CLOSED-END FUND SERVICES. Spectra. Professional Services

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1 CLOSED-END FUND SERVICES Spectra Professional Services

2 Spectra Professional Services Spectra Professional Services is an advisory firm providing a wide spectrum of consulting and project management services to the investment management industry. Managing resources efficiently while having the right people to execute projects effectively is a balancing act. Spectra Professional Services ( Spectra ) can help. We bring the collective experience of our partners, principals and associates to your business needs. We help you ease the burden on your staff, allowing them to focus on their day-to-day mandates. We provide a focused approach to engagements with the objective of delivering value on day one. Our closed-end fund services cover the full product cycle, from initial public offerings to advanced strategies involving complex capital transactions and activist investors. We offer component or end-to-end services customized to meet your goals. Spectra assists firms looking to establish a closed-end fund ( CEF ) business as well as firms with an established CEF business that are looking to strengthen their position within the market or are in need of targeted services. We can provide an introduction to the business model, review with you the current state of the industry, and consult on specific CEF issues. Our goal is to partner with you in the CEF sector, whether it is to help you improve on product offerings, position you more effectively in the secondary market, or create a product and market presence. We invite you to discuss how Spectra Professional Services can help your firm achieve your goals in the closed-end fund sector.

3 OVERVIEW OF CLOSED-END FUNDS The actively managed closed-end fund sector provides an attractive business opportunity for institutional and retail-focused investment advisors, both large and small. The structure offers advantages to advisors and investors that cannot easily be replicated elsewhere within the capital markets. A CEF is a pooled investment vehicle registered with the Securities and Exchange Commission under the Investment Company Act of Assets are raised through an Initial Public Offering ( IPO ). Additional assets may be raised through rights offerings or, though less commonly, through secondary market offerings. A CEF is typically listed on one of the national stock exchanges and its share price is determined by supply and demand in the market. Like any other publicly traded security, the market price of a CEF will fluctuate. Shares may trade at a discount or premium to its calculated Net Asset Value per share, and investors cannot ordinarily buy or redeem their shares directly from a CEF. CEFs are commonly leveraged through one or more forms of borrowing, subject to regulatory limits, which increases the managed assets of the fund. The CEF structure allows for investment strategies that typically are more diverse and flexible than in open-end funds. Whereas open-end funds cannot invest more than 15% of assets in illiquid securities, CEFs have a greater ability to invest in smaller and less liquid securities. And since a CEF does not need to contend with redemptions or subscriptions, it is structurally more suited to less liquid investments and strategies. As publicly traded companies, CEFs also have unique secondary market requirements regulatory, governance, compliance and investor relationship management compared to other registered investment products. THE CLOSED-END FUND INVESTOR Sophisticated: Affluent: Well educated: Retired: Self-directed: Closed-end fund investors tend to hold a broad array of mutual funds, equities, and variable annuities. Has the highest household income and financial assets versus U.S. households owning mutual funds and/or individual equities. More likely to have a college or other higher degree. More likely to be retired than either mutual fund or stock investors, consistent with the focus on income. Closed-end fund investors generally tend to make their own investment decisions and often rely less on financial advisors. Closed-End Fund Services 1

4 THE CLOSED-END FUND MARKET The investment banking community as well as the investing public continue to have a general appetite for well-articulated and vetted investment themes and structures. Closed-End Fund Assets Totaled $289 Billion at Year-End 2014 * $325B $275B $225B $175B $125B Assets under management increased to $289 billion at year-end 2014, demonstrating a continued rebound from a low of $184 billion following the financial crisis in New issuance has steadily picked up since 2009 at levels of $6 billion, $10.4 billion and $10.1 billion in 2011, 2012 and 2013, respectively. In 2014, new issuance totaled $4.1 billion. Recent Years Have Seen Consolidation and Streamlining * At year-end 2014, there were 568 closed-end funds. This is below the peak of 662 in 2007, as fund sponsors have been streamlining their offerings to provide clearer product differentiation by consolidating duplicative and smaller funds. With a few notable exceptions in 2010 and 2012, closed-end fund liquidations have been extremely rare since Spectra Professional Services

5 Equity Funds Are a Growing Part of the Closed-End Fund Sector * Assets in closed-end bond funds totaled $170 billion (59%) of all closed-end fund assets at year-end Equity closed-end fund assets totaled $119 billion (41%) of closed-end fund assets. A decade ago, two-thirds (67%) of all closed-end fund assets were held in bond funds while only a third (33%) were in equity funds. Income oriented, but not necessarily fixed income: In 2014, over $4.0 billion in new closed-end fund assets was raised. While master limited partnership funds continued to be the most popular asset class, approximately $1.3 billion was raised in funds with other investment strategies such as equity income. 31% 10% 20% 8% 31% Global / International Bond Municipal Bond Taxable Bond US Equity Global / International Equity Closed-End Fund Sponsorship Is Broadly Diversified * Closed-end fund sponsorship is broader than ever, with greater diversity among investment sponsors than prior years. In fact, no single sponsor or group of sponsors has dominance over the closed-end fund market. Studies show that nearly 90% of closed-end fund sponsors have between one and ten funds. The largest sponsors actually compose only 11% of the market. Recent years have seen a host of new sponsors enter the closedend fund market with new investment mandates and structures. 10% 6% 38% 5% Only 1 fund 2-5 Funds 6-10 Funds Funds 15+ Funds 41% * Data Source: Antoniewicz, Rochelle and Erin Short The Closed-End Fund Market, ICI Research Perspective 21, no.2 (April). Available at Data shown is as of calendar year end unless otherwise noted. Closed-End Fund Services 3

6 SPECTRA: MEETING THE FULL RANGE OF YOUR CLOSED-END FUND NEEDS Spectra s closed-end fund business services cover the full product scope. From initial public offerings to fund administration to strategies involving tenders, mergers and liquidations, Spectra offers both component and end-to-end support services. Business and Infrastructure Services: Gap analysis: A detailed review of investment, operational and governance capabilities. Review and analysis of investment capabilities and market demand. Prepare a multi-year business plan, pro-forma business budgets, break-even analysis at both product and business level. Address unique financial, tax and accounting implications for specific products, as necessary, and vet with accounting firms involved. Work with and lead or assist the internal compliance teams in designing and implementing a comprehensive compliance program. Provide board construction support and build a 40 Act governance and compliance infrastructure. Evaluate and select the right service providers, including the design and implementation of RFPs as well as creating the right vendor oversight model. 4 Spectra Professional Services

7 The IPO Process: Product development: Work with the investment team to design and develop viable CEF products. Lead and coordinate the initial public offering process, including registration statements, underwriters due diligence process, and exchangerelated issues. Assist management in getting product approval and investment management contracts approved by fund boards. Develop IPO marketing and sales strategy and materials, which may include working with underwriters and wholesalers. Assist in negotiating the most favorable forms of leverage at the most advantageous terms; coordinate all work with the rating agencies, if applicable. Design a comprehensive pre-ipo communication plan and establish the foundation for an effective post-ipo program. Post IPO Secondary Market Support: Develop an effective strategy to support the closed-end funds in the secondary market. Consult on ongoing best-practice issues related to closed-end funds, including distribution strategies, discount management, regulatory issues, communications. Work with market makers and exchanges to ensure orderly trading patterns. Consult on risk and crisis management. Provide regular industry updates and board education. Develop strategies for, and provide support in, managing activist shareholder relationships. Support your CEF infrastructure by providing component or end-to-end services. KEY CONSIDERATIONS FOR NEW SPONSORS Investment capabilities: Investment need: Distribution: Infrastructure: Do you have expertise and a demonstrated track record in a specific investment mandate? CEFs may be a good way for you to access retail investors. Is there a demand in the investor community for your investment capabilities that can be quantified and targeted? Can you design a product around your capabilities that is innovative and can be differentiated from the competition? The IPO market for closed-end funds operates in an advisor-sold distribution model. Do you have access to, and have the relationships with, major investment banks, underwriters, selling syndicates, wholesalers? How do you go about establishing and maintaining those relationships to achieve critical mass? Do you have an existing infrastructure that can support all aspects of a CEF business, including its unique demands? What is the optimal model for your organization: building a CEF infrastructure within your organization or getting professional help outside of your organization? Closed-End Fund Services 5

8 ABOUT OUR PRINCIPALS AND THEIR EXPERIENCE Closed-end funds have become increasingly complex and sophisticated over the past years, and our principals have been at the forefront of the trend. Our principals have over 80 years of combined experience in the asset management industry and have been instrumental in launching some of the most innovative, complex and groundbreaking funds in the industry. We have experience in virtually all aspects of the closed-end fund business, from conception to implementation, administration and oversight. We have built and managed one of the most successful closed-end fund businesses in the industry, encompassing firms such as Salomon Brothers, Smith Barney, Travelers Group, Citigroup Asset Management and, most recently, Legg Mason, Inc. Collectively, Spectra principals were responsible for the successful launch of nearly $6 billion in closed-end assets covering a wide range of complex product offerings, including domestic, international and emerging markets taxable fixed income funds, real estate investment funds, MLP funds, limited-term municipals, and corporate loan funds. We understand and have a demonstrated ability to design complex accounting, compliance and tax structures to support new and innovative products. We have designed, implemented and managed some of the most effective secondary market and investor communication programs in the industry. We have built and managed an effective analyst program that resulted in increased visibility and funds under rated coverage. Spectra principals have built and executed custom, complex compliance programs for sophisticated products, including guideline monitoring, tax compliance, loan covenant compliance monitoring and SEC Regulation Fair Disclosure policies. We have extensive experience in dealing with regulators, exchanges, legal counsels, accounting firms, fund boards and virtually all other participants in the closed-end fund market. 6 Spectra Professional Services

9 BRENDA GRANDELL GEORGE BETZIOS KAPREL OZSOLAK Brenda Grandell is a principal at Spectra. Prior to joining Spectra, Ms. Grandell was the Director of Closed-End Fund Administration at Legg Mason, Inc. Ms. Grandell has developed and managed two of the largest and most successful closed-end fund complexes in the U.S. She developed Legg Mason s closed-end fund business following the firm s acquisition of Citigroup Asset Management. Prior to joining Legg Mason, Ms. Grandell built and managed Citigroup Asset Management s closed-end fund business, which included well-known brands such as Salomon Brothers, Travelers and Smith Barney. In addition to building and managing closed-end fund businesses, Ms. Grandell has experience in strategic planning, marketing, communications, investor and board relations, and relationship management. Ms. Grandell has served on the Investment Company Institute s Closed-End Fund Committee. Ms. Grandell holds an MBA in Finance from Stern School of Business and an MA in English from the University of Chicago. She earned her BA from New York University and has done additional course work at Stockholm School of Economics. Ms. Grandell currently serves on three non-profit health care boards in New York City. George Betzios is a founding partner at Spectra. Mr. Betzios began his career in the fund industry with National Securities and Research Corporation (National Funds) as a systems programmer. He acted as Head of Information Technology and then Head of Operations. Mr. Betzios subsequently accepted a position as Head of Mutual Fund Operations for Salomon Brothers Asset Management. Through various mergers and acquisitions he continued as Director of Mutual Fund Services and Transfer Agency Operations for both domestic and international operations at Smith Barney Asset Management, Citigroup Asset Management and most recently at Legg Mason, Inc. Mr. Betzios has extensive experience in vendor selection, consolidation of shareholderservicing functions for both onshore and offshore mutual funds as well as the conversions and oversight of multiple Section 529 programs. He has developed and implemented several vendor and service-level oversight programs focusing on areas of risk with a track record of reducing errors while increasing performance and service levels. Mr. Betzios has served on the Investment Company Institute s Operations and International Operations Committees. Kaprel Ozsolak is a founding partner at Spectra. Prior to Spectra, Mr. Ozsolak was the Chief Financial Officer of all Act registered products for Legg Mason, Inc. Mr. Ozsolak oversaw all open-end and closed-end fund administration and related product and business functions for Legg Mason. Mr. Ozsolak performed substantially similar functions at predecessor firms, Citigroup Asset Management, Travelers Group and Smith Barney Asset Management since Mr. Ozsolak was instrumental in and responsible for the design, launch and oversight of complex and innovative closedend products during his tenure at Legg Mason. Prior to joining Legg Mason and its predecessor firms, Mr. Ozsolak was with Ernst and Young, a global, top-tier accounting firm providing assurance services to clients in a wide range of industries, since Mr. Ozsolak has extensive experience in the areas of complex investments, securities valuation, service provider oversight, product design, fund governance and regulatory compliance. He has been a member of the ICI s Treasurer s Committee and has been an active speaker and panelist at several ICI and other industry conferences in the asset management field. Mr. Ozsolak holds a BA from Bosphorus University in Accounting and Finance. Closed-End Fund Services 7

10 MORE ABOUT SPECTRA Spectra Professional Services, LLC (Spectra) was established in 2012 by Kaprel Ozsolak and George Betzios. Kaprel Ozsolak was previously the chief financial and principal accounting officer of all registered investment companies sponsored by Legg Mason, Inc. George Betzios was previously in charge of all investor servicing and transfer agency functions at Legg Mason. Since its beginning Spectra has partnered with senior consultants with extensive experience in the asset management industry who are available to be deployed on projects as the needs arise. Spectra provides a wide range of front, middle and back office consulting, project management and staff augmentation services to various pooled investment vehicles, such as mutual funds, hedge funds, unit investment trusts, exchange traded funds (ETFs), closed-end funds (CEFs) and Section 529 college savings plans. Unlike larger corporate consulting firms, Spectra is narrowly focused on a sector where the principals have over 80 years of combined experience. We understand the big picture and yet are equally well versed in the details. This allows Spectra to be nimble and step in quickly to meet the needs of its clients. We differentiate ourselves by being able to hit the ground running on any project or assignment, without the need for retraining or orientation. This unique ability resonates with our clients very strongly, as it substantially cuts the lead-time a typical consultant requires before they start adding value. Our business is built on our extensive industry knowledge and contacts, knowledge of systems and platforms servicing the asset management industry, and our ability to deliver to our clients highest standards. From the very start, our reputation and industry contacts have provided us with a growing roster of distinguished clients in the investment management industry. 8 Spectra Professional Services

11 SPECTRA: SELECT ENGAGEMENTS Large institutional adviser: Oversight of six institutional funds, including ongoing oversight of the service provider and all administrative functions. We also worked to find a liquidity solution for these funds, allowing significant savings in the cost of maintaining these funds. Mid-size full-service adviser/third party service provider: We provided business development services to a client that resulted in them winning the program management services for a state 529 college savings plan. We currently provide client relationship management, board reporting and governance support, project management for accounting and investor record-keeping conversions as well as design and implementation of an ongoing oversight plan for all their services. Leading global investment adviser: Support and coordination of shareholder letters: We oversee the professional writer retained by the firm and coordinate all efforts from reviewing the letters, aggregating and addressing of all comments and running the letters through compliance approval. Highly rated Section 529 college savings plan: We provided various consulting services including NAV calculations, performance reporting, operational design and change management, organizational review and workflow management. After our initial engagement, we were selected and retained for an eight-year term as the operational consultants to the plan. Leading global investment adviser: We designed the oversight model for a new and highly complex registered commodities fund. In this complex project, we worked with all stakeholders, including legal, portfolio management, middle/ front-office, trading operations, compliance and the third-party administrator. Large global investment adviser: We assisted the treasury department in modifying its fund distribution policies to a more manageable pay as you go model from the then-current estimation process. Mid-size closed-end fund and institutional adviser: We provided assistance with shareholder reporting and communications, board reporting and governance support over multiple reporting cycles. Leading global investment adviser: Retained to conduct an analysis and provide a written recommendation of current and comparably available 529 plan recordkeeping systems. Scope of project included an RFI, vendor analysis, and capability matrix of systems relative to plan sizes. Large global investment adviser: Retained to provide support and coordination of closed-end fund IPO. Consulted on product development, listing, underwriters, due diligence, marketing and roadshow materials, and sales training. Large global investment adviser: Conducted studies for boards of directors focusing on institutional use of closed-end funds and asset allocation models of major broker-dealers. Presented results of institutional usage study to boards of directors at due diligence meeting. Large global investment adviser: Retained to develop relationship management role with global institutional shareholder base and domestic broker-dealer community, including research analysts. Scope of project included analysis of shareholder base and expanded use of client relationship management tools to provide seamless global relationship management coverage. Closed-End Fund Services 9

12 Spectra Professional Services BRENDA GRANDELL Principal GEORGE BETZIOS Partner KAPREL OZSOLAK Partner Closed-End Fund Services Product Development Investor Relations Relationship Management Communications Business Development Investor Servicing Transfer Agency Recordkeeping Section 529 Plans Sales Reporting Business Development Fund Administration Treasury Financial Reporting Closed-End Fund Services Section 529 Plans Business Development Photo Credits: Necati Ufuk Baskir Photography