MEMORANDUM. investments in accordance with the Investment Strategy. Exhibit Public-Private Investment Fund

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1 MEMORANDUM To: State Universities Retirement System of Illinois From: Russ Ivinjack Amy Paris Date: October 20, 2009 Re: Public-Private Investment Program Summary The State Universities Retirement System is currently evaluating the merits of the United States Department of the Treasury s ( Treasury ) Public-Private Investment Program ( PPIP ). The opportunity was generally discussed at the September Board meeting when the Board decided it would like to conduct a search to further evaluate whether PPIP is an appropriate investment for SURS. The decision of whether to invest in PPIP will occur after vetting the investment opportunity and interviewing PPIP managers at the October 20, 2009 Board meeting. Below we outline the timeframe for PPIP and the process employed to identify finalists for the Board to interview. Treasury Announced PPIP March 23, 2009 Treasury Announced PPIFs 1 July 9, 2009 EnnisKnupp meets with nine PPIFs July 2009 SURs Board Approves PPIF search September 10, 2009 Semi-Finalists Presentations October 1 & 2, 2009 Final Vote on Investment Mandate October 20, 2009 Finalist Presentations October and December Board Meetings Background Treasury selected nine eligible PPIFs from over 100 applicant firms. Selected firms were chosen based on their ability to meet Treasury s PPIF criteria, including a demonstrated capacity to raise at least $500 million of private capital, demonstrated experience investing in eligible assets 2, a minimum of $10 billion (market value) of eligible assets under management, and demonstrated operational capacity to manage the funds in a manner consistent with Treasury s stated investment objective 3 while also protecting taxpayers. The firms must also be headquartered in the 1 Public-Private Investment Fund 2 Eligible assets: commercial mortgage backed securities ( CMBS ) and residential mortgage backed securities ( RMBS ) issued prior to 2009 that were originally rated AAA or an equivalent rating by two or more nationally recognized statistical rating organizations without ratings enhancement and that are secured directly by the actual mortgage loans, leases or other assets and not other securities (other than certain swap positions, as determined by the Treasury). The Eligible Assets must be purchased solely from financial institutions from which the Secretary of the Treasury may purchase assets pursuant to Section 101(a)(1) of the Emergency Economic Stabilization Act of 2008 ( EESA ). 3 Investment Objective: To generate attractive returns for taxpayers and private investors through long-term opportunistic investments in accordance with the Investment Strategy.

2 United States. To ensure robust participation by both large and small firms, these criteria were evaluated on a holistic basis and failure to meet any one criterion did not necessarily disqualify an application. Most criteria set forth by Treasury were met by the nine managers with the exception of $10 billion of eligible assets under management, which was met by less than half of the eligible managers. The firms selected by the Treasury include: 1. AllianceBernstein LP ( Alliance Bernstein ) 2. Angelo Gordon/GE Capital Corporation ( Angelo Gordon ) 3. BlackRock Inc. ( BlackRock ) 4. Invesco Ltd. ( Invesco ) 5. Marathon Asset Management ( Marathon ) 6. Oaktree Capital Management ( Oaktree ) 7. RLJ Western Asset Management ( RLJ / Western ) 8. TCW Group Inc. ( TCW ) 9. Wellington Asset Management ( Wellington ) Search Process In evaluating the nine PPIFs selected by Treasury, EnnisKnupp judged such factors as the qualifications of the managers PPIF teams in managing structured asset pools, the portfolio construction process, the security selection process, the alignment of interests between the PPIF and the parent firm, the structure of firm ownership, the use of strategic and minority partners, and fees. To clarify its subjective judgments, EnnisKnupp scored each offering on 25 factors from 5 (best) to 1 (worst) in each of five broad categories: organization (30%), portfolio construction (30%), terms of the PPIP offering (25%), risk management (10%), and past performance (5%). EnnisKnupp identified six managers with particularly compelling investment platforms which we believe would be an appropriate fit within the SURS investment program. Semi-finalist interviews were conducted with these managers at SURS offices. 1. Alliance Bernstein 2. Angelo Gordon 3. Marathon 4. Oaktree 5. RLJ / Western 6. TCW 2

3 After meeting the semi-finalists, SURS Investment Staff and EnnisKnupp determined that the below listed four PPIFs presented the most attractive investment opportunities and decided to bring these firms forward for the Board s consideration. 1. Angelo Gordon 2. RLJ / Western 3. TCW 4. Oaktree 1 Each finalist presents a differentiated offering. Angelo Gordon possesses strength in combined investment skill between the two PPIP asset classes, residential mortgage-backed securities ( RMBS ) and commercial mortgagebacked-securities ( CMBS ), and top level talent to navigate between the two markets. RLJ / Western is the only PPIF to be minority owned with 51% of the PPIF belonging to RLJ, the investment firm founded by Robert L. Johnson 2. Western s investment team, who will be running PPIF investment activities, has significant investment experience in non-agency RMBS and has approximately $20 billion currently invested in the asset class. With 65 investment personnel and two legacy non-agency RMBS funds, TCW has the deepest RMBS investment team and infrastructure. For full evaluations of these managers, please see the attached investment profiles. Exclusions Of Treasury s nine selected PPIFs, BlackRock, Invesco and Wellington were excluded from semi-finalist interviews. After conducting semi-finalist interviews, Alliance Bernstein and Marathon were excluded. Each excluded PPIF is listed below with an explanation of the reasoning leading to their exclusion. First Round Exclusions BlackRock: Blackrock was excluded from EnnisKnupp s top PPIF choices due to its high fees and lower institutional capacity. High Fees - BlackRock s management fee is charged on all capital invested under the PPIF mandate, including debt. Therefore investors will pay a management fee double the stated fee of 25 basis points. BlackRock s PPIF also includes an 80/20 catch-up clause, i.e., after the preferred return of 10% is achieved, BlackRock earns a disproportionately high percentage of the PPIF s profits until it has received distributions on all profits as if there were no preferred return. Capacity Constrained - Blackrock has limited institutional capacity for its PPIF product as $600 million of the firm s $1.1 billion PPIF capacity will be allocated to a retail fund. 1 Due to Oaktree s CMBS focus, this PPIP offering will be presented at the December Board meeting when the focus will be on the real estate investment portfolio. 2 The RLJ Companies was founded by Robert L. Johnson, founder of Black Entertainment Television. RLJ manages $3 billion in real estate funds and $300 million in private equity funds. 3

4 Invesco: Invesco was excluded from EnnisKnupp s top PPIF choices due to its bifurcated investment approach and limited organizational collaboration. Bifurcated Investment Approach - Invesco was not selected as a top PPIF due to its two-tiered investment plan of incorporating both the US Treasury-backed securities program and the US Government-backed loan program, of which the details have yet to be announced. While Invesco s private placement memorandum states that Invesco will take advantage of the loan program, the loan program may or may not be launched by Treasury. Also, due to the structure of the securities program where terms are known, it is our understanding that rebalancing across the two programs is not possible due to limitations on distributions out of the securities program, which leaves no advantage for a combined fund relative to two separate funds, should the loan program be launched in the future. Limited Organizational Collaboration - The team is split among three cities: Atlanta, GA; Louisville, KY; and Dallas, TX. Atlanta will be the base for all loan investing, the Louisville office houses the RMBS team, and the CMBS team is located in Dallas. Wellington: Wellington s PPIF offering was not chosen as a semi-finalist because the investment team did not demonstrate above-average security selection techniques. Average Security Selection Skills: EnnisKnupp did not find a unique strength within PPIF team or investment strategy relative to the other managers. While Wellington s fees are low and EnnisKnupp would not discourage an investment in Wellington s PPIP product, EnnisKnupp also does not believe that Wellington s PPIF represents as compelling an opportunity as those recommended. Second Round Exclusions Alliance Bernstein: Alliance Bernstein was included in semi-finalist interviews because the strategy possessed many attractive features. Alliance Bernstein was the only PPIF, for example, to segregate its team from other trading operations, which ensures a non-dilutive allocation process. Additionally, Alliance Bernstein s strategic partners provide an edge to security selection valuation inputs through the ownership of a residential loan servicer. Alliance Bernstein was, however, subsequently excluded from the finalist interviews due to its lack of experience investing in PPIP eligible assets relative to the finalists. Marathon: Marathon s PPIF was selected as a semi-finalist for several reasons. Most notably, the firm has strong alignment of interests. Marathon s employees will personally commit most of the $20 million Treasury has mandated that PPIF managers contribute to their own funds. This is unusual among PPIP managers and ensures the seven partners are personally vested in the success of Marathon s offering. Also, the firm possesses skill and a relatively narrow focus on managing distressed debt and mortgage securities, the focus of PPIP. Marathon was, however, excluded after the semi-finalist round of interviews due to other firms comparative strengths in investing in the CMBS market. G:\SURS\WP\MEMOS\PPIFs_October Board Meeting_FINAL.doc 4

5 Angelo, Gordon & Co. AG GECC Public-Private Investment Fund, L.P. Investment Profile Overview The newly formed partnership between Angelo, Gordon & Co. ( AG ) and GE Capital Real Estate ( GE ) represents a differentiated approach to investing in PPIP eligible assets. The complementary contributions by each firm offer a unique opportunity to leverage ground level data insights from GE with a top tier distressed and real estate investment platform from AG. While both firms share a common negative macro economic outlook 1 and an emphasis on deep dive, bottom-up credit analysis, their contributions to the partnership differ. AG brings a highly regarded expertise in trading and modeling the securitized residential and commercial mortgage markets. GE has originated $50 billion in commercial loans, owns the largest private credit card worldwide with over 100 million consumer relationships, and has invested heavily in its real estate database which has local loan level knowledge of properties and markets throughout the United States. This distinctive combination of resources will enhance Angelo Gordon and General Electric ( AG/GE ) s security selection process and enable the partnership to opportunistically exploit the investment prospects eligible for PPIP investment. AG co-founder Michael Gordon; AG s three head portfolio managers Jonathon Lieberman in RMBS, 1 The macro outlook calls for peak unemployment greater than 12%, a peak to trough decline in home values of 45%, a peak to trough decline in commercial real estate of 50%, and an US economic recovery post Andrew Solomon in CMBS and David Roberts in private equity/special situations; along with four members of GE s real estate division, including President and CEO of GE Real Estate, Joseph Parsons, will comprise the eight-member investment committee. This highly experienced team will set guidelines, such as mix between RMBS and CMBS, as well as other investment parameters. Additionally, four members of GE s real estate division will physically reside at AG and be involved throughout the investment and risk management processes. Organization AG is a privately held investment manager founded in 1988 by John Angelo and Michael Gordon. The firm employs approximately 180 people, about half of whom are investment professionals, and manages approximately $17 billion. The firm s investment focus centers around two core competencies, credit and real estate, and manages capital across four principal lines: (1) distressed debt and leveraged loans, (2) real estate, (3) private equity, and (4) multi-strategy hedge funds. AG has a successful track record and positive reputation in PPIP eligible assets. AG s RMBS and CMBS teams currently manage other similar investment vehicles which are close to fully invested. As such, the majority of the overlap between the PPIP funds and existing investment products in PPIP eligible assets will occur when sales are conducted. If an identical security is held in PPIP and another investment product at the time of sale, proceeds will be distributed ENNISKNUPP STRENGTH FROM KNOWING SM 1

6 proportionately based on capital invested. After the PPIP launch, AG s RMBS and CMBS teams will spend approximately 90% of their time managing PPIP assets. GE Capital has $84 billion in commercial real estate holdings, $50 billion of which is held in the US. The firm has a database on each address in which the firm has invested or this database will be highly researched over the past three years. AG/GE will utilize this database to assist it in its security valuation quantitative modeling process, risk management and ongoing monitoring models as well as in setting portfolio composition guidelines at the investment committee level. Investment Process AG/GE s honed investment platform and experienced team enable an investment program that is both quick to react to changing market conditions and careful to select security types and asset classes that promote risk-reducing diversification. The partnership expects to opportunistically allocate assets between RMBS and CMBS throughout the three year investment term and to rotate the portfolio to take advantage of the best risk-adjusted returns across different asset classes within RMBS and CMBS. The model portfolio prepared by AG/GE, based on current market conditions, shows a split of 50% RMBS and 50% CMBS over the life of the Fund. However, they may or may not implement this split exactly; the ultimate portfolio allocation will depend on market conditions at deployment and bottomsup security valuation. AG/GE believes that security selection will be critical in both the RMBS and CMBS markets, rather than relying on rating agencies and subordination levels. AG/GE s asset selection process in both security type and asset class is anchored by the intrinsic value of collateral of the underlying loans. In RMBS, AG/GE will utilize AG s proprietary model which evaluates each securitized pool of loans on a loan by loan basis. The model uses inputs from GE s massive consumer database and examines factors such as a borrower credit quality, mark-to-market loan-to-value ratios, prepayment propensity, pricing trends by zip code, supply and demand in each local market and servicer motivation and capabilities. This granular loan-byloan process is structured to determine intrinsic value of securities secured by residential mortgages and consumer receivables. AG/GE uses the model output to identify superior and inferior risk-adjusted return characteristics of a RMBS bond. This comprehensive analytical approach combined with the team s own historic experience in RMBS and consumer behavior gives the group insight and conviction to determine allocation between securities and tranches. At the outset, the RMBS portfolio will be concentrated primarily in the most senior tranches within the non-agency RMBS space including, Alt- A Super Seniors, Prime Pass-Thrus, and Subprime Front Pays. The portfolio managers believe that many of these bonds will prepay and/or mature within the three year investment period. When these investments are harvested, AG/GE will reinvest the assets into new investment opportunities with positive risk-adjusted return attributes. The managers also see the risk of principal modification to be high in the first few years of the PPIP program, as such AG/GE will underweight those pools more susceptible to modification such as Pay Option-Arm structures. Similarly, the General Partner evaluates CMBS opportunities on a loan by loan basis utilizing GE s property specific knowledge. AG/GE s credit driven investment process projects loan level losses by creating a unique credit risk profile for each loan ENNISKNUPP STRENGTH FROM KNOWING SM 2

7 using such factors as location and asset quality, collateral valuation, borrower and operator capabilities, comparable sales and leasing quality, and historical performance. After ranking securities by underlying loan, AG/GE then stress tests results with conservative market assumptions such as significant upward movement in capitalization rates, property income haircuts and higher vacancy rates. In the model portfolio provided by the General Partnership, investments will be concentrated in Super Senior CMBS and AM tranches and underweighted in the more subordinated AJ tranche. In EK s meetings with the portfolio managers, we learned that AG/GE expects another leg down in CMBS in 2-3 years at which time they will look to redeploy capital harvested from shorter duration investments made at the inception of the PPIP program. Through the use of GE s database and AG s experienced team, we believe that the AG/GE team possess a substantial edge in CMBS investing when compared to other PPIP managers focused on both RMBS and CMBS. Based on AG/GE s return expectations for the securities in the model portfolio, the General Partner expects to earn a 13.5% base case unlevered return on the portfolio, gross of fees. One-to-one leverage provided by the Treasury is expected to increase the leveraged return to 23% gross of fees. The General Partner is targeting a net return to private investors of 19% 24%. foreign investors. The General Partner has retained Park Madison Partners, a women-owned real estate advisory and consulting firm that has a 25-year relationship with AG, and CastleOak Securities, a minorityowned full service broker-dealer. Park Madison has raised $12 billion since inception, has over 400 US institutional investors and has a 2.5% participation in the AG-GECC Joint Venture. CastleOak has over 400 institutional investors and specializes in RMBS, CMBS, ABS and CDO products. GE has done business with CastleOak since 2006 and the two firms have raised over $72 billion together. CastleOak will be compensated on a fee basis for services rendered as a brokerdealer and placement agent and is not a part of the AG/GE General Partner. Documentation has been finalized with Treasury, the General Partner expects to charge institutional investors a 1.0% management fee plus 20% of profits above an 8% preferred return as carried interest. There is no catch-up provision that would result in the General Partner earning carried interest on the first 8% once the preferred return is met. There is a $5 million minimum investment. Structure Securities in the portfolio will be held by AG GECC PPIF Master Fund, L.P. Institutional commitments to AG/GE will primarily be made to a Delaware feeder fund for domestic investors and Cayman feeder fund, for UBTI-sensitive U.S. investors and ENNISKNUPP STRENGTH FROM KNOWING SM 3

8 Terms: Minimum Investment $5 million Manager s Targeted Levered Net IRR High teens Targeted Yield in Investment Period 6-8% Portfolio Composition Opportunistic RMBS and CMBS Management Fee 1.0% Management Fee Basis 1.0% of aggregate capital commitments during the investment period and 1% net funded capital commitments thereafter Incentive Fee (or carry) 20% Hurdle Return (or preferred return) 8% Catch-up to General Partner after Hurdle No Disclaimer and Notices: This article was prepared by Ennis Knupp + Associates ( EnnisKnupp ) as an assessment of the investment opportunity offered by the Legacy Securities Public-Private Investment Program ( S-PPIP ) implemented by The United States Department of the Treasury ( the Treasury ). EnnisKnupp is a consultant to the Treasury and is currently providing the Treasury with advice regarding S-PPIP; provided, however, that EnnisKnupp has created an internal control structure segregating the duties and systems of those professionals advising the Treasury with respect to S-PPIP and EnnisKnupp s internal S-PPIP research team, which prepared this article and may further advise clients regarding S-PPIP. EnnisKnupp s research is independent and is not based upon any non-public information received from the Treasury. Readers should consult their EnnisKnupp investment consulting team, who is familiar with your particular financial circumstances, as to the appropriateness of this investment for your fund. ENNISKNUPP STRENGTH FROM KNOWING SM 4

9 RLJ Western Asset Management RLJ Western Asset Public/Private Fund Investment Profile Overview The RLJ Western Asset Management partnership is the only PPIP offering with a minority firm owning a majority stake in the partnership. While we believe Western Asset Management ( Western ) is a leading and best in class traditional long only fixed income manager, we view the unique partnership with The RLJ Companies ( RLJ ), founded by Robert L. Johnson, as an appealing proposition, particularly for minority-sensitive clients. RLJ will own a 51% majority state in the partnership while Western will own the remaining 49%. Western possesses significant experience managing structured products through different market cycles. The firm s current assets in PPIP eligible assets exceed $23 billion and spread across a variety of mandates from broad market to single focused strategies. We recognize the challenges Western faced in the past 18 months when performance lagged, but we believe that Western not only learned from its missteps, but that it also appropriately addressed them by upgrading its risk management capabilities and analytics systems. Western will be responsible for managing the PPIF while RLJ will primarily assist in the fund-raising efforts and other administrative duties such as reporting. The partnership s economic interests differs from the ownership arrangement in that profit sharing as well as the Treasury-mandated $20 million general partners commitment will be split approximately two-thirds towards Western and the remaining one-third to RLJ. Organization Western is one of the largest fixed income specialist firms with headquarters in Pasadena, CA. In addition, Western maintains eight offices across the globe. The manager is solely dedicated to institutional management and enjoys a strong reputation in the industry. As of 6/30/09, the firm managed a total of $485 billion in assets under management, including $23 billion in PPIP eligible assets. The firm has over 400 employees including approximately 120 investment professionals with the vast majority located in Pasadena was a particularly difficult year for Western on multiple fronts. The firm announced two organizational developments that included broad firm-wide staff reductions and changes to the investment team. This news came on the heels of several other developments at Western, including the adverse performance of the manager s strategies during 2008 and the change at the CIO position that resulted from Mr. Ken Leech s health condition. While significant, the confluence of events that transpired in 2008 did not cause EnnisKnupp to change its advisory position on Western since the investment process ENNISKNUPP STRENGTH FROM KNOWING SM 5

10 and philosophy remained intact. Further, there has been a low level of voluntary turnover at Western, particularly among the key investment professionals including those in the structured products group. Western s structured products group is comprised of 13 seasoned investment professionals with an average of 15 years of product experience. Led by Ron Mass, the specialist team is broken out by three broad areas of responsibilities including: 1) ABS/Nonagency MBS and CMBS, 2) Agency MBS, and 3) research/mortgage modeling. The joint venture between RLJ and Western is unique among all nine PPIP managers that were chosen due to the majority stake ownership in the partnership by a minority firm. RLJ will primarily be responsible for assisting in the fundraising and marketing efforts. RLJ is headquartered in Bethesda, MD and was founded by Robert L. Johnson, the founder of Black Entertainment Television ( BET ). The RLJ business franchise consists of a diversified portfolio of companies including financial services, real estate, professional sports, hospitality, and other. Investment Process A key strength of Western is portfolio construction. While the manager has one of the deepest teams in the industry with approximately 120 investment professionals and some of the best sector specialists in the industry, its key strength is building broad market portfolios with a strong emphasis on spread sectors such as corporate bonds and structured products. Western prides itself on its team approach and culture. In addition to contributing to the strong performance returns we believe it is a primary reason behind the manager s investment professional stability. Western s sole focus is the active management of institutional fixed income mandates. The manager prides itself on its staff to client ratio, having over 400 employees and approximately 410 client relationships. Western is defined by its diversified longterm value approach. The manager seeks to achieve balance between multiple sources of value-added, namely duration management, yield curve positioning, sector allocation, and security selection. Western has dedicated significant resources to risk management, having dedicated risk models, portfolio position/trading systems and compliance systems by portfolio, country, sector, and security. The manager also has sophisticated portfolio analytics systems including stress testing, return attribution, value at risk (VAR) and tracking error systems. This firm-wide investment process applies to all of its strategies. However, each sector specialty team tailors the investment process for applicability within their respective sectors. The structured products group applies a four step process in evaluating non-agency mortgage securities. It encompasses the following: Issuer review Collateral analysis Structural analysis Servicer review ENNISKNUPP STRENGTH FROM KNOWING SM 6

11 At the issuer level, Western first evaluates the consistency in underwriting, historical and future growth trends, and retail vs. wholesale origination. The collateral and structural reviews are key factors to determining the expected default rates and loss severities, cash flow waterfall as well as the performance triggers. To that end, Western s MBS models have been significantly upgraded and refined to a granular level following the events of Exemplifying granularity of the model, Western s default assumptions are made at the zip code level, not at the Metropolitan Statistical Area ( MSA ) level which are used as an input into the Case-Shiller Index. MSAs are broader and less sensitive to nuances and heterogeneity in various locales. For example, the Los Angeles MSA has both Beverly Hills and Compton in it without distinction. Reliance on zip code information should provide increased accuracy in Western s analysis. Similarly, Western uses zip code level data to make better judgments on potential losses on specific areas within an MSA. This layer of analysis results in better-informed assumptions and likely more accurate loss severity estimates. Also factored into the loss severity assumptions are the costs associated with Real Estate Owned ( REO ) liquidation from start to finish. Western has also extended the assumed REO timeline beyond the average of 14 months to factor in stressed situations. Lastly, the model factors in whether the States in which the homes reside require judicial proceedings to foreclose and liquidate. Judicial States typically have longer timelines for liquidation of property. Although Western underestimated the level of magnitude of home price declines in We have confidence in Western s conservative assumptions of future stress in the residential real estate market. Western anticipates with PPIP it will significantly overweight the RMBS sector relative to CMBS. It expects to have an initial allocation of approximately 95% in nonagency RMBS and 5% in CMBS over the life of the fund. As market conditions change, the manager expects to make some modest variations to the allocation mix between the two sectors while still maintaining a strong bias towards RMBS. In terms of vintage year exposure, Western believes the best opportunities reside in the 2006 and 2007 vintage years. Structure The General Partner intends for institutional capital to comprise $1.0 billion of the total $1.1 billion in private capital. A retailoriented REIT feeder into the Master Fund is expected to contribute the remaining $100 million. The REIT is expected to have between $250 and $500 million in total assets and invest up to 40% of its assets in the PPIP but not to exceed $200 million. In addition, there will be onshore and offshore feeders available to REIT investors. The partnership s net profit will be split 5/7 th and 2/7 th between Western and RLJ, respectively. ENNISKNUPP STRENGTH FROM KNOWING SM 7

12 Terms Minimum Investment Manager s Targeted Levered Net IRR $1 million High teens Targeted Yield in Investment Period 8% Portfolio Composition 95% RMBS/ 5% CMBS Management Fee 0.5% Management Fee Basis Based on Committed Capital as the manager intends to deploy the entire capital within 6 to 9 months Incentive Fee (or carry) 15% Hurdle Return (or preferred return) 10% Catch-up to General Partner after Hurdle 85/15% Disclaimer and Notices: This article was prepared by Ennis Knupp + Associates ( EnnisKnupp ) as an assessment of the investment opportunity offered by the Legacy Securities Public-Private Investment Program ( S-PPIP ) implemented by The United States Department of the Treasury ( the Treasury ). EnnisKnupp is a consultant to the Treasury and is currently providing the Treasury with advice regarding S-PPIP; provided, however, that EnnisKnupp has created an internal control structure segregating the duties and systems of those professionals advising the Treasury with respect to S-PPIP and EnnisKnupp s internal S-PPIP research team, which prepared this article and may further advise clients regarding S-PPIP. EnnisKnupp s research is independent and is not based upon any non-public information received from the Treasury. Readers should consult their EnnisKnupp investment consulting team, who is familiar with your particular financial circumstances, as to the appropriateness of this investment for your fund. ENNISKNUPP STRENGTH FROM KNOWING SM 8

13 TCW Asset Management Company TCW Special Mortgage Credit Fund III Investment Profile Investment Thesis TCW s approach to investing begins with the belief that the most reliable source of incremental return is outperformance at the portfolio sector level. The manager does this by applying specific security analysis expertise as required by each sector. TCW dedicates significant resources to analyzing mortgages, particularly esoteric securities namely, inverse floaters, interest-only and principal-only instruments. Jeffrey Gundlach, TCW s Chief Investment Officer, decides the sector allocations, generally on a monthly basis. Mr. Gundlach bases his allocation decisions on valuation of the eligible non-agency RMBS sectors and analysis of the sector fundamentals with the specialist in those areas. The magnitude of an under / over-weight is driven by the evolving fundamental and technical conditions of the sector. TCW s market outlook is optimistic on nonagency residential mortgage-backed securities (RMBS), but believes that commercial mortgage-backed securities (CMBS) will experience further downside pressure. As such, TCW Special Mortgage Credit Fund III (SMCFIII) will primarily focus on RMBS opportunities. TCW has increasingly focused on non-agency RMBS since 2007 when the Firm raised its first dedicated non-agency RMBS fund. TCW has raised and fully invested two nonagency RMBS funds since July These two funds are 80% invested in Alt-A and 10% invested in each sub-prime and prime nonagency RMBS sectors. Given the Firm s market outlook and expertise, portfolio construction for SMCFIII is expected to be similar. Competitive Advantages Mortgage Research Process. TCW s competitive advantage lies primarily in the team s internal research capabilities. The manager s proprietary research is the driver of the investment process within each sector. The manager notes that nearly 90% of the research information utilized in the strategy is developed internally by the investment teams within each sector. As part of their quantitative research, TCW dedicates significant resources to analyzing mortgages. All of the strategy s internal research efforts for mortgage-backed securities are conducted at their Los Angeles headquarters. The research process uses a number of databases and analytical techniques to determine relative value for the entire range of MBS-type investments. Countless techniques are used in the strategy s valuations to varying degrees depending upon the investment horizon, liquidity constraints, and complexity of the security being considered. This research approach has positioned the manager as one of the premier mortgage investors in the world. ENNISKNUPP STRENGTH FROM KNOWING SM 9

14 Experience and Talent. In addition to the sound research efforts in place at TCW, the manager also maintains a distinguished and experienced team. The TCW MBS team consists of seven portfolio managers with an average of 26 years of industry experience and 11 years with TCW. Investment professionals at TCW tend to stay with the Firm their entire careers. The Firm manages approximately $16 billion in non-agency RMBS and over $54 billion in MBS assets, with a dedicated team of 65 investment professionals. Strengths of Strategy Insight and Experience. TCW is a wellestablished Los Angeles, California fixed income manager renowned for its mortgage capabilities. TCW MBS team has over 22 years of experience specializing in the non-agency RMBS sector and is one of the largest specialized MBS teams of experts. Jeffrey Gundlach, Chief Investment Officer, who oversees all fixed income investments, has been with TCW since Proprietary Research. The manager has a dedicated team in place that focuses on risk management and analytics. This team includes eight dedicated professionals and one assistant. The team tracks all strategies and composites on a real-time basis utilizing several analytical systems. This team is available to provide general and specific analysis to TCW s clients as well as to executive and portfolio management teams. Risk Control. The MBS team s philosophy is focusing on bottom-up risk management. Risks such as credit, prepayment, liquidity, as well as sector and security weightings are evaluated continuously and maintained at appropriate levels. Professional Turnover. Historically turnover among the Firm s senior professionals has been relatively low. The Firm s ability to attract and retain high-quality investment professionals stems in part from an incentive-based compensation structure put in place at TCW. Investment professionals at TCW are compensated through a base salary and fee sharing and/or performance-based compensation. Specifically, portfolio managers are compensated based on fee-sharing formulas which take into account revenues or profitability of assets under management and/or investment performance. TCW implemented Stock Option Plans, through which effective economic interest in the Firm have been allocated to key employees. The Firm has made significant efforts to retain the depth of the portfolio management team. Specifically, the executive management team has initiated a succession planning initiative aimed at securing future investment leadership of the Firm. This plan includes increasing the size of portfolio management teams to include both senior and junior portfolio managers, expanding the use of team-based decisions made within the investment process, and broadening the use of financial and other incentives to attract, maintain and promote junior investment analysts. Risks of Strategy Key Person Risk. While we acknowledge the depth and talent of TCW s investment team, we identify Jeffrey Gundlach and Philip Barach s insights as essential to the success of SMCFIII. The SMCFIII s key man clause is triggered if or when Mr. Gundlach ceases his investment ENNISKNUPP STRENGTH FROM KNOWING SM 10

15 duties. The key man clause is not triggered, however, in the case of Mr. Barach ceasing his investment responsibilities. Limited CMBS Experience. Although TCW s SMCFIII has conveyed that it will be primarily invest in RMBS, it will have the latitude to invest part or all of its assets in CMBS. The manager notes, however, a low likelihood that the riskreturn profile in the CMBS market would present a better opportunity set than RMBS during the three-year investment period for SMCFIII. the California Public Employees' Retirement System (CalPERS), the largest pension plan in the country. Mr. Barach is on the oversight board of the Israeli Securities Exchange Commission (SEC). He attended the Hebrew University of Jerusalem, where he received a BA in International Relations and an MBA in Finance. Biographies Jeffrey Gundlach Chief Investment Officer Mr. Gundlach is the Chief Investment Officer and a member of the Board of Directors of the TCW Group, Inc. In addition, he oversees fixed income investments as Chairman of the TCW Multi-Strategy Fixed Income Committee and is the Co-Founder and lead portfolio manager of the Mortgage-Backed Securities group. Mr. Gundlach joined the firm in 1985, prior to which he was associated with Transamerica Corporation's Los Angeles-based Property/Casualty Insurance division. He is a graduate of Dartmouth College summa cum laude holding a BA in Mathematics and Philosophy. He also attended Yale University as a PhD candidate in Mathematics. Philip A. Barach Group Managing Director, Mortgage-Backed Securities Mr. Barach is the Co-Founder of the MBS Group and joined TCW in He has over 29 years of fixed income investment experience. Prior to joining TCW, Mr. Barach was Senior Vice President of Chief Investments for Sun Life Insurance Company in Los Angeles. Previously, he served as Principal Fixed Income Officer for ENNISKNUPP STRENGTH FROM KNOWING SM 11

16 Terms: Minimum Investment Manager s Targeted Levered Net IRR $1 million High teens Targeted Yield in Investment Period 8% Portfolio Composition RMBS focus Management Fee 1.0% Management Fee Basis On invested capital Incentive Fee (or carry) 10.0% Hurdle Return (or preferred return) 3% Catch-up to General Partner after Hurdle 90% / 10% Disclaimer and Notices: This article was prepared by Ennis Knupp + Associates ( EnnisKnupp ) as an assessment of the investment opportunity offered by the Legacy Securities Public-Private Investment Program ( S-PPIP ) implemented by The United States Department of the Treasury ( the Treasury ). EnnisKnupp is a consultant to the Treasury and is currently providing the Treasury with advice regarding S-PPIP; provided, however, that EnnisKnupp has created an internal control structure segregating the duties and systems of those professionals advising the Treasury with respect to S-PPIP and EnnisKnupp s internal S-PPIP research team, which prepared this article and may further advise clients regarding S-PPIP. EnnisKnupp s research is independent and is not based upon any non-public information received from the Treasury. Readers should consult their EnnisKnupp investment consulting team, who is familiar with your particular financial circumstances, as to the appropriateness of this investment for your fund. ENNISKNUPP STRENGTH FROM KNOWING SM 12

17 July 8, 2009 TG-200 Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair on the Legacy Asset Program The Financial Stability Plan, announced in February, outlined a framework to bring capital into the financial system and address the problem of legacy real estate-related assets. On March 23, 2009, the Treasury Department, the Federal Reserve, and the FDIC announced the detailed designs for the Legacy Loan and Legacy Securities Programs. Since that announcement, we have been working jointly to put in place the operational structure for these programs, including setting guidelines to ensure that the taxpayer is adequately protected, addressing compensation matters, setting program participation limits, and establishing stringent conflict of interest rules and procedures. Recently released rules are detailed separately in the Summary of Conflicts of Interest Rules and Ethical Guidelines. Today, the Treasury Department, the Federal Reserve, and the FDIC are pleased to describe the continued progress on implementing these programs including Treasury's launch of the Legacy Securities Public-Private Investment Program. Financial market conditions have improved since the early part of this year, and many financial institutions have raised substantial amounts of capital as a buffer against weaker than expected economic conditions. While utilization of legacy asset programs will depend on how actual economic and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate. Thus, while the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs. Legacy Securities Program The Legacy Securities program is designed to support market functioning and facilitate price discovery in the asset-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses. Improved market function and increased price discovery should serve to reinforce the progress made by U.S. financial institutions in raising private capital in the wake of the

18 Supervisory Capital Assessment Program (SCAP) completed in May The Legacy Securities Program consists of two related parts, each of which is designed to draw private capital into these markets. Legacy Securities Public-Private Investment Program ("PPIP") Under this program, Treasury will invest up to $30 billion of equity and debt in PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities. Thus, Legacy Securities PPIP allows the Treasury to partner with leading investment management firms in a way that increases the flow of private capital into these markets while maintaining equity "upside" for US taxpayers. Initially, the Legacy Securities PPIP will participate in the market for commercial mortgage-backed securities and non-agency residential mortgage-backed securities. To qualify, for purchase by a Legacy Securities PPIP, these securities must have been issued prior to 2009 and have originally been rated AAA -- or an equivalent rating by two or more nationally recognized statistical rating organizations -- without ratings enhancement and must be secured directly by the actual mortgage loans, leases, or other assets ("Eligible Assets"). Following a comprehensive two-month application evaluation and selection process, during which over 100 unique applications to participate in Legacy Securities PPIP were received, Treasury has pre-qualified the following firms (in alphabetical order) to participate as fund managers in the initial round of the program: AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC; Angelo, Gordon & Co., L.P. and GE Capital Real Estate; BlackRock, Inc.; Invesco Ltd.; Marathon Asset Management, L.P.; Oaktree Capital Management, L.P.; RLJ Western Asset Management, LP.; The TCW Group, Inc.; and Wellington Management Company, LLP. Treasury evaluated these applications according to established criteria, including: (i) demonstrated capacity to raise at least $500 million of private capital; (ii) demonstrated experience investing in Eligible Assets, including through performance track records; (iii) a minimum of $10 billion (market value) of Eligible Assets under management; (iv) demonstrated operational capacity to manage the Legacy Securities PPIP funds in a manner consistent with Treasury's stated Investment Objective while also protecting taxpayers; and (iv) headquartered in the United States. To ensure robust participation by both small and large firms, these criteria were evaluated on a holistic basis and failure to meet any one criterion did not necessarily disqualify an application. Each Legacy Securities PPIP fund manager will receive an equal allocation of capital from Treasury. These Legacy Securities PPIP fund managers have

19 also established meaningful partnership roles for small-, veteran-, minority-, and women-owned businesses. These roles include, among others, asset management, capital raising, broker-dealer, investment sourcing, research, advisory, cash management and fund administration services. Collectively, the nine pre-qualified PPIP fund managers have established 10 unique relationships with leading small-, veteran-, minority-, and women-owned financial services businesses, located in five different states, pursuant to the Legacy Securities PPIP. Moreover, as Treasury previously announced, small-, veteran-, minority-, and women-owned businesses will continue to have the opportunity to partner with selected fund managers following prequalification. Set forth below is a list (in alphabetical order) of the established small-, veteran-, minority-, and women-owned businesses partnerships: Advent Capital Management, LLC; Altura Capital Group LLC; Arctic Slope Regional Corporation; Atlanta Life Financial Group, through its subsidiary Jackson Securities LLC; Blaylock Robert Van, L.L.C.; CastleOak Securities, LP; Muriel Siebert & Co., Inc.; Park Madison Partners LLC; The Williams Capital Group, L.P.; and Utendahl Capital Management. In addition to the evaluation of applications, Treasury has conducted legal, compliance and business due diligence on each pre-qualified Legacy Securities PPIP fund manager. The due diligence process encompassed, among other things, in-person management presentations and limited partner reference calls. Treasury has negotiated equity and debt term sheets (see attached link for the terms of Treasury's equity and debt investments in the Legacy Securities PPIP funds) for each pre-qualified Legacy Securities PPIP fund manager. Treasury will continue to negotiate final documentation with each pre-qualified fund manager with the expectation of announcing a first closing of a PPIF in early August. Each pre-qualified Legacy Securities PPIP fund manager will have up to 12 weeks to raise at least $500 million of capital from private investors for the PPIF. The equity capital raised from private investors will be matched by Treasury. Each pre-qualified Legacy Securities PPIP fund manager will also invest a minimum of $20 million of firm capital into the PPIF. Upon raising this private capital, pre-qualified Legacy Securities PPIP fund managers can begin purchasing Eligible Assets. Treasury will also provide debt financing up to 100% of the total equity of the PPIF. In addition, PPIFs will be able to obtain debt financing raised from private sources, and leverage through the Federal Reserve's and Treasury's Term Asset-Backed Securities Loan Facility (TALF), for those assets eligible for that program, subject to total leverage limits and covenants.