ARC FUNDS LIMITED — AGM Information 2008

Nov 25, 2008

MANAGING DIRECTOR’S COMMENTARY TO THE ANNUAL GENERAL MEETING OF TIDEWATER INVESTMENTS LIMITED

26 NOVEMBER 2008

Good Morning and thank you for attending our Annual General meeting.

As a 15 year old at Grammar School in England in 1974/5, I often wondered what it was really like to be involved in a financial market meltdown of that magnitude, and the bargains which could be obtained from the ensuing rubble. I don’t have to wonder any more. The bigger question would appear to be whether I need my textbooks and biographies of the 1970’s or the older classics documenting the crises of 1907 and 1929. Probably both.

I don’t see any point in giving yet another analysis of the financial contagion which has gripped investment markets over the past twelve months, as the price of risk has escalated from virtually zero in April 2007 to previously unseen – or at least unmeasured – levels in the past few weeks. To be frank, none of us know anyone who was alive as a market practitioner when the 1929 crisis hit, so we all have to use the textbooks and our own research.

For a niche company such as Tidewater, the impacts are not only with respect to the inputs of investment valuations, but also on the bid-offer spreads and transaction values of illiquid assets. The “dash for cash” in the prevailing environment means allied to tight credit availability means that quoted prices often bear no resemblance to the fair value of a company, but that it is still too early for corporate activity to occur to at least partially correct the divergence between price and value.

A year ago, we espoused a view at this meeting of directing our capital towards:

• Agency funds management where we invest in our own product, including the seeding of new funds;

• Discount financial investments where we use our expertise to make financial sector related investments; and

• Investments in our distribution and network partners – those folks we can grow with and mutually assist.

Not surprisingly, this strategy has been severely tested over the past twelve months, especially in the period from the end of May 2008. The test has come in various areas:

• New funds are hard to raise in the current environment;

• The option exercises reasonably expected this time last year for the Fat Prophets Australia Fund in April 2008 did not occur as a result of market declines;

• The ability to securitise property in the Australian environment has completely evaporated for the time being;

• The aforementioned massive discounts to fair value which have emerged in listed, but illiquid securities, mainly as a result of forced sellers, which have yet to be closed by corporate activity; and

• The discounts to NTA of financial investments such as listed investment companies have blown out to levels we have not previously witnessed, rendering some of the investments we made earlier this year now look farcical instead of the well reasoned commitments they actually were.

Some of these issues will, as a result of the magnitude of this downturn, evolve into structural movement; others will be of a much more cyclical nature. For example, the dramatic changes of the past year mean that it would be sensible to make additional principal investments, without managing the underlying assets, because the return opportunity is so significant.

We are not blindly bounding ahead imagining the past twelve months being merely a nightmare from which we will awake in the morning. We have reduced our operating costs to ensure the investments in new initiatives put in place last year have a far less significant impact on profitability going forward. For example, our two asset management functions – sub contract management of Fat Prophets Australia Fund and management of Cheviot Kirribilly Vineyard Property Group now generate an operating surplus, before the costs of the Managing Director, and despite the onerous regulatory imposts involved.

We continue to demonstrate a capacity to create transactions and perform our own internal investment banking, which we suspect will prove to be a significant attribute in the year ahead. In the past twelve months we have:

• Performed due diligence, acquired and closed the acquisition of Cheviot Asset Management and Cheviot Kirribilly Limited;

• Initiated and closed a takeover offer for Goldlink GrowthPlus (now Equities and Freeholds Limited) retaining an 86% stake in the company;

• Underwritten the rights issue for Cheviot Kirribilly Vineyard Property Group in January 2008; and

• Provided significant assistance to Aequs Capital through the development of the takeover offer for Aequs by Findlay Securities Limited.

The latter transaction, in particular, if consummated, will leave Tidewater with over 5% of the expanded capital of an enhanced Findlay Securities under the direction of a new, but proven management team.

Given the cheap nature in the long term of financial assets, we will clearly be looking to make more investments which benefit from financial asset market improvement, such as funds managers, distributors and stockbrokers. We have some caution in that increased levels of regulation are an inevitable accompaniment to the vast supply of Government resources which have assisted in stabilising financial systems and markets in the past months. Australia is never immune from US regulation as, historically, our regulators have striven to be “worlds best practice” – such as we saw in 2003 in response to US changes - and ensure the elimination of regulatory arbitrage. It does mean that the financial asset management value chain could well be structurally re-cut over the next few years.

We are well aware that we must work to derive value from a number of our larger investments. We own 20% of First Opportunity Fund Limited (“FOF”) which despite a share price of 40 – 50 cents, has close to 44cents per share of cash and the equivalent of 26cents per share of loans and equity in two profitable winery businesses plus working capital.

In proposing a takeover offer for FOF, in a fair minded manner using Equities and Freeholds scrip, we hoped to put FOF’s funds to work in the same fashion as EQF. The proposed scrip based offer would have effectively given FOF shareholders a free call option on equity and listed property markets for as long as the offer was open; in the event a free put option would have been far more appropriate. The magnitude of stock market declines over the preceding month meant that we were forced to announce our intention not to proceed with the offer on 10 November.

We must also strive to close the gap between the market’s assessment and stated book value in Fat Prophets Australia Fund and Cheviot Kirribilly Vineyard Property Group, where we hold significant investments. The Fat Fund has operated an active capital management program over the past year, largely under our direction, albeit to limited effect given the prevailing environment in the listed investment company arena, which is the worst I have ever witnessed. Rationalisation of the sector is virtually inevitable.

It has been a tough year to be a member of a public company board and Tidewater has been no exception. My thanks to Paul Young, our Chairman, and Steve Roberts for counsel together wise Clare Porta and Richard Ochojski who served at various stages during the year on the EQF board.

Attempting to comment on the outlook is virtually impossible – mainly due to timing. We are hostage to two issues which have meaningful impacts on our results over any short term period: mark to market accounting and the impact of wide bid-offer spreads – as we noted in the annual report. For what its worth, the decline in market value of portfolio is currently somewhat less than the one third decline in major Australian indices in the financial year to date. Due to the impact of gearing, however, Tidewater’s equity per share on a consolidated basis – including identifiable intangibles – is currently down around about one third from its levels at 30 June 2008.

We are currently working on ideas to enhance the value of Tidewater on a number of fronts, although it is likely to be early in calendar 2009 before these come to fruition. Let’s just say that we’ve got the textbooks out. For those of you in attendance today, you can see from the bookshelf to my right that we have plenty to choose from.