

9 New Markets Fund Valuation P/E x Average MCAP, USD 2.0bn Dividend yield 12m 7.4% Expected growth % EPS growth Two special situation cases in Russia Protek (pharmaceutics) and Bank Sankt- Petersburg (corporate & retail banking) Model portfolio Country Allocation Kazakhstan Slovenia Romania Russia Ukraine Montenegro Turkmenistan Lithuania 0% 10% 20% 30% Top-10 holdings Fondul Proprietatea 17% Kcell 15% KazmunaiGaz 11% Reinsurance Co Sava 11% MHP 9% Bank Sankt-Petersburg 6% Protek 5% Zavarovalnica Triglav 5% KRKA 5% Montenegro Telekom 4% Total 87% All data as per

10 Fondul Proprietatea Buying OTC ahead of listing (Step I) Romanian restitution fund, current assets EUR 3.7bn Enormous redistribution of assets EUR 4bn Shares distributed to citizens as compensation From end 2008 state ownership went from 70.4% to 0% Bering Balkan bought shares OTC with direct contracts Enormous legal work Around 80% discount to NAV Investment rationale Management to be transferred from the state to Franklin Templeton Discount to NAV expected to shrink To be listed on Bucharest stock exchange All three objectives achieved, 50% of position sold with 284% gain (capital and dividends) in local currency Source: Bloomberg and East Capital estimates

11 Fondul Proprietatea Decreasing NAV discount, activist (Step II) Despite high returns there should be upside left Not sold Holding Fund % of AUM 20.2% Fondul Proprietatea Bering Balkan Purchase date Exit date Total return 346%* The next steps becoming activist Several measures to decrease discount to NAV (currently at a record low 32%) Buybacks Latest buyback of 8% implies EUR120m/240 days of purchases Dividends - 66% of invested amount received back through dividends 6.3% yield currently Cash incentive for distribution introduced Vote on stricter performance criteria for the fund manager in the upcoming EGM The board changed to a (good) independent one Additional listing still being discussed Exit when discount 15-20% Source: Bloomberg and East Capital estimates *assuming average purchasing price of all shares

12 Company case Linas Agro Proven ability to generate value through organic growth, vertical integration and successful acquisitions Low valuation: 2013 P/E 3.9x, EV/EBITDA 4.2x Linas Agro is a leading Lithuania-based vertically integrated agro trader, producer and investor in the Baltic States Main operations: grain trading, feedstuffs production, farming, seed production, machinery trading, fertiliser production, poultry production Exports 3/4 of its agro produce volumes to Europe, Asia, and Africa Outstanding growth since 2010 IPO: sales up by 33% CAGR to EUR569m in 2012/2013 Rapid growth through acquisitions, excellent M&A track record: Divestment of Ukrainian fertiliser subsidiary with a 18m profit in 2011/2012 Value generating acquisitions in farming, seed production, machinery trading, and other agro inputs production companies Latest acquisition two poultry farms in Latvia Despite a recent run up in price, valuation still attractive: 2012/2013 P/E 3.9x, EV/EBITDA 4.2x 2013/2014e P/E 7.4x, EV/EBITDA 10x, upside risk for results

13 Montenegro Telekom 40% market share in mobile EBITDA margin > 40% Potential buyout of minorities EC together with other minority shareholders pushed for extra dividend 2014 yield of 20% (in EUR) Leading telecommunication provider in the country offering fixed, mobile, broadband and IP TV services Highly efficient operation with high margins and room for further growth High mobile penetration, but growing roaming revenues to due increased tourist arrivals Majority owned by Magyar Telecom and thus part of DT Group Good corporate governance Attractive valuation at 3x EV/EBITDA Historically high dividend pay-outs, special dividend in 2014 Company is regularly paying 100% of net profit In 2014, additional dividend from net cash on the balance sheet

14 East Capital Deep Value Fund

15 Investment process Focus on quality of management and business model Consolidation or other special situations given priority A focus on shareholder activism Track record of concluding large number of activist deals Manual approach Very close contact with management and owners when in realisation mode Deal and exit sourcing through unconventional ways Lack of information and research frequent company visits Activist approach Legal expertise to support hands-on deal making and activism Board member nominations and other shareholder actions to assure minority rights and proper corporate governance Push for trade sale and repurchase of shares Key investment criteria Small caps proven business model, attractive valuations Deep value legacy assets at large discount to acquisition value Private equity strong in its industry, consolidation target, no new investments will be made, focus on exits Capitalising on efforts of a large team

16 Portfolio Three key focuses, all with significant revaluation potential All categories meet a very high required rate of return criteria Small caps Long term positions Proven business models, good owners and management Deep value Typically written down 70-99% Some problematic, some off investors radar screen Most very cheap (on P/E and/or P/B multiples) Structured sale aiming at above market exit Largest in number of holdings Private Equity Small number of holdings Active approach, board seats

17 Activism approach Discussions with managements and boards: company visits and meetings/year, numerous letters and contacts Nomination or endorsement of INEDs: 19 in Russia, 9 in Balkans, 2 in Nordics and Baltics YTD Voting at shareholders meetings: 70+ meetings YTD Collaboration with others: Investor Protection Association (IPA, Moscow), UNPRI, Transparency International Dialogue with governments, stock exchanges, other authorities: Advocate improvements in the legal context and capital market framework

18 Deep Value Fund Average MCAP 172M USD 131 holdings 16% unlisted (of portfolio ex cash) Almost half of the portfolio at less than 0.2x sales 21% of the holdings at less than 2x earnings Many holdings written down 80-90% Significant upside if holdings can be sold at anything close to fair value Model portfolio Asset allocation by country Russia Serbia Ukraine Kazakhstan Bosnia Slovenia Turkey Georgia Romania Macedonia Armenia Montenegro 0% 10% 20% 30% 40% Top-10 holdings % Verofarm 8 B92 8 Cantik 4 Integra 4 Steppe Cement 4 Pinar Et Ve Un 3 Bank Tsentrkredit 3 Telekom Srpske 3 Bambi 3 Komercijalna Banka Skopje 3 Total 43 P/E % < >10 20 P/S % >1 27

19 Exits 2013 Exits process already started Some done at very significant premiums to the market Recently realised Bezdan, Ravnica and Zlatica Serbian agricultural companies 18 months negotiation with main owner Sold at 3x initial bid, and twice the official buyout price USD 1.8m transaction Metrostroy Russian construction company Negotiation with one of the owners during shareholder conflict Sold at 76% premium to the market USD 500k transaction Vetropack Ukrainian packaging company Sold back to Swiss mother company at a 880% premium to valuation USD 90k transaction

20 Exits Bambi Cheap, high quality consumer stock Large discrepancy between strategic and market valuations showed there is significant opportunity Hands on approach Strategic deal delayed, but highly profitable exit due to strong local network 29% IRR Leading confectionary producer in Serbia and the Balkans Bought from distressed sellers, waiting for strategic deal Good relationship with the majority owners, a PE Fund Semi strategic stake of 10% Activist role during the time of the investment Buyback of 25% of the total shares outstanding Tag along right if transaction would have taken place New exit alternative emerged Local competitor wanted to built a position and our stake was crucial 3 months negotiations 110% total return

21 Exits 2014? Very large potential for returns Sometimes lengthy processes but also significant progress achieved In process Bamtonnelstroy Russian construction company Assets stolen from the company East Capital filing court cases over three years 18 court cases 17 won, 1 not finished Potential out of court settlement at 4-8x current valuation USD 2.8m potential deal Buyout offer just launched at 3x entry price Construction company Central Asia / Caucasus Distressed project, but with valuable fixed assets East Capital increased its stake from 10% to 40% of the project in August from a distressed seller, at 95% discount to asset value East Capital in lead of divesting company s main asset. Purchase agreement signed in April 2014 at price corresponding to valuation 10x higher than August distressed valuation. East Capital taking seat in supervisory board from May 15 th with aim to promote cash distribution to shareholders.

22 Pharmstandard Buying GDRs trading with shares of spin-off Co #1 Russian generic producer Bought GDRs at USD8.6 sold at 8.5 Received share dividend worth up to USD6 Holding Fund Pharmstandard Deep value fund Purchase date Sold PHST GDRs, shares of Exit date spin-off Co are to be sold Expected return ~80% Pharmstandard shareholders voted for reorganization of the Co, i.e. spin-off of branded OTC business. All shareholders were to get shares in new OTC Pharm company Due to mistake done by the Co record date for Pharmstandard GDRs to get OTC Pharm shares was not announced in time GDRs were trading with OTC Pharm while the market treated them as trading without OTC Pharm, which was completely wrong Investment rationale Bought GDRs which were mispriced by the market shares of spin-off OTC Pharm were valued at 0 by the market Received shares of spin-off OTC Pharm Co proportionally to our position Exit the position once OTC Pharm shares start trading in May 2014 Under very conservative scenario OTC Pharm fair value USD6/share vs. 0 at the time of acquisition Source: Bloomberg and East Capital estimates

23 Komercijalna banka Skopje Other 2 banks owned by Greek and Slovenian parents Economy pick up should bring back the growth The stock is up 40% YTD on renewed interest for banks Eventually, interesting strategic target One of the 3 large banks in Macedonia The only bank in the Balkans with leading market share (>20%) and no strategic owner Low financial intermediation offers structural growth opportunity Loans/GDP at 40% Operating profitability remained strong Operating income up 10% over last 2 years Net profit burdened by provisions, but profitability should reach precrisis levels of 20% ROE EC as the single largest shareholder 13% stake bought in a capital increase Board membership Aligned interest with other shareholders After recent rally, stock trades at 0.6x P/B

24 East Capital Eastern Europe Frontier funds East Capital Balkan fund Daily traded, broad exposure to Balkans and Turkey East Capital Baltic fund Daily traded, broad exposure to Baltics East Capital New Markets fund Concentrated, pan-eastern Europe frontier Monthly traded East Capital Deep Value fund Diversified special situations fund Frontier and Russia

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26 Integra Turnaround with potential Improving outlook and high dividend or deleveraging potential following asset disposal Holding Fund % of AUM 3.7% Integra GDR Bering Russia Purchase date Exit date Total return 31% IRR high Drilling, work-over and technology service for Russian oil and gas companies Investment rationale Stock collapsed by 97% since IPO in 2007 Company has passed its through level and implementing changes Sold 9 drilling rigs in February 2013 for USD 69m Company is now considering a special dividend, debt repayment or investment Replacement value of remaining business is 2x EV East Capital is taking an activist role in the company East Capital owns in total 17.6% of Integra across funds East Capital has been supporting independent directors in the Board East Capital holds active discussions with management and Board of Directors Current valuation EV/EBITDA 13 3x Potential special dividend yield 52% without breaking self-imposed covenants Source: Bloomberg and East Capital estimates

27 Performance overview Combined Bering portfolios split in two parts creating two new funds +85.6% for New Markets Fund between the period and versus -10.6% for the European frontier index Deep Value Fund performance in line with European Frontier index but fund valuations at depressed levels with good potential to recover New Markets and Deep Value Funds 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 34,5% 21,6% -2,0% 16,7% -21,8% -33,0% -22,6%-23,7% Source: Bloomberg and East Capital estimates, as per Performance for New Markets and Deep Value funds corresponding to the return of a buy & hold basket that has been rebalanced monthly based on the ingoing market value of each included holding in each month. Performance is gross of fees and excluding cash. 41,9% -9,2% 11,7% 24,3% 23,0% -4,3% YtD East Capital New Markets Fund MSCI CEE + CIS (European Frontiers) East Capital Deep Value Fund MSCI EM Emerging Europe 5,9% -3,0%

28 Thank you. Multumesc. Hong Kong Kyiv Luxembourg Moscow Oslo Paris Stockholm Tallinn 31