FRONTAURA CAPITAL LLC FRONTAURA GLOBAL FRONTIER FUND LLC FRONTAURA GLOBAL FRONTIER FUND OFFSHORE LIMITED Managing Frontier Market Portfolios Nick Padgett,

FRONTAURA CAPITAL LLC

FRONTAURA GLOBAL FRONTIER FUND LLC

FRONTAURA GLOBAL FRONTIER FUND OFFSHORE LIMITED

Managing Frontier Market Portfolios

Nick Padgett, Managing Director, Frontaura CapitalCFA InstituteInvesting in Africa Traveling Conference SeriesFebruary 2013

Frontaura Capital LLC180 North Stetson Avenue, Suite 1935Chicago, Illinois 60601 USATel: +1 312 777 1500Fax: +1 312 268 [email protected]

© 2007 - 2013 Frontaura Capital LLC

Most of the world’s stock exchanges are frontier

2

70% of countries with stock exchanges are not represented in the

MSCI All-Country World Index

Frontier markets are stock markets, categorized by country, that leading index providers typically do not classify as either “developed markets” or “emerging markets”

MSCI World Countries

MSCI Emerging Countries

MSCI Frontier Countries

Other countries with stock exchange

Countries with no stock exchange

Frontier = 30% of world’s population;13% of world’s GDP, but <3% of global market cap

Source: IMF World Economic Outlook October 2012 for 2012 population and GDP estimates.

Market capitalization data through 11 October 2012 if present on Bloomberg. World Bank World Development Indicators database 2011 used to supplement Bloomberg.

Market cap shown is the total market cap for all of the countries in each group, not just the total market cap for the companies within the MSCI index.

3

MSCI Developed Countries



Other Countries w/ Stock Exchanges

Countries w/ No Stock Exchanges

14%

56%

12%

13%

5%

World Population(6.9 billion total)

46%

41%

6%6% 1%

World GDP ($83 trillion total, PPP)

75%

23%

1% 1%

World Market Capitalization($50 trillion total)

Frontier Potential

Why invest in frontier markets?

4

Participate in the world’s fastest growing economies 23 of 25 fastest growing countries over next 5 years are frontier

Capture additional returns by exploiting market inefficiencies Volatility and inefficiency allow for favorable entry and exit points

Benefit from favorable return characteristics Dividend yields are high Low PEs are plentiful as there is a wide dispersion in valuations

between and within countries High Return on Invested Capital companies with favorable earnings

growth exist

Complement existing developed and emerging market positions Frontier countries comprise 30% of the world’s population, 13% of the

world’s GDP, but <3% of the world’s market capitalization

Today’s frontier markets are tomorrow’s emerging markets

The fastest growing economies are frontier countries

The end of the Cold War, a step change in communications infrastructure, and significant cost advantages are allowing the least developed countries to grow the fastest

5

Of the 25 countries with local stock markets that are projected to grow fastest in 2012 - 2017, the MSCI All-Country World Index only captures 2

Source: International Monetary Fund October 2012

UzbekistanMyanmarVietnam

IndonesiaSri Lanka

BangladeshNigeria

PanamaTanzania

Burkina FasoCambodia

RwandaCôte d'Ivoire

ZambiaGhana

MozambiqueNigerLaos

Papua New GuineaChina

Sierra LeoneIraq

BhutanMongolia

Libya

0% 5% 10% 15% 20% 25%

25 Fastest Growing Economies 2012 - 2017

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Real GDP Growth and Trends

Advanced economies

Polynomial (Advanced economies)

Emerging and developing economies

Polynomial (Emerging and developing economies)



Other countries with stock exchanges

Frontier markets are inefficient

Frontier markets are inefficient. Limited information coupled with limited liquidity drive major price / valuation swings.

6Volatility presents favorable entry and exit opportunities

Source: Bloomberg

Jan-

04

Apr-0

4

Jul-0

4

Oct-0

4

Jan-

05

Apr-0

5

Jul-0

5

Oct-0

5

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Monthly Returns

Ghana

Croatia

Vietnam

Bangladesh

S&P 500 Index

Frontier markets have favorable return components

7

Stock market returns are attributed to capital appreciation due to earnings growth and change in valuation multiples, plus dividend yield

Total Return = ∆ Earnings + ∆ P/E + Dividend Yield

Return Component

Frontier Market Attributes

∆ Earnings High GDP growth Growing middle class and integration of informal economy can provide

market growth > GDP growth for listed companies

∆ P/E Inefficient security pricing provides excellent entry and exit opportunities

High risk-free rates limit P/E ratios, but over time these rates will decline and P/E ratios will rise

Dividend Yield Frontier markets feature high dividend yields Frontier market companies often have high ROIC/ROE, allowing for

both high earnings growth AND good dividend yields

Frontier Markets offer potential for outsized returns

Frontier PEs often lower than emerging, developed

8

Source: MSCI data on Bloomberg

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

0

5

10

15

20

25

30

Trailing Price to Earnings

MSCI Frontier MSCI Emerging MSCI World (Developed)

Frontier price/book ratios also lower

9


Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Trailing Price to Book


Frontier companies pay much higher dividends

10


Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

0

1

2

3

4

5

6

7

8

9

Trailing Dividend Yield


%

Highest ROEs in emerging, frontier

11


Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

0

2

4

6

8

10

12

14

16

18

20

Trailing Return on Equity


Frontier markets total return 2.4x since 2003

12Source: MSCI

Jan-

03

May

-03

Sep

-03

Jan-

04

May

-04

Sep

-04

Jan-

05

May

-05

Sep

-05

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

0

100

200

300

400

500

600

MSCI FM, EM, and Developed Returns(Monthly, USD, Total Return Net Dividend)


Frontier markets underperforming since GFC

13Source: MSCI

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

0

20

40

60

80

100

120

MSCI FM, EM, and Developed Returns(Monthly, USD, Total Return Net Dividend)


Current environment may provide additional benefits

Developed world macro events will continue to impact frontier markets, but frontier markets have some structural advantages:

Corporate Deleveraging Reduced ROE as capital structures

are normalized Drag on GDP growth as banks

normalize balance sheets

Low corporate leverage ROEs are high due to competitive

advantage, not unsustainable leverage Banks in many frontier countries are well

capitalized and conservatively run

Consumer retrenchment Falling asset values, economic fears,

and reduced credit likely lead to a thrift mindset

Emergence of consumers Growing middle class becoming first

time consumers Consumer credit is in its infancy

Increased government role in private sector Increased government ownership in

the financial services industry coupled with fiscal policy could reduce innovation and productivity

Privatization & growth of free enterprise In most frontier markets, governments

are adopting free market policies and privatizing state-owned companies

Developed Markets Frontier Markets

14

How do we think about and manage risk?

15

We aim to invest in countries that are stable or improving; however, country diversification is ultimately the main tool to manage general market risk.

The two specific risks we actively manage are sudden currency devaluation and incorrect securities valuation.

Risk Mitigating Action

Currency devaluation Country Score of macroeconomic indicators helps identify high-risk countries

Company valuation models account for projected devaluations based on inflation differentials

Incorrect securities valuation

We select only securities trading at a discount to intrinsic value, providing a margin of safety

We strongly prefer relatively simple businesses that we are confident in valuing

Investors have these common concerns…

16

Concern Factors to consider

Corruption, political, and macro risks We monitor a number of indices that quantify macro risks. Generally, the risk metrics for frontier markets are similar to, not worse than, emerging markets.

Financial information quality; fraud Many countries have adopted or are in the process of adopting the IFRS standard for financial reporting.

Most of the publicly traded firms we invest in are audited by the Big 4.

Counterparty risk Most of our securities are held through our global custodian or local subsidiaries of leading global banks. We do not use a prime broker, and thus do not have prime broker counterparty risk.

Taxation and capital controls Frontier markets are similar to, but perhaps slightly better than, emerging markets in this area. Frontier markets typically do not have capital controls or levy taxes on capital gains. Many frontier countries have no dividend withholding taxes, but if dividend taxes are withheld, rates tend to be 10% – 15%.

Risks and investor issues faced in frontier markets are generally no worse than emerging markets

Frontier investors must choose a fund type…

Pros Brand name manager; safe choice

No performance fee Frequent fund liquidity Often available without high minimum

Cons Unless you know manager personally, you

probably have not heard of them High fee Lockups May have high minimum Business continuity of manager less certain

Cons The trade off for large fund size, superior

liquidity terms are investing liquidity constraints that eliminate many countries and shrink universe to a few hundred stocks

The most-liquid stocks often trade at higher PEs Manager may need to buy what they can

instead of what they want Personnel not always exclusive to fund

Pros Investable universe is a few thousand stocks

A broad range of valuations is available within universe

Best values and opportunities more likely to be investable

Managers live and breathe frontier markets

Conclusion Larger frontier funds may behave similar to

frontier index, for better or for worse

Conclusion Boutique frontier funds can perform significantly

different from an index, for better or for worse Outperformance necessary to overcome high

fees

Larger Funds Boutiques

17

Frontier markets are illiquid; a potential source of return

18

Recent Ibbotson research shows: Illiquid stocks outperform liquid stocks significantly (see table) This liquidity effect is present in every size quartile and every value quartile (not shown) The liquidity effect appears stronger than the well-known small-cap effect The liquidity effect exists globally (US, UK, Europe, and Japan) Not only do illiquid stocks outperform, they do so with less volatility

Quartile Geometric Mean Standard Deviation

1 – Illiquid 15.46% 19.81%

2 13.57% 20.08%

3 11.66% 22.91%

4 – Liquid 7.11% 27.32%

US data from 1972-2008. Source: Zhiwu Chen and Roger G. Ibbotson, Zebra Capital Management, LLC. All rights reserved. www.zebracapm.com. Cited in Ibbotson SBBI 2009 Classic Yearbook, Chapter 9.Liquidity Investing. Chicago: Morningstar, 2009.

We experience this liquidity effect firsthand in frontier markets and it can work for us or against us. Double-digit percentage discounts or premiums are common

when no one else is willing buy or sell.

http://www.zebracapm.com/

Example of an actively managed frontier portfolio

Market, portfolio, and most recent 12 months of reported fundamental data as of January 31, 2013. Portfolio PE and PB are the harmonic means of all positions, weighted by position size. Portfolio dividend yield and return on ending equity (ROEE) are the means of all positions, weighted by position size. The yield on Frontaura Global Frontier Fund is less than our portfolio dividend yield due to cash held, withholding taxes, management fees, and operating expenses. At present, we retain all income, rather than distribute it.

19

Portfolio Statistics

Portfolio Price to Earnings 6.2

Portfolio Price to Book 1.1

Portfolio Dividend Yield 5.1%

Return on Ending Equity 21.7%

Country Holding

Vietnam 13%

Nigeria 13%

USA (cash only) 8%

Tanzania 7%

Zimbabwe 5%

Iraq 5%

Ukraine 5%

Serbia 4%

United Arab Emirates 4%

Pakistan 4%

Cambodia 4%

Estonia 3%

Botswana 3%

Senegal 3%

Industry Holding

Banks 32%

Consumer Staples 17%

Industrials 15%

Consumer Discretionary 12%

Cash 9%

Telecommunication Services 6%

Specialty Finance 3%

Materials 2%

Energy 2%

Diversified 1%

Country Holding

Qatar 3%

Lebanon 3%

Rwanda 2%

Romania 2%

Kazakhstan 2%

Cote d’Ivoire 1%

Ghana 1%

Oman 1%

Laos 1%

Papua New Guinea 1%

Montenegro 1%

Cyprus 1%

Zambia <1%

Kenya <1%

Characteristics of companies we invest in

20

Intelligent capital allocation – High return on invested capital– Track record of using free cash flow wisely

Reasonable growth prospects– Ample expansion opportunities– Product or service that benefits from growing middle class

Franchise characteristics– High market share or growing market share in fragmented market– Low competition and low threat of new entrants – Reasonable pricing power over customers

Low risk– Positive free cash flow, often in excess of net income– Predictable business model that can be forecasted easily– Margin of safety: valuation at a discount of our estimate of intrinsic value

Past Investment Example: Millat Tractors

21

Business Description:

Leading tractor assembler in Pakistan, selling Massey Ferguson brand.

Thesis: • In 2008, relatively unknown. No research on the company; local brokers had never met management.

• Management buyout during privatization

• Favorable cash cycle; 100% upfront cash payment required when order placed.

• At time of initial purchase: - LTM P/E: 8.2 - Dividend Yield: 8.8% - 5-year ROE: 25%

Source: Bloomberg

MTL PA price and running sum of dividends received

MTL PA price

Jan-

08

Mar

-08

Jun-

08

Sep-0

8

Dec-0

8

Mar

-09

Jun-

09

Sep-0

9

Dec-0

9

Mar

-10

Jun-

10

Sep-1

0

Dec-1

0

Mar

-11

Jun-

11

Sep-1

1

Dec-1

10

100

200

300

400

500

600

700

800

900

Buy

DPS: 10

DPS: 13

Partial Sale DPS: 16

DPS: 24

DPS: 28

DPS: 33

Exit

MTL PA Price and Dividend Chart

Pa

kist

an

i Ru

pe

es

Past Investment Example: Kingdom Hotels

22


Owns and operates luxury hotels in primarily emerging and frontier markets.

Thesis: • Unlike many real estate investments:

- Low debt - Book stated at cost - Portfolio largely complete and generating revenue• Stock oversold in 2008 due

to misperceived exposure to Dubai real estate due to HQ location. Over 90% of operations actually outside Dubai.

• At low, traded at $1.00 (0.15 book)• Acquired at $5.00

Source: Bloomberg

0

1

2

3

4

5

6

7

8

9

10

Weighted avg. purchase price

Frontaura accumulates position

Acquisition and delist-ing

KHI LI Price Chart*

US

Dol

lars

*Kingdom Hotels was listed in Dubai as KHI DU and also in London as KHI LI.

Current Investment Example: Swissport Tanzania

23


Leading airport baggage and air cargo handling service in country of 47 million.

Valuation Price: 1,740 TZS

Intrinsic Value: 2,821 TZS

Market Cap: $39 million

LTM P/E: 8.4

Price / Book: 6.3

Dividend Yield 9.4%

ROE: 74.6%

Debt / Equity: 35%

Investment Thesis:

• Global carriers gradually increasing flights to Tanzania.

• High returns on capital and oversight of multinational parent.

Source: Bloomberg

Market data current through 31 January 2013, and fundamental data current through 30 June 2012.

SWISSPOR TZ price and running sum of dividends received

SWISSPOR TZ price

Jul-0

7

Nov-0

7

Mar

-08

Jul-0

8

Nov-0

8

Mar

-09

Jul-0

9

Nov-0

9

Mar

-10

Jul-1

0

Dec-1

0

Apr-1

1

Aug-1

1

Dec-1

1

Apr-1

2

Aug-1

2

Dec-1

2400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

Frontaura accumulates position

DPS: 40

DPS: 33 DPS: 40

DPS: 50

DPS: 43

DPS: 55

DPS: 62

DPS: 95

DPS: 68

SWISSPOR TZ Price and Dividend Chart

Ta

nza

nia

n S

chill

ing

s

FRONTAURA CAPITAL LLC

FRONTAURA GLOBAL FRONTIER FUND LLC

Disclaimer

This document is confidential and is for the exclusive use of the original recipient only. No portion of this document may be reproduced without the written permission of Frontaura Capital LLC.

This document does not constitute an offer to sell, or a solicitation of an offer to buy the membership interests described herein. No such offer or solicitation will be made prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to the LLC, potential investors are advised to read carefully the offering memorandum, the LLC operating agreement and the related subscription documents, and to consult with their tax, legal, and financial advisors.

This document contains a preliminary summary of the purpose and principal business terms of the LLC; this summary does not purport to be complete and is qualified in its entirety by reference to the more detailed discussion contained in the private offering memorandum and the actual text of the LLC operating agreement. The LLC managing member has the ability in its sole discretion to change the strategy described herein.

This document is being provided to you on a confidential basis solely to assist you in deciding whether or not to proceed with a further investigation of an investment in Frontaura Global Frontier Fund LLC. Accordingly, this document may not be reproduced in whole or in part, and may not be delivered to any person without prior written consent of Frontaura Capital LLC.

24© 2007-2013 Frontaura Capital LLC

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FRONTAURA CAPITAL LLC FRONTAURA GLOBAL FRONTIER FUND LLC FRONTAURA GLOBAL FRONTIER FUND OFFSHORE LIMITED Managing Frontier Market Portfolios Nick Padgett,