AAFH QUANTUM LEAP FUND. Product Disclosure Statement. 06 March 2018

Transcription

1 AAFH QUANTUM LEAP FUND Product Disclosure Statement 06 March 2018 AAFH CAPITAL ACN Level 3, 179 Queen Street, Melbourne, VIC 3000, Australia

2 Fund Information AAFH Quantum Leap Fund ARSN Fund Manager AAFH Capital Pty Ltd ACN AFSL CAR No Responsible Entity & Trustee Melbourne Securities Corporation Ltd ACN , AFSL Custodian Sandhurst Trustees Limited ACN Compliance & Financial Auditor Moore Stephens ACN AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 2

3 Important Notices This Product Disclosure Statement ( PDS ) is dated 06 March Melbourne Securities Corporation Ltd ACN ("Trustee") holds an Australian Financial Services Licence ("AFSL"), number , and is the Responsible Entity and Trustee of AAFH Quantum Leap Fund ( Fund ) available for investment through this PDS. AAFH Capital Pty Ltd ACN is the Manager of the Fund ("Manager"). The Manager is an authorised representative (No: ) of MSC Advisory Pty Ltd (ACN , AFSL ). The Trustee is the issuer of the PDS and the Units in the Fund. Units to which this PDS relates will only be issued on the receipt of a properly completed Application Form included in or accompanied by this PDS or obtained from the Trustee and any other required information as to an investor s identity and the source of payment of the Application Money. This PDS is not required to be, and has not been, lodged with the Australian Securities and Investments Commission (ASIC). The Fund is subject to investment risk, including possible delays in repayment and loss of income and principal invested. None of the Fund, the Trustee, Manager or any of their associates or related bodies corporate, guarantees in any way the performance of the Fund, repayment of capital from the Fund, any particular return from, or any increase in, the value of the Fund. Any prospective financial information in the PDS is predictive in nature, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties and may differ materially from the results ultimately achieved. This PDS has been prepared without taking into account the investment objectives, financial situation or needs of any particular investor. Before deciding whether to make an investment decision you should carefully read all of this PDS and obtain professional advice about an investment in the Fund having regard to your particular investment needs, objectives and financial circumstances before investing. Any information or representation not contained in this PDS must not be relied on as having been authorised by the Trustee or Manager. The offer to which this PDS relates is only available to people receiving this PDS in Australia. This PDS does not constitute an offer or invitation in any place where, or to any person to whom, it would be unlawful to make such an offer or invitation. The information in this PDS is current as at 06 March Information in this PDS may change from time to time. Unless the changed information is materially adverse to you, the Trustee may not always update or replace this PDS to reflect the changed information. Updated information can be obtained at A paper copy of this information is also available free of charge upon request from the Manager. Terms used in this PDS are defined in the Glossary in Section 11. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 3

4 Contents 1. KEY FEATURES 6 2. BENCHMARKS FOR UNLISTED MORTGAGE SCHEMES 8 3. INVESTMENT OVERVIEW Investment objective and target return Additional Classes of Units Benefits of the Fund Fund structure Investing in the Fund Minimum investment amount Unit Price Cooling Off Distributions Withdrawals Transfer of Units Labour standards and environmental, social and ethical considerations ABOUT THE MANAGER AND SERVICE PROVIDERS AAFH Capital Pty Ltd Management Agreement Trustee Custodian AAFH Property Investment Fund INVESTMENT OPPORTUNITIES Mortgage Backed Security investment opportunities 18 (a) Analysis and evaluation 19 (b) Approval process and ongoing management 20 (c) Default management Other Indirect Property Investment Opportunities 20 (a) Analysis and evaluation 21 (b) Approval process and ongoing management RISKS General risks Mortgage-Backed Security investment risks 26 (a) Interest rate risk 26 (b) Counterparty and credit risk 26 (c) Default risk 26 (d) Related party risk Indirect Property Investment risks FEES AND OTHER COSTS AAFH Quantum Leap Fund 28 AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 4

5 7.2 Example of annual fees and costs Additional explanation of fees and costs TAX CONSIDERATIONS Tax Summary Income Tax Provisions Income Tax (AMIT Provisions) Income Tax (Non-AMIT Provisions) Disposal of Units Non-Resident Members Annual Reporting Tax File Number (TFN) and Australian Business Number (ABN) Goods and Services Tax (GST) Stamp Duty Foreign Account Tax Compliance Act (FATCA) Common Reporting Standard (CRS) ADDITIONAL INFORMATION Winding up the Fund Related party transactions Privacy Anti-Money Laundering and Counter-Terrorism Financing Laws Limitations of Liability of Members Constitution and the Trustee Valuation of Fund assets and unit pricing Supplementary PDS Compliance Plan Compliance Committee Complaints Continuous Disclosure Requirements CORPORATE DIRECTORY Enquiries GLOSSARY 45 AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 5

6 1. KEY FEATURES This Section of the PDS summarises key features of the investing in the Fund and provides references to other Sections of the PDS where you can find further information. You should read the entire PDS before deciding whether to invest in the Fund. Topic Summary Where to find more information Manager AAFH Capital Pty Ltd ACN is the Manager of the Fund. Section 4.1 Trustee Melbourne Securities Corporation Ltd ACN , AFSL is the Trustee of the Fund. Section 4.3 Custodian Investment objective Target Return Sandhurst Trustees Limited ACN is the Custodian of the Fund. The Fund provides investors the opportunity to obtain investment exposure to Mortgage Backed Securities and other Indirect Property Investments. The Fund will have a Target Return of 5% per annum (net of fees and expenses) on initial investment. Distributions and/or capital returns at any rate of return, including the Target Return referred to above, are not guaranteed. Section 4.4 Section 3.1 Section 3.1 Fund structure Term of the Fund Investing in the Fund Minimum investments Underlying assets An illiquid open unit trust that is registered with ASIC as a managed investment scheme. Members will be offered Units in the Fund. The term of the Fund is 30 years. To invest in the Fund, you need to complete and submit the application form contained at the back of this PDS to become a Member. The minimum investment in the Fund is $10,000. Each additional investment must be at least $5,000. The Fund will invest in securitisation vehicles and may make other Indirect Property Investments. Section 3.4 Section 3.5 Section 3.6 Section 5 AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 6

7 Distributions Withdrawals The Trustee intends to make bi-annual distributions of income received from the underlying assets net of expenses. Generally, you have no right to redeem units in the Fund until the end of the Term. However, the Trustee may be in a position to provide an ability to withdraw every 5 years after commencement of the Fund. Section 3.9 Section 3.10 Cooling off period There is no cooling off period. Section 3.8 Fees There are fees and costs payable in relation to the management of the Fund. Refer to Section 7 for further details about the Fees and costs that may be applicable. Section 7 AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 7

8 2. BENCHMARKS FOR UNLISTED MORTGAGE SCHEMES ASIC has developed 8 Benchmarks and Disclosure Principles designed to provide investors with key information about investing in mortgage funds. The Benchmarks and Disclosure Principles are contained in Regulatory Guide 45: Mortgage Schemes: Improving disclosures for retail investors. They are outlined below. Details in the table below relate to the Class of Units offered under this PDS. Additional information about any other Classes will be included in the relevant Supplementary PDS for that Class. Benchmarks and Disclosure Principles Benchmark and Disclosure Principle 1: Liquidity For a pooled mortgage scheme, the Trustee has cash flow estimates for the scheme that: (a) (b) (c) demonstrate the scheme s capacity to meet its expenses, liabilities and other cash flow needs for the next 12 months; are updated at least every three months and reflect any material changes; and are approved by the directors of the Trustee at least every three months. Benchmark and Disclosure Principle 2: Scheme borrowing The Trustee does not have current borrowings and does not intend to borrow on behalf of the scheme. Benchmark and Disclosure Principle 3: Loan portfolio and diversification For a pooled mortgage scheme: (a) (b) (c) the scheme holds a portfolio of assets diversified by size, borrower, class of borrower activity and geographic region; the scheme has no single asset in the scheme portfolio that exceeds 5% of the total scheme assets; the scheme has no single borrower who exceeds 5% of the scheme assets; and Statement The Fund meets this benchmark. The Trustee prepares cash flow projections for the next 12 months, the projections are updated and are approved by the directors of the Trustee every three months and more frequently where material changes occur. The Fund will be illiquid and intends to make withdrawal offers only on a 5 yearly basis, in accordance with the expected maturity profile of its investments. The Fund meets this benchmark. As at the date of the PDS, the trustee does not have current borrowings and does not intend to borrow on behalf of the Fund. The Fund meets this benchmark in respect of our mortgage-backed securities investments and requires any such investments to meet this benchmark. The Fund will not be exposed through those investments to any single borrower who exceeds 5% of the Fund assets and no single asset in the Fund will exceed 5% of the total Fund assets. The Fund may not meet aspect (d) of this benchmark in respect of its other property investments. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 8

9 (d) all loans made by the scheme are secured by first mortgages over real property (including registered leasehold title). For more information on the Fund s policy on investing in lending entities please refer to section 5.1 of this PDS. Benchmark and Disclosure Principle 4: Related party transactions The Fund does not lend to related parties of the Trustee or to the Manager. Benchmark and Disclosure Principle 5: Valuation policy In relation to valuations for the scheme s mortgage assets and their security property, the board of the Trustee requires: (a) a valuer to be a member of an appropriate professional body in the jurisdiction in which the relevant property is located; (b) a valuer to be independent; (c) procedures to be followed for dealing with any conflict of interest; (d) the rotation and diversity of valuers; (e) in relation to security property for a loan, an independent valuation to be obtained: (i) before the issue of a loan and on renewal: (A) for development property, on both an as is and as if complete basis; and (B) for all other property, on an as is basis; and (ii) within two months after the directors form a view that there is a likelihood that a decrease in the value of security property may have caused a material breach of a loan covenant. The Fund does not meet with this benchmark. The Fund's investment in Mortgage Backed Securities may be made through the AAFH Property Investment Fund, of which the Trustee is the trustee and the Manager is the manager. Nonetheless, the Trustee considers that the risks associated with the related party transactions are being appropriately managed. This investment will be on arms' length terms (except in relation to the rebating of fees, as described in section 7.3(g)). Risks associated with related party transactions are detailed in section 6.2(d) We comply with this benchmark. The Fund will not hold any direct mortgage assets or security property. However, we will assess the valuation policy of any entities the Fund is investing into to make sure that it meets this benchmark. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 9

10 Benchmark and Disclosure Principle 6: Lending principles Loan-to-valuation ratios If the scheme directly holds mortgage assets: (a) (b) (c) where the loan relates to property development funds are provided to the borrower in stages based on independent evidence of the progress of the development; where the loan relates to property development the scheme does not lend more than 70% on the basis of the latest as if complete valuation of property over which security is provided; and in all other cases the scheme does not lend more than 80% on the basis of the latest market valuation of property over which security is provided. Benchmark and Disclosure Principle 7: Distribution practices The Trustee will not pay current distributions from scheme borrowings. The Fund does not directly hold mortgage assets. However, the mortgage-backed securities the Fund will invest into will comply with this benchmark by lending not more than 70% on the basis of the latest as if complete valuation of property over which security is provided or more than 80% on the basis of the latest market valuation. The Fund invests a significant component of its assets in development loans. It is anticipated that the Fund will invest 25% of its assets in development loans. The Fund meets this benchmark. Distributions will come from income made from the Fund s investments. Distributions will be paid bi-annually at the end of June and December. Distributions may fall below the Target Return for a range of reasons, including as described in section 3.1. Returns above the Target Return will be retained by the Manager as a management fee (as described in section 7). Benchmark and Disclosure Principle 8: Withdrawal arrangements Liquid schemes For liquid schemes: (a) the maximum period allowed for in the constitution for the payment of withdrawal requests is 90 days or less; (b) the Trustee will pay withdrawal requests within the period allowed for in the constitution; and (c) the Trustee only permits members to withdraw at any time on request if at least 80% (by value) of the scheme property is: (i) money in an account or on deposit with a bank and is available for withdrawal immediately, or The Fund will not be liquid. A registered scheme is liquid if liquid assets account for at least 80% of the scheme property. Property is only considered to be a liquid asset if the responsible entity expects that the property can be realised for its market value within the period specified in the Fund constitution. This will not be the case, as we anticipate that the Fund's assets will only comprise of Mortgage Backed Securities and Indirect Property AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 10

11 (ii) otherwise on expiry of a fixed term not exceeding 90 days, during the normal business hours of the bank; or assets that the Trustee can reasonably expect to realise for market value within 10 business days. Investments which we do not anticipate will be liquid. Non-liquid schemes For non-liquid schemes, the Trustee intends to make withdrawal offers to Members at least quarterly. Our Fund does not meet this benchmark. As the Fund will be illiquid, investors will have limited ability to withdraw during the Term (if any). The Trustee intends to make withdrawal offers during the term every 5 years after commencement of the Fund. Any amounts not withdrawn at this point will be rolled over for a further 5 year period. The Fund expects to be in a position to make withdrawal offers on this basis by ensuring that the Mortgage Backed Securities investments to which it is exposed include a buy back obligation on the Mortgage Backed Securities note issuer after 5 years. The Fund may not be able to make a withdrawal offer if it does not have sufficient liquid assets, for example because the issuer of an Mortgage Backed Securities investment has not completed its buy back. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 11

12 3. INVESTMENT OVERVIEW 3.1 Investment objective and target return The Fund provides investors the opportunity to obtain investment exposure to Mortgage Backed Securities and Indirect Property Investments. The Fund may obtain exposure to Mortgage Backed Securities directly or through investing in units in the AAFH Property Investment Fund, of which the Trustee is also the trustee and the Manager is also the manager. The Fund, either directly or through the AAFH Property Investment Fund, will invest in securities backed by a pool of mortgages. The Fund may also make other Indirect Property Investments. The Fund has a Target Return of 5% per annum on initial investment. Please refer to Section 6 which outlines a range of factors which could have an impact on Distributions and/or capital returns. The Target Return is not guaranteed and actual returns will be based on future revenue, which may be materially lower than the Target Return. 3.2 Additional Classes of Units In addition to the investment opportunity described in this PDS, the Fund may offer additional Classes of Units. These Classes may provide exposure to different investments, with different investment objectives and target returns. In relation to any additional Classes, this PDS forms the first part of the disclosure you receive. Specific details about the investments of the additional Class, its fees and specific risks will be set out in a Supplementary PDS. You should consider the information in this PDS and the Supplementary PDS before investing in Units in any other Classes. 3.3 Benefits of the Fund Indirect Exposure to Australian real estate assets. The Fund allows investors the opportunity to acquire indirect exposure to Australian real estate assets via indirect property investments in property development or property holding entities. This allows Investors to profit from a property development, without having any managerial or operational responsibilities that a property developer would usually undertake. For more information please refer to section 5.2 Other Indirect Property Investment Opportunities. Exposure to Mortgage Backed Securities investments The Fund will invest into Mortgage Backed securities, in the form of Residential Mortgage Backed securities. Residential Mortgage Backed (RMBS) securities are a type of note or Bond that is secured by a pool of residential mortgages. Investing in RMBS provides Investors the ability to spread their investment risk across multiple assets. For more information please refer to section 5.1 Mortgage Backed Security Investment opportunities. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 12

13 Periodic distributions to your account As an Investor, you will be receiving regular periodic distributions in the form of interest return from the Fund s Mortgage Backed Securities Investments. Distributions occurs bi annually, at the end of June and December. Please refer to section 3.9 Distributions for more information. Attractive rate of return on investment. The Fund has a target return of 5% return per annum on initial investments net of fees and charges. 3.4 Fund structure The Fund is a managed investment scheme which has been registered with ASIC under Chapter 5C of the Corporations Act. The Trustee and Responsible Entity of the Fund is Melbourne Securities Corporation Ltd ACN The Trustee holds an Australian Financial Services Licence (AFSL No ) which authorises it to operate the Fund. The Trustee has engaged AAFH Capital Pty Ltd as the Manager of the Fund. Information about the Manager is contained in Section 4.1. The Trustee has also engaged Sandhurst Trustees Limited as the Custodian. The Custodian will hold all assets of the Fund on behalf of the Trustee. The Custodian will hold all assets of the Trust. This ensures the Fund assets are segregated from the Trustee's own assets. The Custodian does not guarantee the obligations of the Trustee or carry out a supervisory function over the Trustee. The Fund will offer investors the opportunity to obtain investment exposure to Mortgage Backed Securities and other Indirect Property Investments. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 13

14 3.5 Investing in the Fund To invest in the Fund, you need to complete and submit the application form contained at the back of this PDS to become a Member. The Trustee can accept or reject your application in its discretion. If your application is accepted, you will become a Member of the Fund and you will be issued with Units. The Trustee has the discretion to reject part or all of an application, without giving reason for doing so. If the Trustee rejects an application for Units it must give you written notice of the rejection and repay the Application Money (less any Taxes and bank fees incurred by the Fund or the Trustee in connection with the application) back to you. Any interest earned on the application account will be retained by the Manager. 3.6 Minimum investment amount The minimum investment is $10,000, and then in increments of $5,000. The Trustee may, in its absolute discretion, accept lesser amounts and may change these amounts from time to time. 3.7 Unit Price Units will be issued at $1.00 per Unit. 3.8 Cooling Off Members do not have cooling-off rights under the Corporations Act. Once you have invested in the Fund, you will only be able to withdraw your investment as described in Section 3.10 below. 3.9 Distributions Distributions will be paid bi-annually within 10 Business Days after the end of June and December to your nominated bank account Withdrawals You cannot withdraw your investment Fund before the end of the investment term, unless permitted by the Trustee, in its discretion, subject to the Constitution and the Corporations Act. The Trustee may be in a position to provide an ability to withdraw every 5 years after commencement of the Fund. While the Fund is not liquid, withdrawals may only be made in accordance with the provisions of the Corporations Act. Additional information about investor's ability to withdraw during the Term is included in section 2 in relation to Benchmark 8. Withdrawal proceeds will be paid to the Member's nominated account Transfer of Units A Member may transfer the ownership of their Units at any time provided that the transferee meets the requirements of a Member in the Fund and has been approved by the Trustee. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 14

15 Under the Constitution, the Trustee has the discretion to refuse the transfer of Units and is not obliged to accept a transfer of Units. Please note that a transfer of Units may have taxation consequences (see Section 8). There will not be an established secondary market for the sale of Units Labour standards and environmental, social and ethical considerations The Trustee and the Manager do not take into account labour, environmental, or social or ethical standards for the purpose of selecting, retaining or realising the investments of the Fund. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 15

16 4. ABOUT THE MANAGER AND SERVICE PROVIDERS 4.1 AAFH Capital Pty Ltd The Trustee has delegated responsibility for the management of the Fund to the Manager, AAFH Capital Pty Ltd. AAFH Capital Pty Ltd ACN is the Fund Manager of the Fund ( Manager ). The Manager is an authorised representative (No: ) of MSC Advisory Pty Ltd (ACN , AFSL ). AAFH Capital Pty Ltd is a member of the Aus. Asia Finance Hub (AAFH) group of companies. Founded in 2009, AAFH is a financial group specializing in residential, commercial and development funding. We have a team of dedicated accounting, banking, mortgage and finance experts who have the capability to provide an in-depth assessment of property investments. With a network of service points across Asia Pacific, we provide a safe and reliable platform for Australian and foreign investors. AAFH Capital Pty Ltd was established to provide our high net worth individuals, wholesale investors and institutional investors access to Australian property investments. Key personnel Nolan Leo Director of AAFH Capital Pty Ltd Nolan Leo is the Director of AAFH and AAFH Capital Pty Ltd with extensive experience in banking and finance. Following successful employment with American Express, Westpac and ANZ, Nolan launched his own boutique finance firm, Aus Asia Finance Hub. Under his directorship, AAFH has managed over $600 million worth of deals within the first 6 years of operation. Mona Abou Zeid Director of AAFH Capital Pty Ltd Mona has over 20 years of lending with Commonwealth Bank and Westpac banking Corporation. She has an extensive credit knowledge and is also very experienced in dealing with Development Lending and establishing investment portfolios for overseas investors. 4.2 Management Agreement The Trustee's engagement of the Manager occurs under a Management Agreement. The key duties of the Manager under the Management Agreement are: Assist in the administration of the Fund; and Assist the Trustee in exercising their duties under the Constitution. 4.3 Trustee Melbourne Securities Corporation Limited ACN is the Trustee of the Fund and the issuer of this Product Disclosure Statement. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 16

17 Melbourne Securities Corporation Limited is licensed by the Australian Securities & Investments Commission ("ASIC") under Australian Financial Services Licence No ("AFSL"). The Trustee is required to meet strict financial guidelines as set out in the Corporations Act and under its AFSL, including holding adequate professional indemnity insurance, a minimum net tangible assets and it must produce regular cash flow projections to ensure it has the financial resources to meet its obligations on an ongoing basis. The main responsibilities of the Trustee are to operate the Fund and ensure compliance as legislated by the Corporations Act and governed by ASIC. In exercising its powers and duties, the Trustee will: act honestly and in the best interests of Unitholders at all times; appoint and monitor the performance of the Manager; exercise a reasonable degree of care and diligence; treat each class of Unitholders equally and fairly; not make use of information obtained to gain an improper advantage or cause detriment to unitholders; comply with the Fund s Compliance Plan and governing documentation and all applicable laws; ensure Fund property is separated from the property of and other schemes operated by the Trustee or Manager; ensure the Fund is conducted in accordance with the Constitution, the Corporations Act and all other applicable legislation. In adherence with Corporations Act requirements, Melbourne Securities Corporation is subject to independent financial audit. It is also subject to independent compliance audit on a minimum annual basis. For further information, please refer to Custodian The Custodian of the Fund is Sandhurst Trustees Limited ACN , Sandhurst Trustees Limited is engaged by the Trustee as a third-party Custodian to hold the assets of the Fund. Sandhurst Trustees ltd is an experienced independent custody provider and is Custodian of other investment funds managed by the Trustee. 4.5 AAFH Property Investment Fund The Fund may obtain exposure to Mortgage Backed Securities directly or through subscribing for units in the AAFH Property Investment Fund. The Trustee is the trustee of the AAFH Property Investment Fund and the Manager is also the manager of the AAFH Property Investment Fund. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 17

18 5. INVESTMENT OPPORTUNITIES The Fund will invest in Mortgage Backed Securities investments and other Indirect Property Investments. 5.1 Mortgage Backed Security Investment Opportunities This section contains a summary of the Mortgage Backed Securities investment opportunities that will be pursued by the Fund. It also provides general information on how the Trustee and the Manager will make and manage those investments Key terms The following table provides a summary of the key terms the Manager will be seeking in an Mortgage Backed Securities investment: Mortgage-Backed Security Investment Expected life Jurisdiction Terms of Mortgage Backed Securities Investments Generally, the Manager will be concentrating on Residential Mortgage Backed Securities (RMBS). However, it is possible that other Mortgage Backed Securities investments, including commercial mortgage-backed securities, may be made. Anticipated to be between 5 and 30 years, however the Manager will use reasonable endeavours to put in place mechanisms (such as buy back arrangements with Mortgage Backed Securities issuers) to enable liquidation of an investment after a 5 year period. Australian dollar denominated and issued by Australian issuers. The Borrowers may be located in or outside Australia. The terms of each Mortgage Backed Securities will be determined by the issuer of the security and must be consistent with the Manager s investment strategy, as described below What is an Mortgage Backed Securities? A Mortgage-Backed Security is a type of security where the value of the security and income payments under the security are derived from and secured (or backed ) by a specific pool of mortgages. Primarily, the Manager will focus on RMBS, which is a type of Mortgage Backed Securities secured by a pool of residential mortgages. The key feature of RMBS structures is tranching, which transforms the mortgage pool into a range of securities (the RMBS notes), each with a different risk and maturity profile. The RMBS notes usually make periodic payments of principal and interest that AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 18

19 are funded from the payments of principal and interest made on the underlying mortgage collateral by the borrowers. An RMBS transaction will usually be issued in two or more separate tranches. This establishes the relative order in which the RMBS notes are paid principal and interest and the priority in which losses are allocated between holders of the RMBS notes. For example, a tranche of notes referred to as "senior notes" will receive principal and interest payments in priority to another tranche referred to as "junior notes". The risk rating of each tranche is usually determined by an accredited credit rating agency. A typical RMBS transaction includes an option for the issuer to buy back the RMBS at face value once the underlying mortgage pool is repaid down to an agreed percentage (often 10%) of the original pool size. The RMBS notes in which the Fund will invest, and hence the underlying mortgages have a maximum term of up to 30 years. The expected life is determined based on forecast mortgage discharge speeds and issuer buy back action. The weighted average life of an RMBS investment held by the Fund is anticipated to be between 3 and 5 years. If discharge speeds are slower than forecast and if the RMBS issuer does not buy back the RMBS at the agreed percentage then the life could be longer than expected and up to the maximum term of 30 years Investment Strategy The Manager intends for the Fund to receive Mortgage Backed Securities exposure through the AAFH Property Investment Fund. The Manager will ensure at all times that the risk / reward profile of each Mortgage Backed Securities investment is appropriate having regard to the quality and value of the Mortgage Backed Securities, the credit performance of the underlying mortgage pools (such as arrears levels), prepayment speeds, associated market mispricing from time to time and the risk analysis process. The Manager intends to allocate % of the Fund to Mortgage Backed Securities investments, more information can be found in section 3.4 Fund Structure Mortgage Backed Securities selection and assessment process The Manager, as manager of the AAFH Property Investment Fund, will be responsible for undertaking the assessment of any Mortgage Backed Securities investments proposed to be made by the Fund or the AAFH Property Investment Fund. (a) Analysis and evaluation The Manager will assess the merits of an Mortgage Backed Securities and the associated risks. The analysis takes into account a set of criteria in accordance with the investment strategy. The risks can be described in three broad categories as follows: (i) (ii) Counterparty risk the Manager must assess the capacity of the Mortgage Backed Securities issuer to meet its financial commitments and susceptibility to adverse effects in change of circumstances and economic conditions. Servicing risk the ability of the underlying Borrowers to meet loan commitments, which focusses on the loan-to-valuation ratios and income and cash flow sources of the underling borrowers. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 19

20 (iii) Saleability the exit strategy of the Mortgage Backed Securities investment, which may be longer than expected if the issuer does not buy back the security at the agreed percentage. (b) Approval process and ongoing management After an Mortgage Backed Securities investment is made, the Manager is responsible for the day-to-day and ongoing management of that investment. It will provide reports to the Trustee in relation to the investment including in respect of payment and collection of interest and principal and the credit performance of the underlying mortgage pools. (c) Default management Whether principal and interest is paid on an Mortgage Backed Securities note partly depends on whether the underlying Borrowers default on the loans to which the Mortgage Backed Securities notes relate. If an underlying Borrower does default on its loan, the steps which may be taken by the issuer include the following. Possession taken of the residential property. Sale of the residential property. Any shortfall is submitted as a claim to mortgage insurers (if any). If there is no mortgage insurance or if the mortgage insurers are unable to pay the claim (for example deteriorated financial capacity arising from extreme adverse financial conditions) then the shortfall would be absorbed by the net interest margin of the Mortgage Backed Securities trust. If the net interest margin is insufficient then the cash reserve, if any, would be used to meet the short fall. If the cash reserve is insufficient then the principal of the lowest tranche of notes is reduced. If the lowest tranche of notes is insufficient then the principal of the next lowest tranche of notes is reduced and so on. The highest tranche of notes will have a lower interest rate because of their security position at the top of the principal and interest priority order. The lower tranche of notes will have a higher interest rate because of their security position in the principal and interest priority order. To mitigate against default risks, the Fund will invest only in Mortgage Backed Securities with underlying loan pools with an average loan-to-value ratio of less than 80%. The Fund may invest in senior or junior tranches of notes. 5.2 Other Indirect Property Investment Opportunities This section contains a summary of the equity investment opportunities that will be pursued by the Fund through other Indirect Property Investments Key terms: AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 20

21 The following table provides a summary of the key terms the Manager will be seeking in an equity investment: Indirect Property Investment Generally, the Manager will be concentrating on preference shares that rank ahead of ordinary shares for distributions of both income and capital. However, it is possible that an ordinary shares may be made. Use of equity funds Location of projects Terms of investment Equity investments required for residential or commercial developments or passive property holdings will be considered with a focus on townhouse developments. Across Australia, with a main focus on Brisbane, Sydney and Melbourne. Between 2 to 3 years. However, the terms of each equity investment might differ depending on the specific funding needs of the relevant project Investment strategy The Manager intends for the Fund to invest in Indirect Property Investments through one or more third party property funds (such as registered and unregistered managed investment schemes). The Manager will conduct a feasibility analysis to ensure at all times that the risk/reward profile of each Indirect Property Investment through such property funds is appropriate and in the best interest of the Fund. The Manager will seek out property development funds focusing on the following: - Australian Major Capital cities and Metro Area properties. - Apartment, Land subdivision and Townhouse developments. - Experienced Developers with a minimum of 2 completed projects. - Within 30 Km of a Major City (Melbourne, Brisbane, Sydney, Gold Coast). The Manager intends to allocate 10% - 30% of the Fund to Indirect Property Investments Selection and assessment process The Manager will be responsible for undertaking the assessment of any equity investments proposed to be made by the Fund. (a) Analysis and evaluation AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 21

22 The Manager will assess the merits of any third-party property fund. The analysis takes into account a set of criteria in accordance with the investment strategy. The assessment includes and not limited to: Previous projects/investments. The Manager will assess the third-party property fund s previous investments, Analysing the rate of return it achieved, the duration of the project/investment, the location of the property and if their investment parameters match in accordance with the Fund s investment strategy. Experience of the Property Development Company The property developer s experience is a major aspect of the Manager s analysis and evaluation prior to indirectly investing into the property investments. The Manager will look at how many projects the development company is currently undertaking, the directors of the development company, the size of each projects (in terms of number of units, townhouses, etc) and the size of the team of the development company. By assessing these criteria, the Manager will have a better understanding and determine if the development company is capable of delivering the projects that they have set out to achieve. Experience of the Investment Company The Manager will analyse the parties involved within the investment company. The combined number of experience between all members, any certification/education/training each member has received and the number of investments/ third party funds, the investment company is currently undertaking to ensure that the Fund s best interest are met in accordance with the investment strategy. (b) Approval process and ongoing management After an Indirect Property Investment is made through a third-party property fund, the Manager is responsible for the day-to-day and ongoing management of that investment. After conducting analysis and evaluation of the third-party property fund, the Managers will conduct a meeting to approve the third party property fund and include it as part of the fund s allocated investments. The Manager is responsible for the day-to-day and ongoing management of that investment such as receiving and distributing project update reports to investors, managing the investor s funds and accounts and liaise with the third party on behalf of the investors. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 22

23 6. RISKS All investments involve risk and there can be no guarantee against loss resulting from an investment in the Fund, nor can there be any assurance that the Fund's investment objectives will be achieved or that any Member will get any of their money back. There are a number of risk factors that could affect the performance of the Fund and the repayment of Member s capital. Many risk factors fall outside of the Trustee and the Manager s control and cannot be completely mitigated. The Fund's ability to generate the Target Return could be impacted by a range of factors, including the following: Factors Risk of changes Sensitivity analysis Defaults by Borrowers Low - Medium The Fund's sensitivity to Borrower defaults is managed by ensuring exposure to particular borrowers is limited. Counterparty risk Low - Medium The Fund manages this risk through careful selection of Mortgage Backed Security issuers and Indirect Property Funds. Property market risks Medium Adverse events in the property market have the potential to impact the Fund's Mortgage Backed Securities and Indirect Property Funds. The following is a non-exhaustive list of the main risks that could be associated with investment in the Fund. The risks that will apply to your investment in the Fund will depend upon the Class in which you invest. In general, the potential risks of investing in the Fund can be broken into the following three broad categories: 1. General risks The main risks associated with any investment in the Fund. 2. Mortgage Backed Security investments risks The main risks associated with an investment in Mortgage Backed Securities investments. 3. Property investments The main risks associated with an indirect investment in real property, including property development projects. Members should consider and weigh the risks up carefully and make their own assessment as to whether they are comfortable with them. Members should also seek professional, legal, tax and investment advice before proceeding. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 23

24 6.1 General risks (a) Manager risk The Manager is responsible for providing investment management services to the Fund and for managing the Fund s investments on a day to day basis. By investing in Mortgage Backed Securities, the Fund is also exposed to risks associated with the managers of the underlying securitisation vehicles and any other investment vehicles in which it invests. If the Manager or any manager of an investment vehicle fails to provide their services effectively, then this could negatively affect the Fund s performance. In particular, there is a risk that a manager may fail to anticipate movements in the property market, fail to manage the investment risks appropriately or fail to properly execute the Fund s investment strategy. These factors could have an adverse impact on the financial position and performance of the Fund. (b) Risks associated with the solvency and financial position of the Manager If the Manager either becomes insolvent or encounters financial difficulties, which mean that it is unable to perform its role under the Management Agreement, then the Trustee will most likely need to terminate the Management Agreement. If that were to occur, then the Trustee would either need to find a replacement investment manager or wind up the Fund. This could result in you suffering a loss or a diminished return on your investment in the Fund. (c) Limited operating history risk The Fund is newly formed with no operating history upon which investors can evaluate its likely performance. Accordingly, there can be no assurance the Fund will achieve its investment objective. The past investment performance of the Trustee or Manager or their key persons is not a reliable indicator of future performance or results of an investment in the Fund. (d) Counterparty risk The Fund will invest in Mortgage Backed Securities and other debt and property investments. The performance of the Fund depends on the performance of these underlying investments. The Fund is therefore also dependent on all of the entities involved in operating the underlying investments properly performing their obligations and on any external service providers they engage. (e) Liquidity As the Fund will be illiquid, Members cannot withdraw from the Fund during the investment term unless the Trustee makes a withdrawal offer. While the Trustee intends to make withdrawal offers every 5 years after commencement of the Fund, the Fund may not be in a position to do so if it does not have sufficient assets. Additional liquidity risks are described in section 2 in relation to Benchmark 8. There is also no established external secondary market for the sale of Units. Members may arrange for their own private sale and the Trustee, without obligation, may assist in that process. There is no right for Members to require these Units to be purchased by the Manager, the Trustee or by any other person, or to have their Units redeemed. The Trustee retains the right to provide some liquidity to Members, and will advise Members of its intention to do so and its policy for redemptions if it is able to or elects to provide liquidity. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 24

25 The Fund will not be listed on the ASX or any other exchange. (f) Return risk The Fund is designed for investors seeking a return greater than the interest paid on basic deposit and saving products offered by an Authorised Deposit-taking Institution ("ADI"). Any target return provided in this PDS is not a forecast. The Fund may not be successful in meeting this objective. Returns are not guaranteed. Members should note that an investment in the Fund is not an investment in an ADI (such as a bank) regulated by APRA and an investment in the Fund carries more risk than an investment in a bank. (g) Market risk Market risk is a generic term to describe the risk factors affecting the securities markets generally that could adversely affect the value of investments in the Fund. These factors include inflation rate increases, real or perceived unfavourable market conditions, investor behaviour, economic cycles and climate, movements in interest rates and foreign exchange rates, changes in domestic and international economic conditions which generally affect business earnings, political and natural events and changes in governments monetary policies, taxation and other laws and regulations. (h) Operational risk There is a risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Adverse impacts may arise internally through human error, technology, or infrastructure changes, or through external events such as third party failures or crisis events. The Trustee and the Manager have procedures in place to manage these risks and, as much as possible, monitor the controls within these procedures to ensure operational risks are adequately managed. The loans to which the Mortgage Backed Securities relate may be regulated by the National Credit Code and the National Consumer Credit Protection Act. Returns may be impacted by any breaches of the National Credit Code. (i) Concentration risk Generally, the more diversified a portfolio, the lower the impact that an adverse event affecting one investment will have on the income or capital value of the portfolio. The Fund will be invested primarily in Mortgage Backed Securities. However, the Fund may also be exposed to other debt and property investments. (j) Regulatory and economic risk There is the risk that the value of an investment may be affected by changes in domestic or international policies, regulations or laws (including taxation laws). There is also a risk that a downtown in domestic or international economic conditions may adversely affect investments. These factors are outside the control of the Trustee and the Manager but they may have a negative impact upon the operation and performance of the Fund. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 25

26 (k) Taxation risk The returns to Members may be affected by changes to taxation legislation. Changes to taxation legislation may necessitate a change to the Fund s structure to ensure Member interests are protected. (l) Fund risk The Fund could terminate, or the fees and expenses paid from the assets of the Fund could change. There is also the risk that investing in the Fund may give different results than investing in the underlying assets directly because of the income or capital gains accrued in the Fund and the consequences of investment and withdrawal by other Members. 6.2 Mortgage-Backed Security investment risks (a) Interest rate risk The capital value or income of the Fund's Mortgage Backed Security investments may be adversely affected when interest rates rise or fall. In particular, the income of an mortgage back security can fluctuate significantly in reaction to changes in interest rates. Interest is typically floating rate in nature. The capital value of Mortgage Backed Securities can fluctuate significantly in reaction to changes in fixed margins available in the market. (b) Counterparty and credit risk The Fund may incur loss when investing in a mortgaged backed security if a counterparty, such as the trustee or manager of the securitisation vehicle, or any of their service providers, fails to deliver on its contractual obligations or experiences financial difficulties. Credit risk ratings are an assessment of the issuer s ability to meet its financial obligations. If credit risk ratings change, this may reduce the value of the Mortgage Backed Securities which may in turn reduce the overall value of the Fund. (c) Default risk If underlying Borrowers default on the loans made by a securitisation vehicle in which the Fund invests, this would reduce the principal and interest paid on the Fund's Mortgage Backed Security investment. The Fund may incur loss and this may in turn reduce the overall value of the Fund. The Manager seeks to manage this risk through a requirement that the Fund may invest only in Mortgage Backed Securities with underlying loan pools with an average loan-to-value ratio of less than 80%. (d) Related party risk The Fund will invest through the AAFH Property Investment Fund, of which the Trustee is the trustee and the Manager is the manager. When dealing with related parties, there is a risk that there will be insufficient supervision and monitoring. Investment by the Fund into the AAFH Property Investment Fund will be on arms' length terms and the Trustee will supervise the actions of the Manager in its capacity as manager of the AAFH Property Investment Fund in the same way as if those activities were performance in respect of the Fund. Any other related party transactions will be carried out with the same rigour and independence as unrelated transactions. AAFH QUANTUM LEAP FUND PRODUCT DISCLOSURE STATEMENT 26