INVESTSMART GROUP LIMITED - Audit Report / Information 2013

INDEPENDENT EXPERT’S REPORT Australasian Wealth Investments Limited

14 October 2014

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Tel: +61 2 9251 4100 Level 11, 1 Margaret St Fax: +61 2 9240 9821 SYDNEY NSW 2000 www.bdo.com.au Australia

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FINANCIAL SERVICES GUIDE

This Financial Services Guide is issued in relation to an independent expert’s report (Report or IER) prepared by BDO Corporate Finance (East Coast) Pty Ltd (ABN 70 050 038 170) (BDO) at the request of the directors of Australasian Wealth Investments Limited (AWK or the Company) to opine on whether the internalisation of the investment management contract (Management Contract) of the Company in exchange for payment of $900,000 cash (Proposed Transaction) is fair and reasonable to AWK’s nonassociated shareholders (Non-associated Shareholders) under the Corporations Act 2001 (Cth) (Act). The Report is intended to accompany the notice of meeting and accompanying explanatory memorandum (Documents) that are to be provided by the directors (Directors) of AWK.

Financial Services Guide

BDO holds an Australian Financial Services Licence (License No: 247420) (Licence). As a result of our Report being provided to you BDO are required to issue to you, as a retail client, a Financial Services Guide (FSG). The FSG includes information on the use of general financial product advice and is issued so as to comply with our obligations as holder of an Australian Financial Services Licence.

Financial services BDO is licensed to provide

The Licence authorises BDO to provide reports for the purposes of acting for and on behalf of clients in relation to proposed or actual mergers, acquisitions, takeovers, corporate restructures or share issues, to carry on a financial services business to provide general financial product advice for securities and certain derivatives (limited to old law securities, options contracts and warrants) to retail and wholesale clients.

BDO provides financial product advice by virtue of an engagement to issue the Report in connection with the issue of securities of another person.

Our Report includes a description of the circumstances of our engagement and identifies the party who has engaged us. You have not engaged us directly but will be provided with a copy of our Report (as a retail client) because of your connection with the matters on which our Report has been issued.

Our Report is provided on our own behalf as an Australian Financial Services Licensee authorised to provide the financial product advice contained in the Report.

General financial product advice

Our Report provides general financial product advice only, and does not provide personal financial product advice, because it has been prepared without taking into account your particular personal circumstances or objectives (either financial or otherwise), your financial position or your needs.

Some individuals may place a different emphasis on various aspects of potential investments.

An individual’s decision in relation to the Proposed Transaction described in the Documents may be influenced by their particular circumstances and, therefore, individuals should seek independent advice.

Benefits that BDO may receive

BDO has charged fees for providing our Report. The basis on which our fees will be determined has been agreed with, and our fees will be paid by the person who engaged us to provide the Report. Our fees have been agreed on either a fixed fee or time cost basis.

BDO will receive a fee based on the time spent in the preparation of this Report in the amount of approximately $27,500 (plus GST and disbursements). BDO will not receive any fee contingent upon the outcome of the Proposed Transaction, and accordingly, does not have any pecuniary or other interests that could reasonably be regarded as being capable of affecting its ability to give an unbiased opinion in relation to the Proposed Transaction.

Remuneration or other benefits received by our employees

All our employees receive a salary. Employees may be eligible for bonuses based on overall productivity and contribution to the operation of BDO or related entities but any bonuses are not directly connected with any assignment and in particular are not directly related to the engagement for which our Report was provided.

Referrals

BDO does not pay commissions or provide any other benefits to any parties or person for referring customers to us in connection with the reports that BDO is licensed to provide.

Associations and relationships

BDO is the licensed corporate advisory arm of BDO East Coast Partnership, Chartered Accountants and Business Advisers. The directors of BDO may also be partners in BDO East Coast Partnership, Chartered Accountants and Business Advisers.

BDO East Coast Partnership, Chartered Accountants and Business Advisers are comprised of a number of related entities that provide audit, accounting, tax and financial advisory services to a wide range of clients.

BDO’s contact details are as set out on our letterhead.

BDO is unaware of any matter or circumstance that would preclude it from preparing the Report on the grounds of independence under regulatory or professional requirements. In particular, BDO has had regard to the provisions of applicable pronouncements and other guidance statements relating to professional independence issued by Australian professional accounting bodies and Australian Securities and Investments Commission (ASIC).

Complaints resolution

As the holder of an Australian Financial Services Licence, we are required to have a system for handling complaints from persons to whom we provide financial product advice. All complaints must be in writing, addressed to The Complaints Officer, BDO Corporate Finance (East Coast) Pty Ltd, Level 11, 1 Margaret Street, Sydney NSW 2000.

On receipt of a written complaint we will record the complaint, acknowledge receipt of the complaint and seek to resolve the complaint as soon as practical. If we cannot reach a satisfactory resolution, you can raise your concerns with the Financial Ombudsman Service Limited (FOS). FOS is an independent body established to provide advice and assistance in helping resolve complaints relating to the financial services industry. BDO is a member of FOS. FOS may be contacted directly via the details set out below.

Financial Ombudsman Service Limited

GPO Box 3

Melbourne VIC 3001 Toll free: 1300 78 08 08 Email: [email protected]

BDO Corporate Finance (East Coast) Pty Ltd ABN 70 050 038 170 AFS Licence No. 247420 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Corporate Finance (East Coast) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.

Level 11, 1 Margaret St SYDNEY NSW 2000 Australia

Tel: +61 2 9251 4100 Fax: +61 2 9240 9821 www.bdo.com.au

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14 October 2013

The Directors Australasian Wealth Investments Limited Level 4 1 Alfred Street SYDNEY NSW 2000

Dear Directors

INDEPENDENT EXPERT'S REPORT

Introduction

The directors ( Directors ) of Australasian Wealth Investments Limited ( AWK or the Company ) have appointed BDO Corporate Finance (East Coast) Pty Ltd ( BDO, we, us or our ) to prepare an independent expert’s report ( Report or IER ) setting out our opinion as to whether the internalisation of the investment management contract ( Management Contract ) of the Company in exchange for payment of $900,000 cash ( Proposed Transaction ) is fair and reasonable to AWK’s non-associated shareholders ( Non-associated Shareholders ).

AWK is listed on the Australian Securities Exchange ( ASX ) and invests in public and private Australian companies. Andrew Barnes is a director of AWK and currently holds 9.9% of the Company’s equity. He is also the sub-manager of AWK, appointed on behalf of Aurora Funds Management Limited ( Aurora ).

On 15 August 2013, the Directors of AWK announced that agreement has been reached on terms to internalise the management of AWK from Aurora in exchange for the payment of $900,000 cash. If the Proposed Transaction is approved AWK will no longer be externally managed.

Full details of the Proposed Transaction are set out in the notice of meeting and explanatory statement ( Documents ) to be sent to the shareholders of AWK ( Shareholders ) in respect of a general meeting to be convened ( Meeting ).

Purpose and Approach

The Directors have engaged us to prepare this Report to opine on whether the Proposed Transaction is fair and reasonable to Non-associated Shareholders for the purposes of ASX Listing Rule 10.1 ( LR 10.1 ). An IER is required in relation to the Proposed Transaction as:

the cash consideration of $900,000 comprises more than 5% of the net assets of AWK, and
Aurora and its associates are deemed a substantial holder in AWK.

All amounts in this Report are in Australian dollars ($) unless otherwise stated.

Summary of opinion

In our opinion the Proposed Transaction in accordance with the Documents is fair and reasonable to the Non-associated Shareholders.

Fairness assessment

We have formed our opinion in relation to fairness by comparing our assessed value of:

The amount paid to Aurora, being $900,000 cash, to
The fair market value of the Management Contract.

The Proposed Transaction will be fair if the value of the amount paid to Aurora (being the financial benefit provided to the related party) is equal to or less than the value of the Management Contract (being the consideration provided to the entity).

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The result of our fairness analysis is summarised below.

Table 1: Fairness analysis

$’000s unless stated otherwise	Ref	Low	High	Mid
Amount paid to Aurora	4.4	900	900	900
Fair market value of the Management Contract	5.2	1,131	1,933	1,532
Source: BDO analysis

As the value of the amount paid to Aurora is less than the fair market value of the Management Contract, we have concluded that the Proposed Transaction is fair to the Non-associated Shareholders.

Certain assumptions have been made regarding the value of the Management Contract, as disclosed in Section 4.2.1 and Section 5 . The value of the Management Contract:

includes expected growth from the return on investment on existing funds
excludes future capital raisings or acquisitions that may lead to an increase in net tangible assets ( NTA ) and a corresponding increase in management fee income
excludes any performance management fees as these are not capable of estimation.

Reasonableness assessment

In accordance with the Australian Securities and Investments Commission’s ( ASIC ) Regulatory Guide 111 ‘Content of expert reports’ ( RG 111 ), an offer is reasonable if it is fair. It might also be reasonable if, despite being not fair, the expert believes that there are sufficient reasons for Non-associated Shareholders to accept the offer in the absence of a superior offer.

We have considered various factors that we believe Non-associated Shareholders should consider when deciding whether or not to approve the Proposed Transaction. The factors that we have considered are set out in Section 8 and are summarised below:

AWK will be able to proceed with its change in strategy from an Listed Investment Company ( LIC ) to an operating business
The Management Contract was previously acquired by Aurora from Merricks in March 2013. We understand that this was an arms length transaction
The value of the Management Contract does not include performance fees that are potentially payable under the Management Contract, nor does it include the value of management fees payable on additional capital raised (except for the Placement)
The management of AWK will be not be reliant on the terms of the Management Contract
Aurora will not remain the Manager of AWK, management fees will not be payable and Andrew Barnes will provide management services if the Proposed Transaction is approved
AWK will incur transaction costs regardless of whether the Proposed Transaction is approved or not.

Shareholders’ individual circumstances

Our analysis has been undertaken, and our conclusions are expressed, at an aggregate level. Accordingly, we have not considered the effect of the Proposed Transaction on the particular circumstances of individual shareholders of AWK. Some individual Shareholders may place a different emphasis on various aspects of the Proposed Transaction from that adopted in this Report. Accordingly, individual Shareholders may reach different conclusions as to whether or not the Proposed Transaction is fair and reasonable in their individual circumstances. As the decision of an individual Shareholder in relation to the Proposed Transaction may be influenced by their particular circumstances (including their taxation position), Shareholders are advised to seek their own independent advice.

BDO Corporate Finance (East Coast) Pty Ltd

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Approval or rejection of the Proposed Transaction is a matter for individual Shareholders based on their expectations as to the expected value, future prospects, market conditions and their particular circumstances, including risk profile, liquidity preference, portfolio strategy and tax position. Shareholders should carefully consider the Documents. Shareholders who are in doubt as to the action they should take in relation to the Proposed Transaction should consult their professional adviser.

Summary

This summary should be read in conjunction with the attached Report that sets out in full the purpose, scope, basis of evaluation, limitations, information relied upon, analysis and our findings.

Glossary

Capitalised terms used in this Report have the meanings set out in the glossary.

Sources of information

Appendix 1 identifies the information referred to, and relied upon by us during the course of preparing this Report and forming our opinion.

Financial services guide

BDO holds an Australian Financial Services Licence ( Licence ) which authorises us to provide reports for the purposes of acting for and on behalf of clients in relation to proposed or actual mergers, acquisitions, takeovers, corporate restructures or share issues. A financial services guide is attached at the start of this Report.

Yours faithfully

BDO CORPORATE FINANCE (EAST COAST) PTY LTD

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David McCourt Director

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Sebastian Stevens Director

BDO Corporate Finance (East Coast) Pty Ltd

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1.	SC OPE AND LIMIT ATIONS ....... ................... .................. .................. ................... .................. ................ 1	SC OPE AND LIMIT ATIONS ....... ................... .................. .................. ................... .................. ................ 1
	1. 1.	Terms of the ProposedT ransaction ..... .................. .................. ................... .................. ................ 1
	1. 2.	ASX Listin g Rule 10.1 ... ................... .................. .................. ................... .................. ................ 1
	1. 3.	Scope .... .................. ................... .................. .................. ................... .................. ................ 1
	1. 4.	Basis ofA ssessment ..... ................... .................. .................. ................... .................. ................ 1
	1. 5.	Limitatio ns ............... ................... .................. .................. ................... .................. ................2
	1. 6.	APES 225 .................. ................... .................. .................. ................... .................. ................3
	1. 7.	Assumptio ns .............. ................... .................. .................. ................... .................. ................3
2.	PR OFILE OF AWK ................. ................... .................. .................. ................... .................. ................ 4
	2. 1.	Overview ................. ................... .................. .................. ................... .................. ................4
	2. 2.	Board of Directors andK ey Managemen t Personnel .... .................. ................... .................. ................5
	2. 3.	Net Tang ible Asset Back ing ............... .................. .................. ................... .................. ................6
	2. 4.	Historical Financial Infor mation ......... .................. .................. ................... .................. ................7
	2. 5.	Capital St ructure and Ow nership ........ .................. .................. ................... .................. ................9
	2. 6.	Share Pric e Analysis .... ................... .................. .................. ................... .................. ............... 10
3.	TH E MANAGEMEN T CONTRACT ................... .................. .................. ................... .................. .............. 12
	3. 1.	Managem ent Contract Te rms ............. .................. .................. ................... .................. ............... 12
4.	VA LUATION MET HODOLOGY ... ................... .................. .................. ................... .................. .............. 13
	4. 1.	Overview ................. ................... .................. .................. ................... .................. ............... 13
	4. 2.	Selected Valuation Meth odology ......... .................. .................. ................... .................. ............... 13
	4. 3.	Valuation Cross-Check .. ................... .................. .................. ................... .................. ............... 14
	4. 4.	Valuation of the Conside ration .......... .................. .................. ................... .................. ............... 14
5.	VA LUATION OF T HE MANAGEME NT CONTRACT ................. .................. ................... .................. .............. 14
	5. 1.	Overview ................. ................... .................. .................. ................... .................. ............... 14
	5. 2.	Valuation Summary ..... ................... .................. .................. ................... .................. ............... 14
	5. 3.	Managem ent Fees ....... ................... .................. .................. ................... .................. ............... 15
	5. 4.	Marginal Costs of Manag ing AWK as anL IC ............... .................. ................... .................. ............... 15
	5. 5.	Discount Rate ............ ................... .................. .................. ................... .................. ............... 16
	5. 6.	Taxation .................. ................... .................. .................. ................... .................. ............... 16
6.	VA LUATION CRO SS-CHECK ..... ................... .................. .................. ................... .................. .............. 16
	6. 1.	Comparab le Internalisat ion of Managem ent ContractT ransactions .... ................... .................. ............... 16
	6. 2.	Previous Sale of Manage ment Contract. .................. .................. ................... .................. ............... 16
7.	FA IRNESS ASSESS MENT .......... ................... .................. .................. ................... .................. .............. 17
	7. 1.	Fairness . .................. ................... .................. .................. ................... .................. ............... 17
8.	RE ASONABLENES S ................ ................... .................. .................. ................... .................. .............. 17
	8. 1.	Factors .. .................. ................... .................. .................. ................... .................. ............... 17
	8. 2.	Reasonab leness Conclusi on ............... .................. .................. ................... .................. ............... 18
9.	QU ALIFICATIONS AND DECLARA TIONS .......... .................. .................. ................... .................. .............. 19
	9. 1.	Qualificat ions ............ ................... .................. .................. ................... .................. ............... 19
	9. 2.	Independ ence ............ ................... .................. .................. ................... .................. ............... 19
	9. 3.	Disclaime r ................ ................... .................. .................. ................... .................. ............... 19
APPENDIX 1 :		SOURCES O F INFORMATIO N ............... .................. .................. ................... .................. .............. 20
APPENDIX 2 :		GLOSSARY ................. ................... .................. .................. ................... .................. .............. 21
APPENDIX 3 :		VALUATIO N METHODS ... ................... .................. .................. ................... .................. .............. 22
APPENDIX 4 :		DISCOUNT RATE .......... ................... .................. .................. ................... .................. .............. 23
APPENDIX 5 :		COMPARAB LE COMPANY DESCRIPTIONS . .................. .................. ................... .................. .............. 27

BDO Corp o rate Finance ( E ast Coast) Pty Ltd

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1. SCOPE AND LIMITATIONS

1.1. Terms of the Proposed Transaction

On 28 M arch 2013, Aurora purcha s ed the Mana g ement Contr a ct and beca m e the invest m ent manager ( Manager ) of AWK. On 15 Augu s t 2013, the directors of A W K ( Directors ) announced t hat agreeme n t had been r e ached on terms to internalise t he management of AWK i n exchange for the paymen t of $900,000 cash to Auro r a. In essenc e , AWK will n o longer be e x ternally man a ged but will instead empl o y its own m a nagement te a m. The key terms a re:

The Manag e ment Contra c t will be tra n sferred to A W K in return f o r a payment of $900,000 t o Aurora
The payme n t is subject t o a majority o f Non-associ a ted Sharehol d ers voting f o r the acquisi t ion of the Management Contract at the Meeting
Following t h e acquisition of the Mana g ement Contr a ct, AWK will retain Andre w Barnes on a fee of $50,000 p.a., and issue him with opti o ns, to be agr e ed by the Non-associated S hareholders at the Meeting. A n drew Barnes holds 9.9% of AWK and is a director of t h e Company. H e is also the sub-manage r of AWK, ap p ointed on behalf of Auror a

 Details of k e y Management Contract t e rms are det a iled in Section 3.1 . The Directors have engaged us to prepare a Re p ort in relati o n to the Proposed Transac t ion to satisf y the requirements of LR 10.1.

1.2. ASX Listing Rule 10.1

Listing Rule 10 appli e s to transactions between an entity an d persons in a position to i n fluence the e ntity. LR 10.1 prohibits an entity from a c quiring an a s set worth m o re than 5% of its net asset s from a subs t antial holder withou t the approva l of non associated shareh o lders. Under the Proposed Transaction, AWK will acquire assets (the M a nagement Contract) for $ 9 00,000 from A urora. Aurora and its associates (inclu d ing Andrew Barnes) are substa n tial holders o f AWK for th e purposes of L R 10.1. The payment of $ 9 00,000 for t h e Manageme n t Contract compri s es approxim a tely 6.5% of t he net asset s of AWK as a t 30 June 201 3 . Therefore, approval of t h e Non-as s ociated Shar e holders is re q uired.

1.3. Scope

The pr o cedures we h ave undertaken have been limited to those procedur e s that we b e lieve were required in order t o form our opinion. Our pr o cedures in t h e preparatio n of the Repo r t do not incl u de verificati o n work nor constit u te an audit i n accordance with Australi a n Auditing S t andards, nor do they cons t itute a revie w in accord a nce with Au d iting Standar d s applicable to review en g agements.

The as s essment of whether the Proposed Trans a ction is fair a nd reasonab l e necessarily involves det e rmining the ‘fair m a rket value’ o f various sec u rities, assets and interest s .

For the purposes of o ur opinion, t h e term ‘fair market value’ is defined a s :

“The price that w ould be neg o tiated in an o pen and unr e stricted mar k et between a knowledge a ble, willing, but not anxious p urchaser an d a knowledgeable, willing, but not anxi o us vendor, a c ting at arm’ s length.”

1.4. Basis of Assessment

In dete r mining whet h er the Proposed Transaction is fair and reasonable t o Shareholde rs , we have h a d regard to the following ASIC g u idelines:

RG 1 11

 Regulatory Guid e 112 ‘Indepe n dence of ex p erts’ ( RG 112 ).

In particular, RG 111 establishes g uidelines in r e spect of ind e pendent expert reports u n der the Act. RG 111 establishes t w o distinct criteria for an e xpert analysing a transact i on. The test s are:

Is it ‘fair’; and

BDO Corporat e Finance (East Coast) Pty Ltd

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 Is it ‘reasonable’?

That is, the terms fair and reasonable are regarded as separate elements and are not regarded as a compound phrase.

Fair

RG 111.57 indicates that an offer is ‘fair’ if the value of the financial benefit to be provided by the entity to the related party is equal to or less than the value of the consideration being provided to the entity. The comparison should be made assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm’s length.

In our opinion, the Proposed Transaction will be fair to the Non-associated Shareholders if the payment of $900,000 cash to Aurora (being the financial benefit provided to the related party) is equal to or less than the value of the Management Contract (being the consideration provided to the entity).

Reasonable

RG 111.60 indicates that an offer is ‘reasonable’ if it is 'fair'. It might also be ‘reasonable’ if, despite being ‘not fair’, the expert believes that there are sufficient reasons for security holders to vote for the proposal.

1.5. Limitations

General

In preparing the Report, ASIC requires the independent expert, when deciding on the form of analysis for a report, to bear in mind that the main purpose of the report is to adequately deal with the concerns that could reasonably be anticipated by those persons affected by the Proposed Transaction. In preparing the Report we considered the necessary legal requirements and guidance of the Act, ASIC Regulatory Guides and commercial practice.

The Report also includes the following information and disclosures:

Particulars of any relationship, pecuniary or otherwise, whether existing presently or at any time within the last two years, between BDO East Coast Partnership or BDO (or antecedent firms) and any of the parties to the Proposed Transaction
The nature of any fee or pecuniary interest or benefit, whether direct or indirect, that we have received or will or may receive for or in connection with the preparation of the Report
We have been appointed as independent expert for the purposes of providing a Report for the Documents
That we have relied on information provided by the Directors and management of AWK ( Management ) and that we have not carried out any form of audit or independent verification of the information provided
That we have received representations from the Directors in relation to the completeness and accuracy of the information provided to us for the purpose of our Report.

Current Market Conditions

Our opinion is based on economic, market and other conditions prevailing at the date of this Report. Such conditions can change significantly over relatively short periods of time. Changes in those conditions may result in any opinion becoming quickly out dated and in need of revision. We reserve the right to revise any opinion, in the light of material information existing at the Report date that subsequently becomes known to us.

Reliance on Information

This Report is based upon financial and other information provided by AWK, its Directors and Management. We have considered and relied upon this information. We believe the information provided to be reliable, complete and not misleading, and we have no reason to believe that any material facts have been withheld.

Our procedures in the preparation of the Report involved an analysis of financial information and accounting records. This did not include verification work nor constitute an audit or review in accordance with Australian Auditing and Assurance Standards and consequently does not enable us to become aware of all significant matters that might be identified in an audit or review. Accordingly we do not express an audit or review opinion.

BDO Corporate Finance (East Coast) Pty Ltd

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It was not our role to undertake, and we have not undertaken, any commercial, technical, financial, legal, taxation or other due diligence, other similar investigative activities or valuations in respect of the Proposed Transaction. We understand that the Directors have been advised by legal, accounting and other appropriate advisors in relation to such matters, as necessary. We do not provide any warranty or guarantee as to the existence, extent, adequacy, effectiveness and/or completeness of any due diligence or other similar investigative activities by the Directors and/or their advisors.

We do not provide any warranty or guarantee that our inquiries have identified or verified all of the matters which an audit, extensive examination or ‘due diligence’ investigation might disclose. An opinion as to whether a corporate transaction is ‘fair and reasonable’ is in the nature of an overall opinion, rather than an audit or detailed investigation and it is in this context that we advise that we are not in a position, nor is it practical for us, to undertake such an extensive verification exercise.

It is understood that except where noted, the accounting information provided to us was prepared in accordance with generally accepted accounting principles (including adoption of Australian Equivalents to International Financial Reporting Standards) and prepared in a manner consistent with the method of accounting used by AWK in previous accounting periods.

1.6. APES 225

This engagement has been conducted in accordance with professional standard APES 225 Valuation Services, as issued by the Australian Professional and Ethical Standards Board.

1.7. Assumptions

In forming our opinion, we have made certain assumptions as outlined below:

Assumptions addressed in the valuation section.
Matters such as compliance with laws and regulations and contracts in place are in good standing, and will remain so. There are no material legal proceedings, other than as publicly disclosed.
Information in relation to the Proposed Transaction that is distributed to Shareholders, or any information issued by a statutory body is complete, accurate and fairly presented in all material respects.
Any publicly available information relied on by us is accurate, up to date and not misleading.
If the Proposed Transaction is implemented, it will be implemented in accordance with the publicly stated terms.
The legal mechanisms to implement the Proposed Transaction are valid and effective.
There are no undue changes to the terms and conditions of the Proposed Transaction or complex issues unknown to us from the date of issue of this Report.

BDO Corporate Finance (East Coast) Pty Ltd

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2. PROFILE OF AWK

2.1. Overview

AWK is a Sydney bas e d company i n corporated o n 12 November 2004 and subsequently listed on the A SX on 21 Apri l 2005. AWK i s an LIC and h istorically ha s invested in t he public eq u ity and fixe d income mar k ets of Austral i a, with an e m phasis on small to mid-ca p Australian listed companies.

AWK’s e xisting man a gement agre e ment was implemented o n 8 February 2 005 between the Compan y and Fat Prophe t s Funds Man a gement Aust r alia Pty Limi t ed ( Fat Prophets ), and w a s subsequen t ly transferre d from Fat Prophe t s to Merricks Capital Pty Limited ( Merricks ) on 29 July 2010.

On 28 M arch 2013 th e manageme n t rights to A W K were tran s ferred from M erricks to A u rora. Furthermore, Andre w Barnes acqu i red an equit y stake of 19. 9 % of AWK an d was appointed sub-mana g er of AWK o n behalf of Aurora. Andrew Bar n es and Alastair Davidson, a director of A urora, joine d AWK as dire c tors.

On 8 A p ril 2013, AW K entered int o an agreeme n t to acquire100% van Eyk G roup Holdin g s Pty Limite d ( vEGH ) for $13.3 m illion in stag e d payments. vEGH’s sole a sset is a 49. 6 % interest in the equity of van Eyk Research Pty Limite d ( van Eyk ). V an Eyk is a supplier of inv e stment research to the Au s tralian and N ew Zealand m arket. It offers i n vestment m a nagement a n d asset cons u lting service s , model portfolios and pro f essional dev e lopment for financi a l advisers. V a n Eyk also provides fee-fo r -service fina n cial advice t o retail inves t ors. At 30 Ju n e 2013, AW K had settled the purc h ase of 50% o f vEGH and i n July 2013 se t tled a further 35% tranch e of vEGH.

On 20 M ay 2013 AW K held an extr a ordinary general meeting which provid e d an overvie w of the proposed changes to AWK’s operating s trategy. The Company is a n ticipating a c hange in str a tegy from b e ing an invest m ent holding compa n y to become a wealth ma n agement hol d ings compan y , with investments across all wealth m a nagement sectors . AWK will o w n operating b usinesses with the aim of g enerating di v idends from t hese busines s es for shareh o lders. Manag e ment antici p ate that AW K will be valu e d on a price t o earnings multiple rathe r than on an NTA ba s is.

On 13 A ugust AWK a n nounced det a ils of the pu r chase of Inv e stSMART fro m Fairfax Med i a Limited fo r cash consid e ration of $7. 0 million. The acquisition w as settled on 30 Septemb e r 2013. Inves t SMART is an o nline financi a l services po r tal in Australia, providing self-directed investors wit h low-cost ac c ess to finan c ial inform a tion and pro d ucts.

On 15 A ugust 2013 A W K announce d details of t h e Proposed T ransaction. A dditionally, t h e Company h as raised approximately $10 m illion via a placement of 28.6 million S h ares at $0.35 per Share to domestic professional and sophist i cated invest o rs ( Placement ). The Plac e ment was ap p roved by Shareholders at a n extraordin a ry general meetin g ( EGM ) held on 19 September 2013, an d the Shares w ere issued o n 25 Septemb e r 2013. Capi t al raised from t h e Placement will be used t o fund the a c quisition of I n vestSMART and the acquisition of furth e r shares in vEGH.

On 20 S eptember 20 1 3 AWK anno u nced details of an entitle m ent offer to eligible shar e holders of two new Shares for eve r y three existing Shares at $0.35 per Sh a re to raise a p proximately $ 13.3 million ( Entitlement Offer ). The procee d s of the Plac e ment and E n titlement Of f er will be us e d to provide additional w o rking capital and complete the Proposed Transacti o n. The Entitl e ment Offer i s not underw r itten, and th e rights are n o n- renoun c eable. The D irectors have discretion to place the sh o rtfall at a pr i ce of not les s than $0.35. Expenses associa t ed with the E ntitlement O ffer are exp e cted to total $0.7 million

On 25 S eptember 20 1 3 AWK anno u nced the ap p ointment of B en Heap as C EO and Mana g ing Director. Mr Heap has extensi v e financial s e rvices exper i ence in Aust r alia and the U nited States , and was mo s t recently th e Managing Director of UBS Global Asset Man a gement in Australasia. His appointment to AWK posit i ons the Com p any for future i nvestment in the wealth m anagement i n dustry.

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A summary of key corporate events is provided below.

Table 2: Key corporate events

Date	Key event
12 November 2004	Australasian Wealth Investments Limited is incorporated.
21 April 2004	AWK lists on the ASX.
8 February 2005	AWK’s existing management agreement was implemented between the Fat Prophets Australia Fund
	Limited (the original name of AWK) as the company and Fat Prophets as the fund manager.
29 July 2010	The management rights to the Fund were authorised by the Directors of AWK to be transferred from Fat
	Prophets to Merricks.
2 September 2010	The company announced that the majority of previously held equity instruments had been liquidated, with
	97% of the portfolio in cash following the change in investment manager.
1 October 2010	The Fund announced its new investment mandate following the change in investment manager to Merricks.
31 May 2011	AWK provided $6.1 million of mezzanine funding to Digital Harbour Holdings for the construction of the
	new headquarters of Melbourne Water Corporation. The facility was provided for 15 months.
27 August 2012	AWK received the balance of the Digital Harbour loan repayment totaling $7.57 million, achieving a
	17% p.a. effective interest rate.
28 March 2013	The Management Contract was transferred from Merricks to Aurora.
28 March 2013	Andrew Barnes acquired 19.9% of AWK, and was appointed a sub-manager of AWK on behalf of Aurora.
8 April 2013	AWK acquired a 49.6% stake in van Eyk for $13.3 million.
20 May 2013	EGM held, with AWK’s change in operating strategy released to Shareholders.
14 June 2013	The company name changed from ‘Merricks Capital Special Opportunity Fund Limited’ to ‘Australasian
	Wealth Investments Limited’.
13 August 2013	AWK announced details of the purchase of InvestSMART from Fairfax Media Limited for cash consideration
	of $7.0 million. AWK also entered into a trading halt prior to announcement of the Proposed Transaction.
15 August 2013	AWK announced details of a capital raising of approximately $10 million via a placement of 28.6 million
	shares at $0.35 per Share, as well as a subsequent Entitlement Offer at $0.35 per Share to raise
	approximately $6.7 million. AWK also announced details of the Proposed Transaction
28 August 2013	Annual report for FY13 released
19 September 2013	Shareholders approved the Placement.
20 September 2013	AWK altered the Entitlement Offer to increase the number of Shares available for subscription to two new
	Shares for every three existing Shares held. The subscription price remaining at $0.35 per Share.
25 September 2013	AWK announces the appointment of Ben Heap as CEO and Managing Director of the Company.
30 September 2013	AWK settled its acquisition of InvestSMART from Fairfax Media Limited.

Source: ASX announcements

2.2. Board of Directors and Key Management Personnel

AWK’s Directors and key management personnel are as follows:

Andrew Brown – Chairman, Non-Executive Director
John Reynolds – Non-Executive Director
Andrew Barnes - Executive Director
Alastair Davidson – Executive Director

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2.3. Net Tangible Asset Backing

As an LIC, AWK is required to report NTA backing on a monthly basis. We have compared AWK’s NTA against its ASX pricing between August 2011 and August 2013, as depicted below.

Table 3: ASX pricing against NTA pricing – August 2011 to August 2013

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----- Start of picture text -----

Share Price $
1.20
1.00
0.80
0.60
A
0.40
0.20
-
AWK ASX Pricing S&P/ASX 200 Index AWK NTA per Share
----- End of picture text -----

Source: Management

AWK has consistently traded at a discount to NTA over the two years preceding the announcement of the Proposed Transaction. The discount to NTA has ranged between 51% and 8% and was 27% as at 14 August 2013. Following the announcement of the Proposed Transaction, the discount to NTA has decreased and was 2.5% as at 30 September 2013.

We also note that AWK has underperformed the S&P/ASX 200 Index over the two years preceding the announcement of the Proposed Transaction. The S&P/ASX 200 Index increased by 24% over that period, whereas AWK’s ASX Share price declined by 59%.

The fall in both ASX pricing and NTA per Share in 2012 can be primarily attributed to the decline in value of one of AWK’s largest investments, being Straits Resources Limited. The share price of Straits Resources Limited fell from $0.78 per share as at 30 April 2012 to $0.12 per share as at 31 August 2012.

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2.4. Historical Financial Information

2.4.1. Financial performance

AWK’s statements of comprehensive income for the years ended 30 June 2011 ( FY2011 ), 30 June 2012 ( FY2012 ) and 30 June 2013 ( FY2013 ) are set out below:

Table 4: Statements of Comprehensive Income

$	FY11 Audited	FY12 Audited	FY13 Audited
Dividends received	200,890	-	-
Trust distributions	12,800	-	-
Interest received	740,799	1,272,546	332,841
Other income	250	-	-
Total revenue	954,739	1,272,546	332,841
Administrative expense	(63,934)	(63,345)	(56,210)
Management fees	(400,226)	(350,146)	(201,310)
Audit fees	(31,604)	(72,486)	(48,019)
Share registry fees	(33,874)	(20,567)	(31,659)
Directors' fees	(73,700)	(73,700)	(79,500)
Company secretarial fees	(21,833)	(22,000)	(21,756)
ASX listing fees	(24,236)	(24,624)	(23,999)
Legal fees	(7,584)	(4,253)	(7,965)
Tax fees	(14,300)	(14,299)	(10,421)
Other	(59,933)	(48,441)	(45,973)
Total expenditure	(731,224)	(693,861)	(526,812)
Change in fair value of financial assets at fair value through profit	2,403,282	(11,364,791)	(6,569,635)
or loss
Operating (loss)/profit before income tax expense	2,626,797	(10,786,106)	(6,763,606)
Income tax expense	(1,124,850)	(313,203)	(241,910)
Operating (loss)/profit after income tax expense	1,501,947	(11,099,309)	(7,005,516)
Basic and diluted profit/(loss) in cents per share	5.25	(38.90)	(24.57)

Source: AWK Annual Report 2012, AWK Annual Report 2013

We note the following:

AWK’s revenue in FY12 and FY13 was limited to interest income, derived primarily from the Digital Harbour loan which was repaid on 27 August 2012. Funds from this loan were reinvested in AWK’s acquisition of 49.6% of the equity in van Eyk on 8 April 2013.
AWK paid management fees of $0.40 million in FY11, $0.35 million in FY12 and $0.20 million in FY13. The declining figure paid is a result of decreasing net assets as at each balance date over the period. Management fees are charged at the rate of 1.25% p.a. of net assets payable monthly.

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2.4.2. Financial position

AWK’s statements of financial position as at 30 June 2011, 30 June 2012 and 30 June 2013 are set out below:

Table 5: Consolidated Statements of Financial Position

$	As at 30 Jun 2011 Audited	As at 30 Jun 2012 Audited	As at 30 Jun 2013 Audited
Current assets
Cash and cash equivalents	3,205,861	11,427	2,875,399
Trade and other receivables	142,585	11,223	3,126,124
Prepayments	9,677	9,680	10,670
Financial assets at fair value through profit or	21,781,218	13,437,798	7,833,442
loss
Loans	-	7,375,965	-
Total current assets	25,139,341	20,846,093	13,845,635
Non current assets
Deferred tax assets	708,094	241,910	-
Loans	6,230,139	-	-
Total non current assets	6,938,233	241,910	-
Total assets	32,077,574	21,088,003	13,852,049
Current liabilities
Bank overdraft	-	201,833	-
Trade and otherpayables	80,309	96,369	73,665
Total current liabilities	80,309	298,202	73,665
Non current liabilities
Deferred tax liabilities	108,155	-	-
Total non current liabilities	108,155	-	-
Total liabilities	188,464	298,202	73,665
Net assets	31,889,110	20,789,801	13,771,970
Equity
Share capital	28,629,952	28,629,952	28,617,637
Retained earnings	3,259,158	(7,840,151)	(14,845,667)
Total equity	31,889,110	20,789,801	13,771,970

Source: AWK Annual Report 2012, AWK Annual Report 2013

We note the following:

The asset ‘loans’ relates to a secured loan over Digital Harbour, a construction project at 990 LaTrobe Street, Melbourne. The facility was provided for a period of 14 months, accrued interest at a rate of 17% p.a. and was repaid on 27 August 2012. On repayment, net cash and cash equivalents increased by $4.1 million.
The value of AWK’s financial assets declined by $11.4 million in FY12 and $6.6 million in FY13. The large decline in FY12 is predominantly attributed to AWK’s exposure to an investment in Straits Resources Limited, a mid-sized gold-copper company listed on the ASX. Between 30 April 2012 and 30 June 2012 the value of Straits Resources Limited fell by 85% due to the “cash consumptive Mt. Muro operation”, amongst other reasons.
As such, the net assets of the Company have fallen from $31.9 million as at 30 June 2011 to $13.8 million as at 30 June 2013. Subsequent to 30 June 2013, AWK raised approximately $9.5 million net proceeds through the Placement which was approved by Shareholders on 19 September 2013, increasing the net assets of AWK by 69% to approximately $23.3 million (excluding movements in other assets and liabilities).

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2.4.3. Portfolio and sector allocation as at 30 June 2013

A breakdown of AWK’s investment portfolio by value following the Placement, but prior to the Entitlement Offer and the Proposed Transaction, is provided below.

Table 6: Consolidated Statements of Financial Position

Asset class 30 June 2013 Receipt of trade payables	Placement (Net proceeds) Purchase of van Eyk, InvestSMART Disposal of listed securities Pro forma 30 Sep 2013

Cash 2,875 3,126	9,510 (11,712) 464 4,263
Trade and other receivables 3,126 (3,126)	-
Prepayments 11	11
Financial assets at fair value through profit/(loss)
Lantern Hotel Group 464	(464) -
Straits Resources Limited 710	710
Van Eyk Group Holdings (unlisted) 6,658	4,660 11,318
InvestSMART -	7,052 7,052
Company issued options 2	2
Total asset value 13,846 -	9,510 - - 23,356
_Source:_AWK Annual Report 2013, Management

We note that subsequent to 30 June 2013, AWK has fully divested its shareholding in Lantern Hotel Group in line with AWK’s stated change in strategy. Cash was increased by the collection of trade receivables and the receipt of funds form the Placement. AWK acquired a further 35% of vEGH in July 2013 for $4.7 million. This was funded by cash and receivables held at 30 June 2013. The Company is looking to divest its remaining interests in Straits Resources Limited in order to pursue further acquisitions in the wealth management industry.

2.5. Capital Structure and Ownership

As at 1 October 2013 AWK had 57,106,255 ordinary Shares on issue. The top 10 shareholders of AWK as at 1 October 2013 are summarised in the table below:

Table 7: Top 10 Shareholders as at 16 August 2013

Shareholder	Number of Ordinary Shares held	Percentage of Total Ordinary Shares held
Andrew Barnes	5,672,744	9.9%
J P Morgan Nominees Australia Limited	3,709,580	6.5%
RBC Investor Services Australia Nominees Pty Limited	3,636,426	6.4%
UBS Nominees Pty Ltd	3,085,978	5.4%
Bond Street Custodians Limited	2,998,189	5.3%
National Nominees Limited	2,543,089	4.5%
BNP Paribas Noms Pty Ltd	885,482	1.6%
Sandhurst Trustees Ltd	857,142	1.5%
Demeta Pty Ltd	714,286	1.3%
Farnworth House Pty Ltd	714,286	1.3%
Top 10 Shareholders	24,817,202	43.5%
Other Shareholders	32,289,053	56.6%
Total	57,106,255	100.0%
Source: AWK Annual Report 2013

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AWK will provide an Entitlement Offer for Shareholders to subscribe for two new AWK Shares for every three AWK Shares held, to be put to the Shareholders at the Meeting. If the full Entitlement Offer is subscribed, funds of $13.3 million will be raised. The resulting pro forma capital structure of AWK (assuming full subscription) is shown below:

Table 8: Capital Structure following the Entitlement Offer (full subscription)

	Number of	Entitlement	Shareholding	Percentage of Total
Shareholder	Ordinary Shares	Offer Shares	following	Ordinary Shares
	held	subscribed for	Entitlement Offer	held
Andrew Barnes	5,672,744	3,781,829	9,454,573	9.9%
Other existing Shareholders	22,833,511	15,222,340	38,055,851	40.0%
Placement Shareholders	28,600,000	19,066,667	47,666,667	50.1%
Total	57,106,255	38,070,836	95,177,091	100.0%
Source: AWK Placement & Entitlement Offer term sheet

Management advise that Placement Shareholders and Andrew Barnes both intend to take up their allocation of Entitlement Offer Shares. If the Non-associated Shareholders do not take up their allocation of the Entitlement Offer rights, the minimum amount of funds raised will be $8.0 million. The resulting pro forma capital structure of AWK (assuming Non-associated Shareholders do not subscribe) is shown below:

Table 9: Capital Structure following the Entitlement Offer (partial subscription)

Shareholder Number of Ordinary Shares held Entitlement Offer Shares subscribed for	Shareholding following Entitlement Offer Percentage of Total Ordinary Shares held

Andrew Barnes 5,672,744 3,781,829	9,454,573 11.8%
Other existing Shareholders 22,833,511 -	22,833,511 28.6%
Placement Shareholders 28,600,000 19,066,667	47,666,667 59.6%
Total 57,106,255 22,848,496	79,954,751 100.0%
Source: AWK Placement & Entitlement Offer term sheet

We note that the Directors have discretion to place the shortfall at a price of not less than $0.35 per Share.

2.6. Share Price Analysis

We have considered the trading activity and the ASX market price for AWK in the period leading up to 14 August 2013 (being one day prior to the date of preliminary announcement of the Proposed Transaction on 15 August 2013). The table below summarises trades over the year up to 14 August 2013:

Table 10: Volume Weighted Average Share Price of Daily Trades

	High	Low	VWAP	Total Volume	Total Volume	Annualised	Average Bid/Ask
	($)	($)	($)	Traded (‘000s)		Turnover (%)	Spread (%)
As at 14 August 2013	-	-	-		-	-	-
1 month to 14 August 2013	0.36	0.33	0.35		99	3.8%	2.11%
3 months to 14 August 2013	0.45	0.28	0.36		519	7.1%	2.55%
6 months to 14 August 2013	0.53	0.28	0.44		1,758	12.5%	2.88%
12 months to 14 August 2013	0.53	0.28	0.43		3,141	11.0%	2.80%
Sources: Capital IQ, BDO analysis
Legend: VWAP denotes volume weighted average share price.

We note the following with respect to the share trading of AWK over the trading period:

The last closing price in the above trading period was $0.35 per share on 31 July 2013.
The Shares traded between $0.28 per share and $0.53 per share in the year to 14 August 2013.

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VWAP prices are observed to be on a downward trend.
There is low trading volume over the period, as the total traded volume of shares over the 12 months to 14 August 2013 was approximately 11.0% of the total weighted average number of Shares on issue over the period.
Over the year analysed, there were 126 days of trading activity out of a total of 253 trading days.
The average bid-ask spread over each period ranged from 2.11% to 2.88% which typically indicates a moderate level of liquidity.

The ASX value of AWK per Share since the announcement of the Proposed Transaction has ranged between $0.39 and $0.54 per Share.

Table 11: AWK Share price movement over the year to 14 August 2013

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----- Start of picture text -----

Share Price $ Volume (millions)
0.70 0.5
0.4
0.60
B 0.4
C
0.50
0.3
A
0.40
0.3
D 0.2
0.30
0.2
0.20
0.1
0.10
0.1
- -
Volume AWK ASX Pricing S&P/ASX 200 Index AWK NTA
----- End of picture text -----

Source: Management

We note that AWK has traded at a discount to NTA backing (excluding deferred revenue tax assets) over the entire trading period, at a discount that ranged between 8% and 44%. Following the announcement of the Proposed Transaction, the discount to NTA has decreased and was 2.5% as at 30 September 2013.

A brief description of key events over the trading period is provided below:

Table 12: Key corporate events

Event	Date	Key event
A	27 Aug 12	Portfolio update stating that the Digital Harbor loan has been repaid.
B	22 Nov 12	Annual general meeting held.
C	26 Feb 13	Release of FY13 half year accounts.
D	12 Jun 13	Change of Company name and ASX ticker

Source: ASX announcements

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3. THE MANAGEMENT CONTRACT

3.1. Management Contract Terms

The Ma n ager holds t h e duties of m anaging and supervising a l l investment s , as well as p roviding or p r ocuring reason a ble administ r ative suppor t services req u ired by AWK to conduct it s business. T h ese services i nclude:

maintenance of the corp o rate and sta t utory record s of AWK
liaison with the ASX with respect to c o mpliance with ASX Listing Rules
liaison with ASIC with re s pect to com p liance with t h e Corporatio n s Act
liaison with the share re g istrar of AW K
the provision of information necessar y for the main t enance of fi n ancial accou n ts of AWK to be completed.

The Ma n ager is not r e quired to pr o vide or proc u re any servi c es involving the engagem e nt of a third p arty unless AWK is responsible f o r payment o f fees. This li m itation exte n ds only to services to be p rovided by a third party where t he Manager d oes not have professional e xpertise, ho l d a conflict o r be contrac t ually restrict e d.

AWK is responsible f o r the payme n t for compa n y expenses r e lating to fe e s payable to a ny licensed m arket, ASIC or other regulatory b ody and AW K ’s share regis t er and the a p proved valu e r as well as o ther outgoin g s in relation to the p ortfolio and a ll accountin g and audit c o sts of AWK.

The Ma n ager is oblig a ted to bear t he cost of it s internal cos t s such as wa g es and salari e s, rent and e quipment lease c o sts, utilities, research costs, travel an d accommoda t ion.

AWK p a ys the Manag e r the following fees for s e rvices provid e d:

Base management fee – calculated a s 0.1035746 % of the value of the portf o lio calculate d on the last business d ay of each m o nth is payab l e monthly in arrears, whi c h equates to a n effective r ate of 1.25% p.a .
Performance fee – cal c ulated as 15 % of any outp e rformance a g ainst the S& P /ASX 300 Ac c umulation Index for t he previous m onth, payable monthly. A ny negative performance a gainst the S & P/ASX 300 Accumula t ion Index sin c e the comm e ncement da t e of the fund must be rec o uped before t he Manager is entitle d to a further performance fee.

The Ma n ager may be replaced as f ollows:

On an ins o lvency event
The Mana g er is in defa u lt or breach o f its obligati o ns under the Managemen t Agreement
The Mana g er’s Australi a n Financial Services Licen c e is suspend e d or cancell e d
There is a change in co n trol of the M anager and AWK has not p r eviously gra n ted its prior w ritten consent
The Mana g er persistently fails to en s ure that inve s tments mad e on behalf of AWK are consistent with the investment strateg y
The Fund underperfor m s the S&P/A S X 300 Accum u lation Index by more than 15% over the preceding 3 year pe r iod, AWK ma y immediatel y remove the Manager and terminate th e Agreement b y special resolution of AWK’s Sh a reholders.

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4. VALUATION METHODOLOGY

4.1. Overview

RG 111 . 57 advises that a propose d related part y transaction is ‘fair’ if th e value of the financial be n efit to be provid e d by the enti t y to the rela t ed party is e q ual to or les s than the value of the con s ideration being provided to the e ntity. This c o mparison sh o uld be made assuming a k n owledgeable and willing, b ut not anxio u s, buyer and a know l edgeable an d willing, but not anxious, s eller acting a t arm’s length.

Theref o re, for the P r oposed Tran s action to be c onsidered fair, the amount paid to Aur o ra must be equal to or less th a n the value o f the Manage m ent Contra c t.

4.2. Selected Valuation Methodology

In asse s sing the fair n ess of the Pr o posed Trans a ction, we ha v e determine d the value o f the Manage m ent Contrac t assumi n g the contin u ation of an i n vestment m a nagement business. We have considere d the following valuation metho d s:

Ca p italisation of earnings
Dis c ounted cash f low
Net asset value

 The most recent quoted mark e t price of lis t ed securities (share mark e t trading me t hod). Differe n t methodolo g ies are appr o priate in val u ing particular companies, based on the circumstanc e s of that compa n y and availa b le information. Appendix 3 provides a s ummary of t h e valuation m ethodologie s considered.

We have assessed th a t the single a ppropriate m ethodology i n valuing the Management C ontract is t h e discounted cash fl o w ( DCF ) met h odology for t he following reasons:

AW K ’s net asset v alue is mark e d to market monthly, whi c h provides a n accurate st a rting positio n on which to bas e forecast m a nagement fe e cashflows.
The Management Contract has a definite lif e , as the agr e ement concl u des on 20 April 2030.
We hav e summarised our rationale for our choice of method o logy in the table below:

Table 13: Valuation methodology summary

Valuat ion methodolo gy	Valuat ion methodolo gy	Conside ration
Discoun ted cash flow		Employ ed.
Capital isation of earn	ings	The Ma nagement Cont ract has a defin ite life. A capi talisation mult iple is expected to
		oversta te the value.
Net ass et value		The Ma nagement Cont ract does noth ave a net asset value, as thev alue of the co ntract is
		derived from the NTA of AWK.
Quoted market price		The Ma nagement Cont ract is not trad ed on an excha nge.

Source: BDO analys i s

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4.2.1. Discounted cash flow valuation

We have valued the M anagement C ontract usin g the discoun t ed cash flow methodolog y . Management have prepar e d cash flows for the Mana g ement Contr a ct with the f ollowing key assumptions:

Management Contract expiry date of 2 0 April 2030
Base management fee of 1.25% p.a.
No perform a nce fees are generated
NTA increa s es at 9.50% p.a.
Portfolio di v idend yield p aid is 4.25% o f NTA as at period end
There are no additional c apital raising s

Furthe r analysis of t h e key underl y ing assumptions is contai n ed at Section 5 of our Re p ort.

4.3. Valuation Cross-Check

In orde r to provide additional evi d ence of the f air market v a lue of the Management Co n tract, we have consid e red the multiple of the co n sideration p a id for manag e ment rights t o the base m anagement f e e from previous transaction s as a second a ry valuation m ethodology, as detailed in Section 6 .

We have also consid e red a previo u s transactio n in the Mana g ement Contr a ct in March 2 013.

4.4. Valuation of the Consideration

As the a mount to be paid by AWK is $900,000 i n cash to Aur o ra, we consi d er the face v a lue of the c o nsideration to be i t s fair market value.

5. VALUATION OF THE MANAGEMENT CONTRACT

5.1. Overview

To det e rmine the fair market val u e of the Man a gement Con t ract we have considered t h e following:

The forecast cas h inflows deri v ed from ma n aging the assets of AWK
The expected m a rginal costs a n external fu n d manager w ould incur in managing A W K.

5.2. Valuation Summary

Our ass e ssment of t h e fair market value of the Management Contract is set out below:

Table 14 : Valuation su mmary of the Management C ontract	Table 14 : Valuation su mmary of the Management C ontract	Table 14 : Valuation su mmary of the Management C ontract	Table 14 : Valuation su mmary of the Management C ontract
$’000s unless stated otherwise Ref	Low	High	Mid

AWK an nual return on FUM 5.3 9.50% 11.0% 10.3%
Post-ta x discount rate 5.5 13.0% 12.0% 12.5%

Net pre sent value oft he managemen t fees 5.3 2,346 3,224 2,785
Net pre sent value oft he marginal co st of managing AWK 5.4 (1,216) (1,291) (1,253)
Fair m arket value of the Manageme nt Contract 1,131 1,933 1,532
Source: Note: BDO analysi The abovem s ay include rou nding differen ces

Based o n the above, we have esti m ated the fair market value of the Man a gement Contract to be wi t hin the range $ 1.1 million t o $1.9 million.

BDO Corporat e Finance (East Coast) Pty Ltd

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5.3. Management Fees

The key assumptions adopted by BDO in estimating the forecast base management fees which would be avoided assuming the continuation of the Management Contract include the following:

The starting funds under management ( FUM ) figure comprises:
the total asset value of AWK as at 30 June 2013 of $13.8 million
the net funds raised under the Placement of $9.5 million (as per Section 2.4.3 ).
the funds raised under the Entitlement Offer. In the high case we assume that all Shareholders take up their rights with gross funds raised of approximately $6.7 million. In the low case we assume that of all the eligible Shareholders, only Andrew Barnes and the Placement Shareholders take up the rights issue, raising approximately $4.9 million in gross funds. In either case, net capital raised is determined by deducting expenses of $0.7 million from the gross proceeds.
FUM is assumed to grow at the long term market rate over the period. We have taken the market rate to range between 9.5% (provided by Management) and 11.0%, comprising the 10 year average of 10 year government bonds plus the long term market risk premium.
The portfolio dividend yield is 4.25% p.a. of the NTA each period, given by Management.
The base management fee is calculated as 1.25% p.a. of FUM as per the Management Contract. As per Section 4.2.1 we have not considered performance fees.
The discount rate and tax rate are discussed in Section 5.5 and Section 5.6 respectively.

The base management fees calculated for Year 1 and over the term of the contract are shown below.

Table 15: Valuation summary of the Management Contract

$’000s unless stated otherwise	Low	High	Mid
Funds under management (Beginning of Year 1)	30,619	35,947	33,283
Base management fee payable (Year 1)	392	463	428
Present value base management fee payable (Term of contract)	2,346	3,224	2,785
Source: BDO analysis

We have calculated the net present value of the management fees over the life of the Management Contract to range between $2.3 million and $3.2 million.

5.4. Marginal Costs of Managing AWK as an LIC

We note that Andrew Barnes has agreed to provide management services to AWK for $50,000 p.a. plus options to be issued for the next two years. However, as Andrew Barnes holds a 9.9% equity stake in AWK, this transaction is between related parties.

Furthermore, we note that Ben Heap has been appointed the CEO and Managing Director of AWK with an expected commencement date of 12 December 2013. Mr Heap’s appointment will facilitate AWK’s change in strategy from an LIC to an operating business in the wealth management industry. The total remuneration arrangement for this role is $475,000 in addition to discretionary annual short term incentives. Management advise that this role requires greater involvement than if AWK were to operate as an LIC investing predominantly in ASX-listed companies. We have not considered this salary to be indicative of the marginal cost of managing AWK as an LIC.

As such, we have considered what the marginal cost to AWK would be for the services of an investment manager if AWK were to continue operating as an LIC at an arm’s length for the full duration of the Management Contract.

From discussions with Management, the marginal cost of managing AWK as an LIC on an arm’s length is estimated to be $225,000 in the first year. The cost of $225,000 includes 50% of the time for a senior employee and 100% of the time for a junior employee and associated on-costs, together with administrative costs of $25,000. These costs are expected to increase by 2.5% p.a. It is assumed that the acquirer of the Management Contract has sufficient infrastructure to manage the contract and that other marginal costs would be immaterial.

BDO Corporate Finance (East Coast) Pty Ltd

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The m a rginal costs of managing A W K calculate d for Year 1 a n d over the t e rm of the co n tract are sh o wn below.

Table 16 $’000s : Marginal cos unless stated ts of managing otherwise AWK Low High Mid	Table 16 $’000s : Marginal cos unless stated ts of managing otherwise AWK Low High Mid	Table 16 $’000s : Marginal cos unless stated ts of managing otherwise AWK Low High Mid
$’000s unless stated otherwise	High	Mid

Margina l costs of man aging AWK (Yea r 1) (225) (225) (225)
Presen t value margina l costs of mana ging AWK (Term of contract) (1,216) (1,291) (1,253)
Source: BDO analysi s

We have calculated t he net prese n t value of the marginal c o sts of managing AWK over the life of th e Manag e ment Contra c t to range b e tween $(1.2) million and $(1.3) million. The discoun t rate and tax rate are discuss e d in Section 5.5 and Section 5.6 respectively.

5.5. Discount Rate

For the purpose of o u r analysis w e have estima t ed a post-ta x discount rate for AWK of 12.0% to 13.0%. The compo n ents that co m prise this di s count rate a r e discussed i n Appendix 4 .

5.6. Taxation

For the purpose of o u r analysis w e have assum e d that AWK p ays tax at th e marginal ta x rate of 30%. As such, the discou n ted cash flo w s are on a po s t-tax basis u s ing a post-tax discount ra t e.

6. VALUATION CROSS-CHECK

6.1. Comparable Internalisation of Management Contract Transactions

In orde r to provide additional evi d ence of the f air market v a lue of the Management Co n tract, we have compared the co n sideration fr o m previous m anagement r i ght internali s ation transa c tions since 2 0 11 to their h i storical base manag e ment fees as a secondary v aluation me t hodology.

Table 17: Valuation cross check – Consideration as a proportion of FUM

Sep 20 13 AWK 0.9 0.4 2.1

Oct 201 2 DUETG roup 95.6 19.2 5.0
Jun 201 2 Australia n Infrastructur e Fund 55.0 12.8 4.3
Apr 201 1 Spark In frastructure 49.0 8.3 5.9
Feb 20 11 Qube Lo gistics Holdings 40.0 7.3 5.5
Source: BDO analysi s

The m a nagement right consideration to base management f e e multiples ( e xcluding th e Proposed Tr a nsaction) range f r om 4.3x to 5.9x, with the Proposed Transaction falli n g below this range. We c o nsider the D C F valuation more r e presentative of the fair m a rket value o f the manage m ent fee rights as AWK’s b a se manage m ent fee is signific a ntly less tha n that of the c omparable t r ansactions. T his smaller b a se manage m ent fee has l e ss scope to cover expected fixe d costs associ a ted with the Management Contract.

6.2. Previous Sale of Management Contract

We not e that the Management Co n tract was pr e viously exch a nged on an a rms-length b a sis between Merricks and Aurora on 28 March 2 013.

BDO Corporat e Finance (East Coast) Pty Ltd

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7. FAIRNESS ASSESSMENT

7.1. Fairness

In orde r to determin e whether th e Proposed Tr a nsaction is " f air", we hav e compared t h e amount pa y able to Aurora w ith our asse s sed value of the Manage m ent Contract . The re s ult of our fai r ness analysis is summarise d below.

Table 1 8: Fairness an alysis	Table 1 8: Fairness an alysis
$’000s unless stated otherwise Ref Low High Mid

Amoun t paid to Aurora 4.4 900 900 900
Fair ma rket value oft he Managemen t Contract 5.2 1,131 1,933 1,532
Source: BDO analysi s

From t h e above, the value of the a mount paya b le to Aurora is less than t h e range of f a ir values of t h e Manag e ment Contra c t. Therefore, in our opini o n, the Propo s ed Transacti o n is fair for t h e Non-assoc i ated Shareh o lders.

8. REASONABLENESS

In acco r dance with R G 111, an offer is conside r ed to be reasonable, if it i s fair. Howev e r, even if it i s not fair it may be reasonable i f there are su f ficient reaso n s for the sh a reholders to a ccept the of f er. The fa c tors that we h ave conside r ed are set out below:

8.1. Factors

8.1.1. Movement from an LIC to an operating business

The Pr o posed Trans a ction would facilitate AW K ’s transition f rom an LIC t o an operatin g business in t he wealth manag e ment industr y .

Total f u nds raised fr o m the Place m ent of $10. 0 million (and up to $13.3 m illion from t h e related En t itlement Offer) a re required t o fund the acquisition of I n vestSMART, c omplete the partial acqui s ition of van E yk, provide additio n al working c a pital and fu n d the Propos e d Transaction. The net fu n ds raised from the Place m ent (appro x imately $9.5 million) have increased th e pro forma net assets of AWK from the 30 June 2013 balance by 69% to $ 23.3 million .

We not e that LIC’s i n general trade at a discou n t to NTA. Th e ASX publish e s a databas e of LIC premiu m s/discounts to NTA each m onth. As at J uly 2013, LI C s that focus o n Australian shares (of which AWK is one) tr a de at an average discount to NTA of 7. 2 %. As discussed in Section 2.6 , AWK ha s traded at a discount to NTA ov e r the full ye a r to 14 Augu s t 2013. This d iscount has r anged betwe e n 8% and 44 % . Manageme n t expect that on implementa t ion of AWK’s new strategy to become a n operating b u siness in the wealth management industr y , the busine s s will be con s idered by in v estors on an e arnings multiple rather th a n by NTA. Since the announ c ement of th e Proposed T r ansaction A W K’s discount t o NTA has la r gely been re d uced, decre a sing to 2.5% as at 3 0 September 2 013.

8.1.2. Previous arm’s length transaction

We not e that the Management Co n tract was pr e viously exch a nged on an a rms-length b a sis for $900, 0 00 on 28 Mar c h 2013.

BDO Corporat e Finance (East Coast) Pty Ltd

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8.1.3. Additional management fee savings for AWK

Our fairness assessment calculations assume that AWK would not raise any additional capital over the remaining period in the Management Contract. Any funds that would have been raised over the remainder of the Management Contract would generate additional management fees which would not be payable if the Proposed Transaction is approved by Non-associated Shareholders.

Furthermore, we have not attributed any value to the Performance Fees saved that may have become payable under the Management Contract over the remaining period. Any outperformance greater than 15% above the S&P/ASX 300 Accumulation Index over a 3 year period would generate additional management fees that the internalisation of the Management Contract would negate.

8.1.4. Choice of Manager will not be reliant on the terms of the Management Contract

As detailed in Section 3.1 , the Management Contract contains several clauses whereby AWK could instigate a change in investment manager for cause which includes breach of contract, non-performance of reporting or other duties or poor investment results. Management advise that it is difficult to instigate a change in investment manager without cause.

If the Proposed Transaction is implemented then this management agreement will not apply to future performance as the management team will be an internal function of AWK. Management advise that AWK will have greater autonomy over the make-up of the management team if the Proposed Transaction is approved.

8.1.5. Change in Manager from Aurora to internally provided services

By implementing an internalised management model, AWK will no longer have access to the support provided by Aurora’s investment management team. However, this loss of experience is mitigated as Andrew Barnes has been appointed the sub-manager of AWK on behalf of Aurora. He is expected to be retained by AWK in an investment advisory role following the Proposed Transaction for $50,000 p.a. plus options to be issued over the next two years.

We note that AWK are already implementing their strategy of moving away from being an LIC and becoming an operating business in the wealth management industry through their appointment of Ben Heap as CEO from December 2013, in addition to the acquisitions of van Eyk and InvestSMART.

8.1.6. Transaction costs

AWK will incur additional transaction costs (legal fees, independent expert and others) regardless of whether the Proposed Transaction is approved or not.

8.2. Reasonableness Conclusion

We have concluded in Section 7.1 that the Proposed Transaction is fair to the Non-associated Shareholders. In accordance with RG 111 an offer is considered to be reasonable, if it is fair.

If the Proposed Transaction is approved, it will enable AWK to pursue its stated change in strategy from being an LIC to an operating business in the wealth management industry. This change in operations has already begun with the acquisition of 49.6% of van Eyk in April 2013, a further 35% of van Eyk in July 2013 and the acquisition of InvestSMART in August 2013.

We conclude that the Proposed Transaction in accordance with the Documents is fair and reasonable to the Non-associated Shareholders.

BDO Corporate Finance (East Coast) Pty Ltd

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9. QUALIFICATIONS AND DECLARATIONS

9.1. Qualifications

BDO ha s extensive e x perience in the provision o f corporate f inance advic e , particularl y in respect o f takeovers, merger s and acquisi t ions. BDO holds an Austral i an Financial S ervices Lice n ce, issued b y ASIC, for giving expert reports pursuant to t he Listing Ru l es of the AS X and the Act.

Mr David McCourt, B B us, CA, is a d irector of BDO Corporate F inance. Mr McCourt is als o a partner of BDO East Coast Partnership. Mr McCourt is t he director r e sponsible fo r the review of this Report.

Mr McC o urt has over 14 years exp e rience in a number of spe c ialist corpor a te advisory a ctivities incl u ding compa n y valuations, financial mo d elling, prep a ration and review of busin e ss feasibilit y studies, acc o unting, advisin g on mergers a nd acquisiti o ns and advising on indepe n dent expert reports. Acco r dingly, Mr M c Court is consid e red to have the appropria t e experience and professi o nal qualifica t ions to provi d e the advice offered. Mr Seb a stian Steven s , BBus, CPA a nd ACA, is a d irector of B D O Corporate F inance. Mr S t evens is also a partner of BDO Ea s t Coast Part n ership. Mr St e vens has be e n responsibl e for the revi e w of this IER .

Mr Ste v ens has over 2 0 years exp e rience all as p ects of corporate advisory including me r gers and acquisitions, valuati o ns and trans a ction adviso r y services. H e also has sig n ificant experience in prov i ding international and cross-b o rder service s including in t ernational c o ordination of assignments. Accordingly, Mr Stevens is considered to hav e the appropriate experien c e and profes s ional qualifi c ations to pro v ide the advi c e offered.

9.2. Independence

We are not aware of any matter or circumstan c e that would preclude us from preparin g this Report on the ground s of independ e nce either u n der regulatory or professi o nal require m ents. In part i cular, we ha v e had regard to the p rovisions of a pplicable pr o nouncement s and other g u idance state m ents relatin g to professio n al indepe n dence issue d by Australia n professional accounting bodies and ASIC.

We we r e not involve d in advising o n, negotiati n g, setting, o r otherwise a c ting in any c a pacity for A W K in relation to the P roposed Tra n saction, oth e r than the pr e paration of t his Report. F u rther, we h a ve not held and, at the date of this Report, d o not hold a n y shareholdi n g in, or other relationship with AWK th a t could be r e garded as capabl e of affecting our ability to provide an u n biased opini o n in relation to the Propo s ed Transacti o n. We consider ourselv e s to be inde p endent in te r ms of RG 112. We will receive a fe e based on th e time spent in the prepar a tion of this Report in the a mount of ap p roximately $27,50 0 (plus GST a n d disbursem e nts). We will not receive a ny fee contingent upon th e outcome of the Proposed Transa c tion, and ac c ordingly, we do not have a ny pecuniary or other interests that co u ld reasonabl y be regarded as bein g capable of a ffecting our a bility to giv e an unbiased opinion in relation to the P roposed Tra n saction.

We rel e ased a draft r eport to AW K for review o f factual acc u racy on 2 Se p tember 2013. This report c oncluded that th e Proposed T r ansaction wa s ‘not fair bu t reasonable’. Subsequent t o issuing thi s report we h a ve had further discussions w ith AWK regarding the tim i ng of the Pla c ement. Fro m these discu s sions we not e that the Placem e nt is not su b ject to the S h areholders a p proving the P roposed Tra n saction. We h ave now val u ed the Manag e ment Contra c t following t h e approval o f the Placem e nt by Shareh o lders on 19 S eptember 20 1 3.

9.3. Disclaimer

This Report has bee n prepared at the request o f the Directo r s and was no t prepared fo r any purpos e other than that st a ted in this R e port. This Report has bee n prepared fo r the sole benefit of the Di r ectors and Non-associate d Shareh o lders. Accor d ingly, this R e port and the information c ontained her e in may not b e relied upon by anyone other t h an the Direc t ors and Non-associated Shareholders w i thout our written consent. We accept no respon s ibility to any person other than the Dir e ctors, and N o n-associated Shareholders in relation t o this Report. The statements and o pinions cont a ined in this R eport are gi v en in good faith and are b a sed upon ou r consid e ration and as s essment of i n formation p r ovided by th e Directors, e x ecutives and Management of AWK.

BDO Corporat e Finance (East Coast) Pty Ltd

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APPENDIX 1 : SOURCES OF INFORMATION

In preparing this Report, we have had access to and relied upon the following principal sources of information:

AWK Annual Report 2012, 2013
AWK ASX announcements
Discussions with AWK management
Information and research sourced from Capital IQ and Bloomberg
Other publically available information

BDO Corporate Finance (East Coast) Pty Ltd

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APPENDIX 2 : GLOSSARY

APPENDIX 2 : GLOSSARY
*Act*	Corporations Act 2001 (Cth)
*AWK or the Company*	Australasian Wealth Investments Limited
*ASIC*	Australian Securities and Investments Commission
*ASX*	Australian Securities Exchange
*Aurora*	Aurora Funds Management Limited
*BDO, we, us or our*	BDO Corporate Finance (East Coast) Pty Ltd (ABN 70 050 038 170)
*CAPM*	Capital asset pricing model
*Placement*	A capital raise of approximately $10 million via a placement of 28.6 million Shares at $0.35 per
	Share to domestic professional and sophisticated investors
*DCF*	Discounted cash flow
*Directors*	Directors of AWK
*Documents*	Notice of Meeting and accompanying Explanatory Memorandum that are to be provided by the
	Directors in relation to the Proposed Transaction
*Entitlement Offer*	1 for 3 Share offer to Shareholders at $0.35 per Share to raise approximately $6.7 million
*EGM*	Extraordinary general meeting
*Fat Prophets*	Fat Prophets Funds Management Australia Pty Limited
*FOS*	Financial Ombudsman Service Limited
*FSG*	Financial Services Guide
*FUM*	Funds under management
*FY20XX*	Financial year ended/ing 30 June 20XX
*LIC*	Listed investment company
*Licence*	Australian Financial Services Licence (License No: 247420)
*LR10.1*	ASX Listing Rule 10.1
*Management*	AWK management
*Management Contract*	AWK’s investment management contract
*Manager*	The investment manager of AWK as set out in the Management Contract
*Meeting*	A general meeting of Shareholders to be convened
*Non-associated Shareholders*	Shareholders other than those directly involved in the Proposed Transaction or associated with such
	persons
*Merricks*	Merricks Capital Pty Limited
*NTA*	Net tangible assets
*Proposed Transaction*	The internalisation of AWK’s Management Contract in exchange for payment of $900,000 cash to
	Aurora
*Report or IER*	This independent expert’s report
*RG 111*	ASIC Regulatory Guide 111_Content of expert reports_
*RG 112*	ASIC Regulatory Guide 112_Independence of experts_
*Shareholders*	All shareholders of AWK
*Van Eyk*	van Eyk Research Pty Limited
*vEGH*	van Eyk Group Holdings Pty Limited
*VWAP*	Volume weighted average trading prices

BDO Corporate Finance (East Coast) Pty Ltd

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APPENDIX 3 : VALUATION METHODS

In conducting our assessment of the fair market valuation, the following commonly used business valuation methods have been considered:

Discounted cash flow

The DCF method is based on the premise that the value of a business or any asset is represented by the present value of its future cash flows. It requires two essential elements:

The forecast of future cash flows of the business asset for a number of years (usually five to ten years)
The discount rate that reflects the riskiness of those cash flows used to discount the forecast cash flows back to net present value

DCF is appropriate where:

The businesses’ earnings are capable of being forecast for a reasonable period (preferably five to ten years) with reasonable accuracy
Earnings or cash flows are expected to fluctuate significantly from year to year
The business or asset has a finite life
The business is in a 'start up' or in early stages of development, or
The business has irregular capital expenditure requirements
The business involves infrastructure projects with major capital expenditure requirements
The business is currently making losses but is expected to recover

Capitalisation of earnings

This method involves the capitalisation of estimated normalised earnings by an appropriate multiple. Normalised earnings are the assessed sustainable earnings that can be derived by the business and excludes any one off profits or losses. An appropriate earnings multiple is assessed by reference to market evidence as to the earnings multiples of comparable companies or transactions.

This method is suitable for the valuation of businesses with indefinite trading lives and where earnings are relatively stable or a reliable trend in earnings is evident.

Net realisable value of assets

Asset based valuations involve the determination of the market value of a business based on the net realisable value of the assets used in the business.

The net realisable value of assets involves:

Separating the business or entity into components which can be readily sold, such as individual business units or collections of individual items of plant and equipment and other assets
Ascribing a value to each based on the net amount that could be obtained for this asset if sold.

Share market trading history

The application of the price that a company’s shares trade on the ASX is an appropriate basis for valuation where:

The shares trade in an efficient market place where ‘willing’ buyers and sellers readily trade the company’s shares
The market for the company’s shares is active and liquid.

BDO Corporate Finance (East Coast) Pty Ltd

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APPENDIX 4 : DISCOUNT RATE

When ap p lying the discounted cash flow method , the cash flo w s expected t o be generat e d by an asse t are discount e d to their pr e sent value b y using a disc o unt rate tha t reflects the relative risk o f the invest m ent, as well as t h e time valu e of money.

The app r opriate risk adjusted discount rate is a n average of t h e cost of de b t and the co s t of equity w e ighted by the p r oportion of debt and equi t y that should be represen t ed in the capital of the bu s iness. This rate of return is known as th e WACC.

The stan d ard formula used to calculate a nomin a l post tax W A CC under a classical tax s y stem is given by:

Where:

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K e = cost of equity ca p ital K d = cost of debt t c = cor p orate tax rat e E = the m arket value of equity D = the m arket value of debt V = D+E

Cost of equity ( K e)

The cost of equity of a company is t he rate of re t urn required by equity in v estors. Ther e are a numb e r of theoreti c al risk and r e turn models a vailable to c a lculate the c ost of equity. Of these, t h e capital ass e t pricing model ( CAPM ) is the m ost widely a c cepted and u sed methodology for dete r mining the c o st of equity c apital. The CAP M is based on the assumpti o n that a rati o nal investor will value an asset such th a t the expect e d rate of return is equal to the risk free rate of return plu s a premium f or the riskin e ss of the ass e t.

Where:

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K e = req u ired return o n equity Rf = the r isk free rate of return R m = the e xpected ret u rn on the market portfoli o  = bet a , the system a tic risk of a s tock relative to the marke t portfolio  = alpha, the non-sy s tematic risk reflecting fa c tors specific t o the asset b eing valued

Risk free rate

The risk f ree rate co m pensates the investor for t he time valu e of money, i n cluding the e xpected infl a tion rate over the investment period. The ri s k free rate s h ould match, as far as pos s ible, the ter m of the cash flows being di s counted. In p ractice, for g oing concern companies, t he 10-year G o vernment B o nd rate is a w idely used and accepted pr o xy for the risk free rate. T his rate is a nominal rate and therefor e includes inflation. We have had regard t o the yield on government b onds to the I mplementati o n Date. Spe c ifically, we h ave had regard t o the average yield on inflation adjuste d government bonds over a 10-year peri o d, which pro v ides a proxy fo r the real risk free rate. We then includ e forecast in f lation to deri v e the nomin a l risk free rate.

Based on the above, our adopted ri s k free rate i s summarised in the table b elow. Impor t antly, the ri s k free rate has been conside r ed in conjun c tion with ot h er inputs an d the overall d iscount rate.

BDO Corp o rate Finance ( E ast Coast) Pty Ltd

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Table 19: Selected Risk Free Rate

		Gov ernment Bond Term		Adjuste d
Go vernment Bon d		A verage Real Y ield	CPI	Nominal Y ield
	Au stralia 10-year	2.26%	2.5%	4.81%
*Source*:	Bloomberg, Cap ital IQ, BDO an alysis

Notes: The average real yield is based o n the daily cl o sing yield over the term of the Government b ond to 30 September 2013. CPI assum p tion is based on long term C PI projection f or Australia. T he adjusted n o minal yield is calculated using the Fisher equation, being (1 + real yield) x (1 + i n flation) - 1.

Equity market risk premium

Australian studies hav e shown historical risk pre m iums of 6% to 8% calculat e d largely usi n g data unde r a classical tax system. H aving consid e red the vari o us approach e s and their li m itations, we consider an e quity market risk premium o f 6.0% to be a ppropriate.

Beta

The bet a coefficient i s a measure of the expect e d volatility a n d therefore r isk of a com p any’s stock r e lative to the mar k et portfolio.

The bet a of a stock is determined b y the charac t eristics of th e firm and is g enerally bas e d on three f a ctors:

the nature o f revenue and the extent t o which it is c y clical;
operating leverage; and
financial lev e rage.

The exp e cted beta ca n not be obse r ved, therefo r e the histori c al beta is usually used as a proxy for th e expecte d beta. A bet a can be esti m ated by reg r essing the ex c ess returns o f the stock a g ainst the ex c ess returns o f the index r e presenting t h e market po r tfolio.

There ar e significant m easurement issues with b e ta, which m e ans that onl y limited reli a nce can be p l aced on such sta t istics. Even m easurement of historical b etas is subj e ct to conside r able variatio n . It require s a consider a ble degree of judgement.

The bet a is measured on the cash f l ows returne d to equity ho l ders and is t h erefore afte r interest. Accordin g ly, a firm’s b eta also refl e cts its capit a l structure. S ince financial leverage is l ikely to alter between firms it i s generally erroneous to m a ke comparis o n of betas b e tween firms w ithout rega r d to each fir m ’s leverage . Accordingl y , the compa n y’s target d e bt and equit y mix is relev a nt. The bet a s can all be degeared (or ‘ d elevered’) t o remove the impact of le v erage. The m ethod is set out below:

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The ung e ared or ‘asset’ betas can t hen be analy s ed to deter m ine an appro p riate asset b e ta for the s u bject of the valu a tion, and it c an be regear e d (or ‘relevered’) to refle c t the appropriate capital s tructure. R e arranging the abov e equation, w e have:

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The bet a for AWK and listed companies that ma y be consider e d broadly co m parable to A WK are set o u t below:

BDO Corp o rate Finance ( E ast Coast) Pty Ltd

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Table 20: Comparable company beta data as at 30 September 2013

Company	Market Cap ($million)	Enterprise Value ($million)	Debt to Equity (%)	Equity Beta	Asset Beta	R- squared
Australasian Wealth Investments Limited	27	16	0%	0.55	0.55	0.03
Australian Foundation Investment	5,985	6,001	0%	0.78	0.77	0.46
Company Limited
Aurora Global Income Trust	8	(0)	0%	0.39	0.39	0.01
Australian Leaders Fund Limited	296	(153)	0%	0.58	0.58	0.15
Aberdeen Leaders Limited	81	110	35%	0.65	0.51	0.16
Amcil Limited	192	173	0%	0.71	0.71	0.23
Argo Investments Limited	4,463	4,268	0%	0.81	0.81	0.49
Australian United Investment Co. Ltd.	823	892	11%	0.71	0.66	0.27
Bentley Capital Limited	11	(7)	0%	0.53	0.53	0.02
BKI Investment Company Limited	746	710	0%	0.82	0.82	0.44
Clime Capital Limited	90	5	0%	0.62	0.62	0.14
Cadence Capital Limited	165	99	0%	0.55	0.55	0.04
Carlton Investments Ltd.	630	600	0%	0.48	0.48	0.08
Continuation Investments Ltd	1	(1)	0%	0.67	0.67	0.02
Contango MicroCap Limited	155	6	0%	1.13	1.13	0.47
Century Australia Investments Ltd.	67	66	0%	0.84	0.84	0.33
Djerriwarrh Investments Limited	964	944	2%	0.84	0.82	0.36
Diversified United Investment Limited	562	616	11%	0.72	0.66	0.30
Emerging Leaders Investment Limited	45	0	0%	0.76	0.76	0.21
Gowing Bros Ltd.	131	174	8%	0.58	0.55	0.18
Ironbark Capital Limited	84	(1)	0%	0.57	0.57	0.16
Mirrabooka Investments Limited	350	315	0%	0.69	0.69	0.18
Milton Corporation Limited	2,401	2,272	0%	0.80	0.80	0.47
Mercantile Investment Company Ltd.	33	29	0%	0.73	0.73	0.03
Orion Equities Limited	4	2	0%	0.75	0.75	0.05
Ozgrowth Limited	67	39	0%	0.88	0.88	0.16
WAM Capital Limited	615	396	0%	0.68	0.68	0.25
WAM Research Limited	141	20	0%	0.80	0.80	0.32
Whitefield Ltd.	297	322	0%	0.71	0.71	0.24
Average (excluding outliers)			3%	0.72	0.72	n/a
Median (excluding outliers)			0%	0.73	0.71	n/a
Source: BDO analysis
Note 1: Betas exhibiting an R-Squared less than 0.05	are considered not to have significant correlation for the results to be reliable, and have
been excluded from the data set (highlighted in grey).

Note 2: The impact of different capital structures is removed in the calculation of unlevered betas (Asset Betas). The Equity and Asset betas shown above are based on 5 years monthly data. The debt to value above is also based on a 5 year average.

We have selected AWK and other LICs as the base set of companies to calculate the discount rate applicable to the Management Contract for the following reasons:

The net assets/ equity of AWK and other LICs are affected by the performance of their investments and the wider movements of the market in general
The Management Contract derives base management fees as a proportion of the net assets of AWK

BDO Corporate Finance (East Coast) Pty Ltd

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As such, the risk of cashflows generated by the Management Contract is subject to similar risks experienced by the underlying LICs.

We note that whilst AWK has an equity beta of 0.55, the correlation to the results is not considered significant (as shown through the R-squared result). After considered the field of Australian-share focussed LICs, we have selected an asset beta range of 0.70 to 0.75 for AWK.

Debt and equity mix

As the Management Contract is an ungeared asset we have adopted a gearing ratio of 0%.

Relevered beta adopted

The relevered beta range equals the asset beta range of between 0.70 and 0.75 for AWK.

Specific company risk factor, Alpha

The specific company risk premium adjusts the cost of equity for company specific factors. The CAPM assumes, amongst other things, that rational investors seek to hold efficient portfolios, that is, portfolios that are fully diversified. One of the major conclusions of the CAPM is that investors do not have regard to specific company risks (often referred to as unsystematic risk).

There are several empirical studies that demonstrate that the investment market does not ignore specific company risks. In particular, studies show that on average, smaller companies have higher rates of return than larger companies (often referred to as the size premium). We note that the management income derived by the Management Contract is significantly less than the comparable transactions at Section 6.1 .

Based on the above we have selected a specific risk premium of 3.0% to 4.0% for AWK.

Cost of Debt Capital

The rate of return required by providers of debt capital is the rate a prudent debt investor would require on interest bearing debt. This rate should reflect the long term rate of interest required by a debt provider to a business such as the business subject to valuation.

As the debt-to-equity ratio is 0%, we have not included a cost of debt capital.

Summary of WACC parameters

Substituting the above parameters into the WACC and CAPM formulae noted results in the following indicative range.

Table 21: WACC Calculation

	Low	High
Risk free rate	4.8%	4.8%
MRP	6.0%	6.0%
Beta (unlevered or asset)	0.70	0.75
Beta (relevered equity)	0.70	0.75
Alpha (size, additional risk)	3.0%	4.0%
Cost of equity (post tax)	12.0%	13.3%
Gearing (D/V)	0%	0%
Cost of debt (post tax)	n/a	n/a
WACC (post tax)	12.0%	13.3%
Management Contract discount rate (say)	12%	13%

Source: ASX announcements

As above, we have taken a discount range of 12.0% to 13.0% in our valuation of the Management Contract.

BDO Corporate Finance (East Coast) Pty Ltd

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APPENDIX 5 : COMPARABLE COMPANY DESCRIPTIONS

The following companies are ASX-listed LICs which predominantly focus on Australian listed equities. A description of their business activities is provided below.

Table 22: Comparable company beta data

Company	Company description
Australian Foundation Investment Company Limited	Australian Foundation Investment Company Limited is a self managed investment company providing its services to
	individuals. It invests in the public equity markets of Australia.
Aurora Global Income Trust	Aurora Global Income Trust engages in the business of investment management in Australia. It invests in equities, index
	derivatives, and fixed interest securities.
Australian Leaders Fund Limited	Australian Leaders Fund Limited is an equity hedge fund launched and managed by Braitling Investments Pty Ltd. It invests in
	the public equity markets of Australia. The fund invests in stocks of companies operating across diversified sectors
Aberdeen Leaders Limited	Aberdeen Leaders Limited is a closed-ended equity mutual fund launched and managed by Aberdeen Asset Management
	Limited. The fund invests in the public equity markets of Australia.
Amcil Limited	Amcil Limited is a publicly owned investment manager. The firm primarily manages separate client focused equity portfolios
	for its clients.
Argo Investments Limited	Argo Investments Limited is a publicly owned investment manager. The firm manages separate client focused equity portfolios
	for its clients.
Australian United Investment Co. Ltd.	Australian United Investment Co. Ltd. is a self management investment trust. The firm invests in the public equity markets of
	Australia.
Bentley Capital Limited	Bentley International Limited, an investment company, invests primarily in equity securities listed on the world's major stock
	markets. It also invests in fixed interest securities and money market instruments denominated in various currencies.
BKI Investment Company Limited	Brickworks Investment Company Limited is a self management investment trust. The firm invests in the public equity markets.
	It invests in a diversified portfolio of companies, shares, trusts, and interest bearing securities with a focus on Australian
	entities.
Clime Capital Limited	Clime Capital Limited is a publically owned investment manager. The firm manages separate client focused equity portfolios.
	It also manages mutual funds for its clients.
Cadence Capital Limited	Cadence Capital Limited is a close ended equity mutual fund launched and managed by Cadence Asset Management. The fund
	invests in the public equity markets of Australia.
Carlton Investments Ltd.	Carlton Investments Limited engages in the acquisition, and long term holding of shares and units in entities listed on the
	Australian Securities Exchange.
Continuation Investments Ltd	Continuation Investments Ltd. is a self managed open-ended mutual fund. The fund primarily invests in the public equity
	markets of Australia.
Contango MicroCap Limited	Contango MicroCap Limited is an open-ended equity mutual fund launched and managed by Contango Asset Management Ltd.
	It invests in the public equity markets of Australia.

BDO Corporate Finance (East Coast) Pty Ltd

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	Company		Company description
	Century Australia Investments Ltd.		Century Australia Investments Limited is an equity mutual fund launched and managed by 452 Capital Pty Limited. It invests in
			the public equity markets of Australia. The fund spreads its investments across diversified sectors.
	Djerriwarrh Investments Limited		Djerriwarrh Investments Limited is a self managed investment trust. The firm invests in public equity markets of Australia. It
			employs a combination of in-house and external research to make its investments.
	Diversified United Investment Limited		Diversified United Investment Limited is a publicly owned investment manager. The firm manages separate client focused
			equity and fixed income portfolios. It invests in public equity and fixed income markets across the globe.
	Emerging	Leaders Investment Limited	Emerging Leaders Investment Limited is a closed-ended equity fund launched and managed by Ausbil Dexia Ltd. The fund
			invests in the public equity markets of Australia. It makes its investments in stocks of companies operating across diversified
			sectors.
	Gowing Bros Ltd.		Gowing Bros. Limited operates as an investment and wealth management company in Australia. It operates through two
			divisions, Investment Management and Property Management.
	Ironbark Capital Limited		Ironbark Capital Limited is an open-ended balanced mutual fund launched and advised by Kaplan Funds Management Pty Ltd.
			The fund primarily invests in the public equity markets of Australia.
	Mirrabooka Investments Limited		Mirrabooka Investments Limited is a self managed investment company. It invests in the public equity markets of Australia
			and New Zealand. The firm primarily invests in value stocks of small-cap and mid-cap companies.
	Milton Corporation Limited		Milton Corporation Limited is a publicly owned investment manager. The firm manages separate client-focused portfolios. It
			invests in the public equity and fixed income markets of Australia.
	Orion Equities Limited		Orion Equities Limited is a publicly owned self managed investment trust. The firm provides its services to individuals and
			institutional investors. It invests in public equity markets of Australia.
	Ozgrowth	Limited	Ozgrowth Limited is a publicly owned investment manager. The firm manages launches and manages equity mutual funds for
			its clients.
	WAM Capital Limited		WAM Capital Limited is a close-ended equity mutual fund launched and managed by Wilson Asset Management (International)
			Pty Limited. It invests in the public equity markets of Australia. The fund also invests in unlisted companies. It makes its
			investments across diversified sectors.
	WAM Research Limited		WAM Research Limited is a close ended equity mutual fund launched by Wilson Asset Management Pty Ltd. The fund is
			managed by MAM Pty Limited. It invests in the public equity markets of Australia. The fund makes its investments in
			companies primarily engaged in the industrial sector.
	Whitefield Ltd.		Whitefield Limited, an investment company, engages in making investments, and deriving revenue and investment income
			from listed securities and unit trusts in Australia. It provides shareholders with a diversified exposure to the industrial
			segment of the Australian share market.
Source:		Capital IQ

BDO Corporate Finance (East Coast) Pty Ltd

AI assistant

INVESTSMART GROUP LIMITED — Audit Report / Information 2013

65130_rns_2013-10-16_7f1f0e08-de6c-4db6-ae83-6e4628e71a36.pdf

FINANCIAL SERVICES GUIDE

Financial Services Guide

Financial services BDO is licensed to provide

General financial product advice

Benefits that BDO may receive

Remuneration or other benefits received by our employees

Referrals

Associations and relationships

Complaints resolution

14 October 2013

INDEPENDENT EXPERT'S REPORT

Introduction

Purpose and Approach

Summary of opinion

Fairness assessment

Reasonableness assessment

Shareholders’ individual circumstances

Summary

Glossary

Sources of information

Financial services guide

TABLE OF CONTENTS

1. SCOPE AND LIMITATIONS

1.1. Terms of the Proposed Transaction

1.2. ASX Listing Rule 10.1

1.3. Scope

1.4. Basis of Assessment

 Is it ‘reasonable’?

Fair

Reasonable

1.5. Limitations

General

Current Market Conditions

Reliance on Information

1.6. APES 225

1.7. Assumptions

2. PROFILE OF AWK

2.1. Overview

2.2. Board of Directors and Key Management Personnel

2.3. Net Tangible Asset Backing

2.4. Historical Financial Information

2.4.1. Financial performance

2.4.2. Financial position

2.4.3. Portfolio and sector allocation as at 30 June 2013

2.5. Capital Structure and Ownership

2.6. Share Price Analysis

3. THE MANAGEMENT CONTRACT

3.1. Management Contract Terms

4. VALUATION METHODOLOGY

4.1. Overview

4.2. Selected Valuation Methodology

4.2.1. Discounted cash flow valuation

4.3. Valuation Cross-Check

4.4. Valuation of the Consideration

5. VALUATION OF THE MANAGEMENT CONTRACT

5.1. Overview

5.2. Valuation Summary

5.3. Management Fees

5.4. Marginal Costs of Managing AWK as an LIC

5.5. Discount Rate

5.6. Taxation

6. VALUATION CROSS-CHECK

6.1. Comparable Internalisation of Management Contract Transactions

Table 17: Valuation cross check – Consideration as a proportion of FUM

6.2. Previous Sale of Management Contract

7. FAIRNESS ASSESSMENT

7.1. Fairness

8. REASONABLENESS

8.1. Factors

8.1.1. Movement from an LIC to an operating business

8.1.2. Previous arm’s length transaction

8.1.3. Additional management fee savings for AWK

8.1.4. Choice of Manager will not be reliant on the terms of the Management Contract

8.1.5. Change in Manager from Aurora to internally provided services

8.1.6. Transaction costs

8.2. Reasonableness Conclusion

9. QUALIFICATIONS AND DECLARATIONS

INVESTSMART GROUP LIMITED Audit Report / Information 2013