6 March LIC RESEARCH - L1 Long Short Fund Ltd. Recommended. About the manager. Our Opinion. Phone

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1 Phone LIC RESEARCH - L1 Long Short Fund Ltd 6 March 2018 Recommended The L1 Long Short Fund is looking to raise a minimum of $100m (and maximum of $600m) under the offer, which will provide investors access to the Australian long short fund. The LIC will be managed by L1 Capital. Whilst the strategy has a short track record (late 2014), the strategy has delivered very strong returns and pleasingly with significant downside protection over this period. The Manager follows a bottom up investment process, with an extensive visitation program (i.e. network of company/industry contacts). Investors can use the solid performance of L1 Capital s existing long only Australian Equities Fund as proxy for the Manager s stock picking ability over a long period of time. About the manager L1 Long Short Fund (ASX: LSF) provides investors access to (1) an actively managed Long and Short Portfolio of securities; and (2) the investment expertise of the Manager. L1 Capital is a global investment fund manager with funds under management of approximately $3.0bn as at 31 Dec-17. The firm is 100% owned by senior L1 staff. Our Opinion Philosophy and fundamental investment process. At the core of Manager s philosophy is the ethos markets are inefficient. The Manager s investment process is what we would describe as the typical investment process of a fundamental, bottom up fund manager. Main Details Investment Manager ASX Code Price (NAV) Market Capitalisation Inception Date Management Fee Performance Fee Portfolio Characteristics Benchmark No. of Stocks L1 Capital LSF A$2.00 (IPO price) A$500m (estimated) 24 April 2018 (estimated shares trading date) 1.44% p.a. (incl. GST) 20% subject to a high watermark S&P/ASX200 Accumulation Index (including franking credits) Long: positions Short: positions Stable investment team. We regard the stability of the team (i.e. no departures since inception) as a positive. However, we do note the team of 4 includes two co-founders, where we would expect stability. Very strong performance, with downside protection. The Manager has delivered very strong performance since 2015 ( %, % and %). The monthly performance numbers provided by the Company indicates strong capital preservation, with the Manager outperforming the ASX200 every market sell off since Sep-14. Fees. The Manager s fee is high relative to the Australian peers, including Long/short, (with majority of the funds invested in Australian shares) and mostly in line with global peers. The Manager earns 20% performance fee on net absolute returns (with high watermark), which we consider is a low benchmark to achieve fees. Both Raphael and Mark are investing $5m each of their own wealth into the fund. The management team has also committed to re-investing all performance fees (after tax) with an escrow agreement up to 10 years. L1 Capital are also foregoing all management fees until issue costs are recouped. Style Active position limits Long-short 10% [max. 6% for long and 4% for short] Gross / Net exposure Maximum 300% / 150% Net beta exposure 0.2 to 0.8 (typically) International Equities Maximum 30% Source: L1 Capital

2 Investment Philosophy At the core of Manager s philosophy is the ethos markets are inefficient. The manager is guided by three key principles: (1) Both valuation and qualitative factors are key determinants of share price drivers. (2) Markets are inefficient, driven by emotional, short-term and backward-looking characteristics. Manager believes by remaining disciplined and adhering to their investment process, they are able to avoid many of the typical behavioural biases that are common among investors. (3) The Manager believes in an extensive visitation program to fully appreciate a company s prospects. This adds to the Manager s bottom-up investment process and independent thought process. Investment Process The Manager s investment process is what we would describe as the typical investment process of a fundamental, bottom up fund manager. The diagram below best sums up the process. Figure 1: L1 Capital Investment Process Source: L1 Capital Key components of the investment process are discussed below. Comprehensive company visitation program. The Manager believes the best way to discover opportunities is via direct meetings with industry contacts, companies,

3 customers, suppliers, consultants and other stakeholders. This allows the Manager to paint a more clear and comprehensive picture of the company and industry trends. Extensive travel program. A natural extensive of the above, the investment team regularly travels around Australia and overseas. Detailed bottom-up analysis. Manager spends a significant amount of time analysing company annual reports & announcements, broker reports, industry publications and other relevant news flow. Valuation. The Manager utilises a number of quantitative tools to assess the intrinsic value of a company, with the main valuation toolkit being discounted cash-flow (DCF) method. The Manager noted that the DCF is sensitive to a company s long-term margin and return on capital measures. It is for this reason the Manager spends considerable time discussing and debating these long-term forecasts. The Manager cross checks the DCF valuation with other valuation methods such as price-to-earnings (PE) multiple, enterprise value (EV), EBITDA (or the earnings from a company operations), price-tobook ratio (P/B) and price-to-sales (P/Sales). Qualitative assessment. The Manager uses a qualitative scorecard on each company, using a score from 1 to 5 (with 1 being excellent and 5 being poor): 1. Management quality. 2. Industry and company structure 3. Business trends Portfolio construction. Essentially the portfolio is constructed of securities (long and short positions) which make it through the Manager s quantitative and qualitative investment process. Further, the Manager also gives due consideration to broader prevailing economic conditions. Risk management. In addition to adhering to its investment process, the Manager also imposes various limits and other policies and controls when managing the funds. Fund Performance Figure 2: Fund historical performance (net of performance) to 31 December 2017 Source: L1 Capital

4 Fund Positioning Figure 3: Top 10 Holdings (as at 31 December 2017) (this has likely changed given the turnover the Fund exhibits) Source: L1 Capital L1 Capital Investment Team Ralphael Lamm Joint Managing Director & Chief Investment Officer Mr Lamm is a co-founder and since founding has jointly headed up the L1 Capital Australian Equities Fund and L1 Capital Long Short Fund. Previously, he spent more than 5 years at Cooper Investors. During that period, Raphael was a portfolio manager of the flagship Cooper Investors Australian Equities Fund. He holds a double degree in Law and Commerce from Monash University, with Honours in Law and First Class Honours in Finance. Mark Landau Joint Managing Director & Chief Investment Officer Mr Landau is a co-founder and since founding has jointly headed up the L1 Capital Australian Equities Fund and L1 Capital Long Short Fund. Previously, he spent 5 years at Invesco as an Investment Analyst in the Large Cap Australian Equities team and later as an Investment Manager in the Smaller Companies Fund. Prior to this he was a Senior Strategy Consultant at Accenture, where he provided financial analysis and corporate strategy advice to a range of large Australian companies in banking, insurance, telecommunications and retail. He holds a double degree in Commerce and Economics from Monash University and a CFA Charterholder. Lev Margolin Portfolio Manager Mr Margolin joined L1 Capital in 2009 and is a portfolio manager of the L1 Capital Australian Equities Fund and L1 Capital Long Short Fund. Previously, he worked in private equity and M&A at Babcock & Brown and AEP and within the Corporate Strategy

5 & Investment team at National Australia Bank. He holds an undergraduate degree in Commerce from the University of Melbourne (with First Class Honours) in Actuarial Studies and is a CFA Charterholder. Martin Tavella Investment Analyst Mr Tavella is an investment analyst and his specific tenure at the firm was not provided. He is responsible for agriculture, aged care, information technology and small cap industrials research. Previously, he was assistant analyst at Diogenes Research where he conducted detailed financial analysis on various listed Australian and International companies. He holds a Bachelor of Business from Monash University. In addition to the investment team, the Company is supported by: Andrew Larke Independent Chairman Mr Larke has over 20 years experience in mergers, acquisitions, capital markets and senior executive leadership positions. He is a Non-Executive Director of DuluxGroup Ltd and Chairman of Sand Hill Road Hospitality. Previously, he was the Global Head of Strategy, Planning and Mergers & Acquisitions at Orica Ltd, where he was part of the Group Executive for 9 years. John Marfarlane Independent Director Mr Marfarlane has previously served as CEO of Bankers Trust New Zealand, Chief Country Officer (Japan) and President of Deutsche Securities Japan, Executive Chairman of Deutsche Bank Australia and New Zealand and Chairman & CEO of Deutsche Bank Australia. Harry Kingsley Independent Director Mr Kingsley is a partner at Holding Redlich. He is senior corporate and commercial lawyer specializing in strategic advice and negotiated transactions. He was formerly the Senior Legal Counsel, Asciano Limited and Chief Legal Counsel, Pacific National, Executive Director, Austock Group and a senior associate at Minter Ellison. Wayne Murray Investment Specialist Lubos Polakovic Head of Dealing Joel Arber Chief Operating Officer David Goss Head of Fund Operations & Compliance Jeffery Lau Operations Manager

6 Fee Structure Base fees. The Manager will be paid a Management Fee of 1.44% (inclusive of GST) per annum of the value of the Company s investments. Under the Investment Management Agreement, the Company will not pay any Management Fees that would otherwise have been payable to the Manager, until such time as the Company has recouped the Offer Costs in full. Performance fees with a high watermark. The Manager will be paid a performance fee of 20% of the funds outperformance (if any) over each 6-month period subject to a high watermark. The performance fee for a performance calculation period is subject to the recoupment of prior underperformance. Key Risks Whilst not an exhaustive list, below are some of the risks associated with this LIC: Asset Allocation. Given the LIC can invest up to 30% in International shares, investors do need to be mindful when using this LIC in their portfolios. Investment Strategy Risk. Ability of the manager to pick securities which outperform its own benchmark. Manager Risk. Key personnel changes which could potentially lead to the loss of IP or investment ability. Market Risk. Fluctuations in the market or increased/decreased correlations between asset classes/securities could lead to underperformance. Derivative Risk. The Manager can invest in exchanged traded derivatives and over-the-counter derivatives. This increases the risk profile of the Fund. Short Selling Risk. This involves borrowing stock, with the view of buying back the stock at a lower price. If the prices move against the short positions, this Manager could be caught in a short squeeze. Currency Risk. The Manager can invest up to 30% of the portfolio in international shares. Liquidity Risk. The liquidity of the LIC is separate to the underlying Fund s securities. Leverage Risk.

7 Investors should read the PDS for further details. APPENDIX Ratings Guide RECOMMENDED We are recommending this managed fund for new or additional funds. NEUTRAL We regard the fund as investment grade however do not recommend the Fund for additional new funds. NOT RECOMMENDED - We are recommending investors withhold from investing or redeem their existing holding.

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