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Palio UK Mid-Market Debt Fund Plans Dual Listing

Palio UK Mid-Market Debt Fund Limited is to to pursue an initial public offering on the Specialist Fund Market of the London Stock Exchange and a dual-listing on the Official List of the Channel Islands Stock Exchange. The proposed placing and offer has a target fund raise in excess of 150 million pounds ($241 million). The company will be advised by Palio Capital Partners.

PRESS RELEASE

Palio UK Mid-Market Debt Fund Limited (the “Company”) today announces its intention to pursue an initial public offering. It is intended that the Company will seek admission to trading of its ordinary shares on the Specialist Fund Market of the London Stock Exchange plc and a dual-listing on the Official List of the Channel Islands Stock Exchange (together, “Admission”), through a proposed placing and offer for subscription with a target fund raise in excess of £150 million. The Company will be advised by Palio Capital Partners LLP (the “Investment Adviser”).

Highlights

Objective – the Company will aim to generate superior risk-adjusted returns comprising both income and capital, through originating and structuring a combination of senior debt (c.50% of portfolio), mezzanine instruments (c.40% of portfolio) and junior equity (c.10% of portfolio) into small and medium sized UK enterprises (“SMEs”), while emphasizing the preservation of capital and capital appreciation.
Attractive target return – the Company has indicated a target net dividend yield of 7 per cent. on the issue price in the first year and an average net dividend yield of 8 per cent.[1] on the issue price thereafter, with a target net total return of 12.5 per cent. on the issue price per annum[2],[3].
Market opportunity – demand for debt financing in the UK Lower Mid-Market (“LMM”) is estimated by the Investment Adviser at £25 billion (2013 to 2017)[4].
Focus on UK assets – the Company’s investment policy is for the portfolio to be invested in loans to assist predominantly UK private equity (“PE”) firms in acquiring UK companies with enterprise values of between approximately £10 million and £100 million.
Highly experienced portfolio management team – the Investment Adviser’s senior executives have over 30 years of combined experience of managing loan assets and PE deals.
First lien security – each financial package offered by the Company will involve senior debt, which will entail a first lien security over the portfolio company’s assets.
Capital deployment – the Company expects to be fully invested within 9 to 12 months.
Limited life – 18-month investment period after which the portfolio will be placed into run-off.
Monthly NAV – the Company will calculate and publish NAV per share on a monthly basis.
Sole Financial Adviser and Bookrunner – Oriel Securities Limited.
Timing – prospectus expected to be available in mid October, with Admission expected in mid November.

Mike Henebery, Chief Executive Officer of Palio Capital Partners LLP, commented
“We are excited to launch Palio UK Mid-Market Debt Fund Limited which will aim to capture the attractive current opportunity in the UK Lower Mid-Market. By collaborating with private equity houses to lead and arrange all loan finance on a private equity deal, the Company is well placed to capture potentially attractive, risk-adjusted returns. The Company’s differentiated model offers greater choice to small and medium sized enterprises by providing a suite of flexible loans from one source, supported by the longstanding private equity and debt experience of its senior executives within the Lower Mid-Market.”

Palio UK Mid-Market Debt Fund Limited
The Company’s investment objective is the generation of superior risk-adjusted returns, comprising both income and capital, through originating and structuring a combination of senior debt, mezzanine instruments and junior equity into SMEs, while emphasising the preservation of capital and capital appreciation.

The Company will only lend to and invest in SMEs with enterprise values of approximately £10 million to £100 million. The Investment Adviser has longstanding relationships with preeminent UK PE houses which have successful track records of selecting outperforming SMEs with strong executive management and a plan to develop shareholder value. It is intended that, following the expiry of the 18-month investment period, the majority of investments in the Company’s portfolio will comprise a combination of the following instruments: (i) senior debt (c.50% of portfolio); (ii) mezzanine loans (c.40% of portfolio) which will typically also include warrants; and (iii) junior equity (c.10% of portfolio).

The Company’s portfolio is expected to consist of approximately 10 investments based on the target size of the Company (although this may increase or decrease with the size of the Company). No investment will represent more than 20 per cent. of the NAV of the Company at the time of investment. Portfolio diversity will be aided by the fact that the Company will invest across a range of sectors including; support services, transport, industrial, healthcare, financial services, information technology and leisure.

An application will also be made to the GFSC to have the Company registered as a registered closed-ended investment scheme pursuant to the POI Law, and the RCIS Rules issued by the GFSC.

Key Product Features
Predictable income
The Company expects that approximately 67 per cent. of the income received will be contractual, comprising predictable scheduled interest income from the senior, mezzanine and equity instruments (such interest constituting approximately 55 per cent. of income) together with fees, including arrangement fees (approximately 12 per cent. of income). The balance of income (approximately 33 per cent. of total income) will comprise profit from mezzanine warrant and equity holdings.

The Investment Adviser expects to obtain margins of between 4.5% and 5.5% above LIBOR for senior debt and c.10% above LIBOR for mezzanine instruments. All income will be allocated to the Company.

Security of repayment & capital preservation.
Senior debt and mezzanine instruments are secured with first and second ranking liens (respectively) over the assets of UK companies. In the event of bankruptcy these instruments will typically be repaid before the holders of the equity. The full PE equity investment in a portfolio company (which the Investment Adviser considers will typically be 50% of the total capital base) needs to be eroded before the Company’s loan capital in that company would be impacted.

Full suite of loans with no scheduled amortisation
The debt and mezzanine loans will typically not have any scheduled amortisation. This differentiator, coupled with the Company’s ability to write a full suite of loans, will make the Company’s offering very attractive to PE houses and SMEs.

Protection from rising interest rates.
With global interest rates at historic lows, the Investment Adviser believes that rates will rise over the coming years. Senior debt and mezzanine instruments, unlike most government, investment grade or high yield bonds, usually pay a floating rate of interest over a base rate (typically LIBOR) that protects investors from the negative effect of rising interest rates.

Investment Process
The Investment Adviser intends to use a selective approach to identifying the highest quality investments to include in the portfolio which will comprise approximately 10 UK SMEs that typically will have successfully secured backing from the UK’s pre-eminent PE firms. In addition to the Investment Adviser’s depth of experience, each investment decision will be informed by independent due diligence reports commissioned by the PE sponsor covering the financial, commercial and legal aspects of the target companies. The Company intends to secure the right to appoint a member of the Investment Adviser’s team to the board of the portfolio company as a condition to the Company’s investment. This should ensure that the Investment Adviser will have direct, regular access to the business and can observe more closely the performance of the management team and explore aspects of t! he portfolio company’s business that may require attention[5].

The Investment Adviser
The Company will be advised by Palio Capital Partners LLP as Investment Adviser. Palio Capital Partners LLP was established in 2009 by experienced PE and senior debt professionals with substantial transaction experience in the LMM and established relationships with PE houses.
The Investment Adviser’s senior executives, (Michael Henebery, Jeremy Wilson and Darren Gibson), have more than 40 years’ combined experience in equity investing, operations and structuring equity and debt in the LMM. This longstanding experience should be very attractive to PE houses and SMEs.

Michael Henebery and Jeremy Wilson will be the Senior Executives primarily responsible for sourcing, executing and advising on the Company’s investments, with Darren Gibson having primary responsibility for operational activities.

Senior Executives

Michael Henebery, Managing Partner and Chief Executive Officer

Michael Henebery’s background is in private equity investment, having been an Investment Director and Managing Director respectively for 14 years at two leading PE funds active in the UK LMM, Montagu Private Equity and Gresham Private Equity. He was head of Gresham Private Equity’s London investment team for eight years. Mr Henebery has strong relationships with many of the PE houses in London. He is a commerce graduate from the University of Birmingham and is both ACA and CF qualified.

Jeremy Wilson, Managing Partner and Chief Investment Officer

Jeremy Wilson has extensive experience of the LMM, with over 13 years’ experience of structuring debt products into the UK MBO midâ��market across a broad range of industry sectors, in particular during his time at The Royal Bank of Scotland from 1997 to 2008 where he was responsible for establishing RBS’s Corporate & Structured Finance unit, the bank’s midâ��market lending unit, in 2002. Under his stewardship, the RBS Corporate & Structured Finance unit was awarded the prestigious ‘…Unquote” Debt Provider of the Year’ accolade in both 2005 and 2006.

Darren Gibson, Managing Partner and Chief Operating Officer

Darren Gibson has more than 11 years’ operational experience predominantly within the banking and PE sectors, having started his career as a graduate analyst at Goldman Sachs. Prior to joining the Investment Adviser, he established the operational infrastructure of Global Macro Fixed Income Fund and was COO for IBIS Capital Management LLP, a PE/family office firm. He holds a BSc Finance (Hons) degree from The Queen’s University Belfast.

For further information please contact:

Palio Capital Partners LLP Tel: +44 (0)203 178 7425

Mike Henebery

Jerry Wilson

Darren Gibson

Oriel Securities Limited Tel: +44 (0)20 7710 7600

Joe Winkley

James Brodie

Neil Winward

Equity Dynamics (media enquiries)

Corinna Osborne Tel: +44 (0)203 651 2151

www.palioukmidmarketdebtfund.com

Notes

[1] Modelled over the life of the investments.

2 Averaged over the life of the Company.

3 This is a target only and is based on market conditions as at the date of this prospectus. There is no guarantee that the target return can or will be achieved and it should not be seen as an indication of the Company’s expected or actual return.

4 Assuming demand for senior debt normalising at levels seen between 2001 and 2005, resulting in an annualised requirement of c. £2 billion per annum (Source: CMBOR), the target market of £25 billion based on this assumption would comprise c. £10 billion primary loans and c. £15 billion refinancing (of which c. £10 billion is bank loans to PE-backed companies (Source: CMBOR) and c. £5 billion (Investment Adviser’s estimate) represented by loan notes financed by the PE houses).

5 Subject to the appointed person’s fiduciary and contractual duties as a member of the board of the relevant portfolio company.

IMPORTANT NOTICES

The consents or approvals for listing or authorisations referred to herein have not yet been obtained. In particular, the Company has not yet been declared by the Guernsey Financial Services Commission (the “GFSC”) to be a registered collective investment scheme under Section 8 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the “POI Law”) and the Registered Collective Investment Scheme Rules 2008 (the “RCIS Rules”). In addition, the investment manager, Palio Capital Management Guernsey Limited has not yet been granted a licence by the GFSC pursuant to section 4 of the POI Law.

This announcement does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any share in the Company or securities in any other entity, in any jurisdiction, including the United States, Australia, Canada, Japan, South Africa nor shall it, or any part of it, or the fact of its distribution, form the basis of, or be relied on in connection with, any contract or investment decision whatsoever, in any jurisdiction. This announcement does not constitute a recommendation regarding any securities.

This announcement is an advertisement and not a prospectus and investors should not subscribe for or purchase any shares referred to in this announcement except on the basis of the information in the prospectus to be published by the Company in due course in connection with the admission of the shares of the Company to the Official List of the Channel Islands Stock Exchange and to trading on the London Stock Exchange plc’s Specialist Fund Market (the “Prospectus”). Copies of the Prospectus will, following publication, be available from the Company’s registered office.

This announcement, and the information contained therein, is not for viewing, release, distribution or publication in or into the United States, Canada, Australia, Japan or South Africa or any other jurisdiction where applicable laws prohibit its release, distribution or publication, and will not be made available to any national, resident or citizen of the United States, Canada, Australia, Japan or South Africa. The distribution of this announcement in other jurisdictions may be restricted by law and persons into whose possession this announcement comes must inform themselves about, and observe, any such restrictions. Any failure to comply with the restrictions may constitute a violation of the federal securities law of the United States and the laws of other jurisdictions.

The shares to be issued by the Company (the “Securities”) have not been and will not be registered under the US Securities Act of 1933 (the “Securities Act”), or with any securities regulatory authority of any state or other jurisdiction of the United States. The Securities may not be offered, sold, resold, pledged, delivered, distributed or otherwise transferred, directly or indirectly, into or within the United States, or to, or for the account or benefit of, US persons (as defined in Regulation S under the Securities Act). No public offering of the Securities is being made in the United States. The Company has not been and will not be registered under the US Investment Company Act of 1940 (the “Investment Company Act”) and, as such, holders of the Securities will not be entitled to the benefits of the Investment Company Act. No offer, sale, res! ale, pledge, delivery, distribution or transfer of the Securities may be made except under circumstances that will not result in the Company being required to register as an investment company under the Investment Company Act.

All investments are subject to risk, including the loss of the principal amount invested. Past performance is no guarantee of future returns. All investments to be held by the Company involve a substantial degree of risk, including the risk of total loss. You should always seek expert legal, financial, tax and other professional advice before making any investment decision.

Neither the Company, Palio Capital Partners LLP, Oriel Securities Limited, their affiliates nor any other person (including without limitation, the directors, officers, employees, partners, agents, representatives, members and advisers of the Company, Palio Capital Partners LLP, Oriel Securities Limited and their affiliates) undertakes any obligation to update or revise any statement made in this announcement (including, without limitation, any forward looking statements), whether as a result of new information, future events or otherwise.

The information in this announcement contains forward looking statements. Any statement other than a statement of historical fact is a forward looking statement. Actual results may differ materially from those expressed or implied by any forward looking statement. You should not place undue reliance on any forward looking statement, which speaks only as of the date hereof.

This announcement is issued and approved by Oriel Securities Limited solely for the purposes of section 21(2)(b) of the Financial Services and Markets Act 2000. Oriel Securities is authorised and regulated in the United Kingdom by the Financial Services Authority. Registered in England No. 04373759. Registered address: 150 Cheapside, London, EC2V 6ET.