The EdgeStone Capital Mezzanine Fund makes subordinated debt, preferred share and related equity investments in North American middle-market companies. The Fund seeks to generate superior risk-adjusted return on investment.

EdgeStone Capital Mezzanine Fund I & II, L.P.
Committed capital in excess of C$380 million
Target investment amount of $10–$40+ million
Targeted IRR of 15–20%
Portfolio companies

Fund management team
Samuel L. Duboc – Managing Partner
Stephen O. Marshall – Partner

The Mezzanine Fund makes subordinated debt, preferred share and related equity investments in North American middle and later stage private and occasionally public companies. The Fund seeks to generate superior risk-adjusted return on investment.

The Fund has invested in a broad range of industries including services, industrial/manufacturing, wholesale retail trade, finance and natural resources. The Fund provides capital to middle-market companies in support of buyouts and going private transactions as well as to facilitate growth, expansion and acquisitions.

The targeted investment horizon of the Fund is three to seven years and the targeted IRR is 15-20%.

When we assess a company as an investment opportunity for the Mezzanine Fund, we consider the fundamental prospects of the potential investment, taking into account:

Equity Sponsorship
As mezzanine investors, it is important to understand the identity and substance of the investor or investors which are junior in the capital structure. While no substitute for primary due diligence, the presence of an experienced equity sponsor of substance can assist in the formulation of a successful strategy for an investee company and can provide an additional review of its fundamentals as well as deep pockets in the event of a bump in the road.

Credit worthiness and stability of cash flows
A key focus of the Mezzanine Fund is capital preservation, therefore, we assess the risk by:

• Evaluating credit characteristics such as cash flow, leverage, interest and fixed charge coverage and liquidity
  
• Determining the ability of the investment to service its debt and other fixed obligations on a current basis
  
• Modeling downside operational cases
  
• Performing liquidation and break-up analyses
  
• Examining the structural/legal subordination of the investment
  

Quality and commitment of management
We believe that partnering with motivated and highly experienced management teams is important to not only realizing greater investment returns, but also to helping investee companies meet their business objectives. We invest in management teams that have:

• High standards of integrity, capability and commitment
  
• An appropriate mix of business skills
  
• A substantial stake in their company, with remuneration linked to investment returns
  
• Passion for their businesses
  

Attractive industry fundamentals
An industry's fundamental attractiveness is one of the dominant factors influencing investment returns. We consider the following issues before making an investment:

• Expected growth rate and maturity
  
• Sensitivity to economic cycles
  
• Intensity of competition
  
• Average profitability and return on capital
  
• Barriers to entry and exit
  
• Availability of substitutes or new technologies that could impact the industry
  
• Relative power of suppliers and customers to influence profits
  
• Customer concentration
  

The Fund generally sits as an observer to the board of directors of the companies in which it invests. Each company is also required to provide periodic reporting of its financial results, including compliance with the financial covenants included in the documentation which evidences the Fund's investment.

EdgeStone Capital Partners The Exchange Tower 130 King Street West, Suite 600 Toronto, Ontario M5X 1A6 Phone: 416-860-3740 Fax: 416-860-9838 info@edgestone.com

EdgeStone Capital 1010, rue Sherbrooke Ouest Bureau 500 Montréal,Québec H3A 2R7 Téléphone: 514-282-2100 Télécopieur: 514-282-1944