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Investment Process – Kleoss Capital

INVESTMENT PROCESS

New deal meeting

All new deals being evaluated by the firm (including new investments, follow-ons, and exits) are documented into a register. Every week at a regular time the transactional teams of the firm meet to discuss the register and its list of current transactions and consider the merit of prospective new deals. Also considered will be the progress of existing new deals under investigation.

The primary purpose of this meeting is to act as a filter in order to ensure that time is spent only on appropriate transactions that have a reasonable chance of success. The outcome of this meeting is to fully apprise all transactional staff of the current status of all ongoing transactions and to briefly consider new transactions. In line with this, certain transactions that are considered unattractive or have little chance of any success are excluded at this point and moved into the firm’s database of historical deals.

Initial Investment Memorandum

Once a transaction has progressed somewhat to the stage where a degree of comfort has been gained by the respective principal that a transaction has a reasonable chance of progressing (either through finalisation of the valuation and returns; and / or signature of the Heads of Agreement, and that fairly significant time will be spent on it; a detailed Investment Memorandum (IM) is prepared.

An IM is a full report that sets out to record all the salient aspects of the target investment, its industry, management and the important aspects of a transaction. The report is well researched and does not miss any materially important aspect, and the prospective main transaction terms are ideally not be too far off what the final likely outcome is.

The report is considered at an Investment Committee meeting. The report is circulated well in advance of this meeting in order to give the participants sufficient time to consider the report and to formulate their views and questions. This meeting is attended by all transactional staff including the independent Investment Committee members. The purpose of the meeting is to provide a unanimous decision to proceed with due diligence (appoint service providers) and sign off on the anticipated budgeted due diligence amount.

In line with the firm’s ethos, significant consensus is sought as to the appropriate way forward for every transaction. The outcome of the meeting is the taking of a decision as to whether and how to proceed with the furtherance of a transaction. The meeting is not held to bind the firm to anything other than further investigation. However, the Investment Committee will decide upon the main transaction parameters, and in all likelihood will take decisions as to the non-negotiable aspects of the transaction including that of price, shareholding structure and gearing levels and general terms.

Final Investment Memorandum

The next step in the firm’s investment process is the preparation, and consideration of, a final Investment Memorandum report which includes the results of the due diligence investigation.

A final report is prepared very late in a transaction once it is known exactly what the final transaction parameters are. The primary purpose of the report is to summarise completely a prospective transaction in a comprehensive manner including every important aspect of the target and the transaction itself. The reports will in all likelihood be very detailed as it includes annexures of the due diligence reports.

The report is considered at a meeting called especially for this purpose and is circulated well in advance of the meeting. The participants at this meeting are expected to read the report in detail, and to formulate their views, comments and conclusions in advance of the meeting. This meeting is attended by all transactional staff including the independent Investment Committee members.

The outcome of the meeting is the making of a decision as to whether to invest in the transaction or not.

Exits

The process for exits is similar to that of new deals. Initially, every exit opportunity is entered into the deal register (as explained above) and debated. When an exit looks like it has real potential, then a new IM is prepared and considered in much the same way as a new investment. Similarly, when an exit is extremely likely; due to price negotiations and due diligence being complete with salient terms of engagement from a legal perspective being known; a final exit IM report is prepared and considered in a full forum in exactly the same way, with the same participants, as that which considers a new deal.

General monitoring of the portfolio companies

During the investment phase Kleoss at a minimum assumes one non – executive board seat, subject to its shareholding. Kleoss post acquiring the minimum one board seat together with management implements the detailed strategic plan over a 5 to 7 year period (which plan will have been agreed upon in some detail during due diligence). Since the size of companies are relatively small, Kleoss also participates in the monthly executive meetings of the portfolio companies. This includes, inter alia, the implementation of the strategy such as negotiating entry into new markets, recruiting and negotiating the terms of the requisite ‘game changer’ management expertise into the target investee company necessary to execute a critical component of the strategy. Kleoss also assists in, inter alia, the identification of weaknesses around internal controls and recommending improvements thereon, assisting the target company with the implementation/monitoring of its transformation score card, ESG considerations, etc. From time to time Kleoss may use the services of experienced outside executives in assisting with the preparation and implementation of the strategic plan.

Quarterly portfolio review

The firm has a formal quarterly portfolio review structure. Every quarter a report is prepared on each portfolio company, which summarises the performance for the quarter under review, compares to budget and other expectations, provides commentary thereon and also performs a valuation of the fund’s investment in the business.

Four meetings a year are scheduled at the inception of the calendar year to discuss the quarterly reports. These meetings include the independent Investment Committee members.

The outcome of the meeting is to make recommendations to the transactional staff, to consider remedial and interventionist strategies where appropriate, and to review and approve the quarterly valuation of each investment. Furthermore, as with the monthly review, the meeting identifies and considers any potential exit actions to be taken and considers any opportunities in this respect. The documentation, views, decisions and strategies following from the meeting form the basis of the quarterly reporting to the Limited Partners.