Dear Investors: In December, Brasil Capital Equity Fund and Brasil Capital Long Only Fund had negative results of -6.59% and -5.56% respectively, compared to the Ibovespa* -11.93% low. The year of 2014 was marked by the substantial volatility of the local markets, arising out of the uncertainties regarding Brazil s presidential elections and the effects thereof on the price of the Brazilian assets. Brasil Capital s funds had regular results when compared to the local stock market indexes, as can be seen in the chart attached hereto. Returns 2014 36 months 60 months Since Inception Annualized Ibov since inception 3 Ibov annualized 3 MSCI since inception 2 MSCI annualized 2 BC Fund -13,26% +15,23% +21,80% +328,19% 1 +29,05% -0,61% -0,10% -5,53% -0,91% LO Fund +2,90% +11,71% - +11,71% 4 +3,87% -37,80% -15,02% -35,18% -13,81% MSCI Brazil -17,39% -35,18% -49,45% - - - - - - Ibovespa* -14,37% -37,78% -52,23% - - - - - - 1 Performance net of all fees. The performance corresponds to the BCFICFIA Fund in USD until Aug/2010. From Sep/2010 onwards, the performance corresponds to the portfolio of the Brasil Capital Equity Fund. 2 MSCI Brazil since inception of each Fund 3 Ibov in USD since inception of each Fund 4 Performance net of all fees. The performance corresponds to the BC LONG ONLY FICFIA Fund in USD until Aug/2014. From Sep/2014 onwards, the performance corresponds to the portfolio of the Brasil Capital Long Only Fund. *in USD In general lines, some of our assets performed extremely well in 2014, as is the case of Brasil Foods, Itaúsa, Kroton Educacional, Tempo Participações and Cetip, and certain assets limited the alpha generated by the Funds in 2014, as can be seen in the following table: Asset Positive Performance Attribution* BRFS3 +3,24% ITSA4 +2,60% KROT3 +2,16% TEMP3 +1,85% CTIP3 +1,83% TOTAL +11,71% *Brasil Capital Equity Fund in BRL We are still invested in the companies that yielded the top results for the fund in 2014, for we believe they are capable of delivering increasing profits as a result of the strong microeconomic specificities that will be essential to face the challenging macroeconomic scenario we see ahead of us. Together, these five companies totaled a positive result of 11.71% in BRL for the fund. In turn, among our lowest performers are Cosan, Brasil Pharma, Gerdau and IMC (International Meal Company), according to the following chart: Asset Negative Performance Attribution* CZLT33-3,12% BPHA3-2,99% GGBR4-2,67% IMCH3-1,90% TOTAL -10,67% *Brasil Capital Equity Fund in BRL We believe Cosan was hindered, to a certain extent, by two specific events: firstly, the acquisition of ALL decreased the potential to capture the cash flow Cosan would generate throughout 2015. The merger also initially rendered its corporate structure more 1
complex and Cosan more leveraged. Secondly, though the sharp drop seen in oil prices apparently did not account for significant losses in the company s cash generation in 2014 and 2015, it eventually caused a negative feeling in relation to the company s operating performance. In general terms, irrespective of the economic impact generated, the drop in the oil prices affected the performance of the energy-related assets. With respect to Brasil Pharma, we believed the company s new management team would be able to promote the turnaround of the transactions, and also stabilize the company s operating cash flow. However, our projection proved itself wrong and despite the substantial operating developments, Brasil Pharma is still having trouble to hit the break even. We nevertheless believe in the strategic value of the asset and have maintained a very small investment in the company. After facing a frustrating 1Q14 because of the effects of the snowstorms that hit the US in the company s operating results, Gerdau had increasingly improved results throughout the subsequent quarters; however, we understand that the perspectives of the Brazilian operation still have a significant weight in the asset s performance in the market, considering the company is primarily focused on Brazil s home builders and infrastructure industries. As for IMC, after a few years of accelerated growth arising out of acquisitions and strong organic development, since 2014, the company has made substantial efforts duly backed by its controlling shareholder (Private Equity Advent) to transform any income generation growth into greater EBITDA margins, but especially to increase the EBITDA conversion into profit and cash. We believe that the first results of the strong cash generation focus are likely to appear in the first six months of 2015. In general, despite the regular performance, our result is below the opportunity cost of our shareholders in the short term, and our purpose is still to deliver consistent medium and long-term returns, irrespective of Ibovespa s performance. It is always worth mentioning that Equity Funds results should be assessed in the long term. On this matter, we believe the past five years have been extremely challenging for fund managers whose purpose was to generate absolute returns in real terms for their investors, especially considering Ibovespa had a -52.23% low in USD, and MSCI had a -49.45% drop. Below are the accumulated performance of the fund and the benchmarks thereof in the past five years: Returns 2010 2011 2012 2013 2014 Total Performance* Annualized Performance* BC Fund +31,16% -19,41% +53,48% -13,51% -13,26% +21,80% +4,02% MSCI Brazil +3,77% -24,85% -3,50% -18,68% -17,39% -49,45% -12,75% Ibov (USD) +5,59% -27,27% -1,45% -26,29% -14,37% -52,23% -13,74% *From Dec/09 to Dec/14 The year of 2015 is likely to bring significant challenges for the Brazilian economy: Possible increase of the short-term interest in the US. Increased interest rates in Brazil. Possible energy rationing. Drop in the prices of certain significant commodities in Brazil s export agent, caused by the deceleration in China s growth. Increased taxes and government cutdowns in Brazil, in order to balance out government accounts, which are more than necessary measures to enable the country s macroeconomic balance, even though they may seem restrictive in the initial at first sight. Low entrepreneurial and consumer trust. Ineffectiveness of Petrobrás, which will imply cuts in the investment plans and renegotiation of corporate contracts, thereby affecting the network of suppliers. Involvement of Brazil s largest contractors in the Petrobras corruption scheme, which will certainly imply deceleration in any investments made in the country. As such, our portfolio is still long in leading, resilient companies with clear competitive advantages, which benefit from the USD valuation and in which we see significant medium/long-term intrinsic value irrespective of the trend the economy may follow. We 2
believe it is necessary to invest in companies capable of delivering consistent results, according to microeconomic specificities. Dufry, Kroton, Suzano and Brasil Foods are among our top investments. Our funds are still hedged in Ibovespa Future, long position in USD x BRL and cash. Below are the tables with the profit of net revenue, EBTIDA and net earnings of Brasil Capital s companies, including the relevant multiples: Multiple 2014 2015 2016 P/E 18,0 13,1 11,0 FCF Yield 3,3% 5,9% 7,6% Div Yield 1,7% 2,6% 3,1% Growth 2013 2014 2015 2016 Net Revenue 11,5% 11,2% 8,6% 8,3% EBITDA 19,9% 18,6% 14,2% 13,4% Net Earnings 22,7% 31,6% 18,8% 24,1% Below are the results obtained by the Funds in December: 3
Brasil Capital Equity Fund Monthly Net Performance (USD): JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC YTD Inception BC FUND 2008 - - - - - - - - - -9,2% -5,1% 6,3% -8,3% -8,3% Ibovespa** - - - - - - - - - -7,0% -10,9% 2,4% -15,1% -15,1% BC FUND 2009 12,1% 0,4% 2,1% 39,0% 27,5% 6,0% 20,1% 5,7% 13,1% 5,1% 7,9% 9,2% 283,4% 251,6% Ibovespa** 5,6% -5,4% 10,1% 22,8% 24,2% -2,2% 10,9% 2,4% 15,5% 2,0% 8,5% 2,8% 145,2% 108,0% BC FUND 2010-5,8% 4,4% 6,4% 2,1% -13,1% 2,7% 13,9% 5,3% 3,0% 5,7% 3,0% 2,3% 31,2% 361,1% Ibovespa** -11,4% 5,3% 7,6% -1,2% -11,1% -2,5% 13,6% -3,4% 10,5% 1,4% -5,0% 5,4% 5,6% 119,7% BC FUND 2011-2,3% -0,3% 2,2% 3,2% -3,0% -1,5% -6,3% 1,5% -13,2% 9,6% -9,5% 0,1% -19,4% 271,6% Ibovespa** -4,4% 2,0% 3,8% -0,2% -2,7% -2,3% -5,4% -5,8% -20,7% 22,4% -9,1% -3,7% -27,3% 59,8% BC FUND 2012 16,0% 8,4% 2,2% -2,3% -5,2% 3,6% 3,3% 2,0% 4,9% 4,3% -2,0% 10,1% 53,5% 470,3% Ibovespa** 19,9% 6,2% -8,1% -8,8% -16,5% -0,2% 1,8% 2,4% 4,0% -3,6% -2,9% 9,3% -1,5% 57,5% BC FUND 2013 6,0% 0,4% -5,1% 1,9% -7,0% -9,5% 0,6% -5,3% 5,0% 5,1% -1,0% -3,9% -13,5% 393,63% Ibovespa** 0,8% -3,3% -3,8% -0,1% -10,2% -14,6% -1,7% 0,1% 11,3% 5,0% -8,4% -2,6% -26,3% 16,1% BC FUND 2014-12,2% 0,7% 3,4% 1,1% 2,0% 5,3% -1,2% 4,1% -8,4% 1,3% -1,86% -6,6% -13,3% 328,19% Ibovespa** -10,7% 2,8% 10,4% 3,6% -0,9% 5,5% 2,0% 11,1% -19,3% 1,2% -4,36% -11,9% -14,4% -0,6% *Performance net of all fees. The performance corresponds to the BC FICFIA Fund in USD until Aug/2010. From Sep/2010 onwards, the performance corresponds to the portfolio of the Brasil Capital Equity Fund. **Ibovespa in USD RETURN TO DATE (% - left axis) & AUM (USD MM right axis) Equity Portfolio Performance Attribution by sector industry December 2014 YTD 4
SECTOR EXPOSURE Daily Liquidity % Market Cap % < BRL 1MM 6.3% < BRL 1 bi 10.2% BRL 1MM - BRL 10MM 10.4% BRL 1 bi - BRL 10 bi 45.5% > BRL 10 MM 83.3% > BRL 10 bi 44.3% Exposure % Long 103.3% Short -17.7% Net Exposure* 85.6% * Delta adjusted ** The data included herein are based on the December 31 th, 2014 NAV; returns are net of management and performance fees. 5
Brasil Capital Long Only Fund Monthly Net Performance (USD): JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC YTD Inception LO FUND 2012 15,1% 7,8% -3,0% -3,8% -10,9% 3,3% 2,8% 3,4% 5,8% 2,3% -1,5% 8,8% 31,5% 31,5% Ibovespa** 19,9% 6,2% -8,1% -8,8% -16,5% -0,2% 1,8% 2,4% 4,0% -3,6% -2,9% 9,3% -1,5% -1,5% LO FUND 2013 4,7% 0,0% -4,3% 1,4% -5,7% -11,5% -0,5% -4,4% 8,1% 4,5% -5,2% -4,5% -17,5% 8,56% Ibovespa** 0,8% -3,3% -3,8% -0,1% -10,2% -14,6% -1,7% 0,1% 11,3% 5,0% -8,4% -2,6% -26,3% -27,4% LO FUND 2014-11,6% 3,3% 7,5% 4,2% 2,3% 6,0% -1,4% 6,0% -9,9% 6,7% -2,3% -5,6% 2,9% 11,7% Ibovespa** -10,7% 2,8% 10,4% 3,6% -0,9% 5,5% 2,0% 11,1% -19,3% 1,2% -4,4% -11,9% -14,4% -37,80% *Performance net of all fees. The performance corresponds to the BC LONG ONLY FICFIA Fund in USD until Aug/2014. From Sep/2014 onwards, the performance corresponds to the portfolio of the Brasil Capital Long Only Fund. **Ibovespa in USD RETURN TO DATE (% - left axis) & AUM (USD MM right axis) Equity Portfolio Performance Attribution by sector industry December 2014 YTD 6
SECTOR EXPOSURE Daily Liquidity % Market Cap % < BRL 1MM 7.2% < BRL 1 bi 9.0% BRL 1MM - BRL 10MM 10.2% BRL 1 bi - BRL 10 bi 48.2% > BRL 10 MM 82.6% > BRL 10 bi 42.8% Exposure % Long 90.8% * Delta adjusted ** The data included herein are based on the December 31 th, 2014 NAV; returns are net of management and performance fees. 7