Subject: Re: Thoughts on BHR Conference Call
From: "Eric Schwerin" <[email-masked]>
To: "Michael Leonard" <[email-masked]>
Cc: "Hunter Biden" <[email-masked]>, "James Bulger" <[email-masked]>
Date: Thu, 25 Aug 2016 10:26:41 -0400

Thanks, Mike.

I think you covered a lot of questions we had as well.

A few quick comments/responses - and granted this is from someone who hasn’t been as involved day to day as the others on this email.

I think getting clarification from Jonathan on the issue of registered capital and whether we would have to make up a shortfall makes sense. I would hope he has a good idea that the employees could cover the full 10m RMB before proposing it but we certainly don’t want to vote for it if we are on the hook for the remainder.

I also agree that we need a better explanation of what the plan is to right the ship and make sure 2017 is better than 2016 and what the potential exits are.

The only place where I’ll disagree slightly is that a normal PE fund has a 5-7 year lockup and investments are typically held for anywhere from 3-5 years.  Given the age of the fund, it should be reasonable for us to wait potentially  up to 5 years before seeing an exit and I wouldn’t want rush an exit for cash if the timing isn’t right.   More importantly, in a typical PE fund there would be management fees to tide the GP partners over until they receive any dividend from an exit.   I know it isn’t our model and it is easier said than done, but perhaps there is a way to find deals going forward that would provide a management fee.  At the very least those management fees could be re-invested into the fund as registered capital.

Just a few thoughts.

Eric D. Schwerin
Rosemont Seneca Advisors, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
[email-masked] <x-msg://59/[email-masked]>
P Consider the environment before printing this email.

> On Aug 25, 2016, at 10:01 AM, Michael Leonard <[email-masked]> wrote:
> 
> Gentlemen:
> 
> Following the BHR conference call the other night I had the following thoughts that I wanted to put out there for the group's consumption. Here they are:
> 
> 
> 1. Registered Capital: Jonathan clarified that they are only going to raise the registered capital by the amount that BHR hopes to raise by offering shares to the employees. The goal is that original shareholders like us won't have to contribute more capital than we already currently owe. However, what if the employees don't fully subscribe or there is somehow a shortfall? Will original shareholders like us be on the hook for the difference?
> 
> 2. Cash Back: We all want to get cash back from BHR. That was the ultimate goal when undertaking this endeavor. That being said we recognize it takes time to grow a business, close deals and make successful exits. However, the other night Jonathan made it clear that we won't be seeing any sort of dividends for at least the next two years. Realizing we might want cash in the nearer term Jonathan said that his plan is that we will be able to sell our interest in BHR to the employees in later purchasing rounds and as well as some point in the future when Jonathan plans a Chinese IPO of BHR.
> 
> Is that how we thought we were going to get our money back? By selling our interest in BHR bit by bit over time?
> 
> I thought the concept of PE funds was that they had relatively low overhead and that when they closed deals there was enough cash that the partners could do very well off the dividends. It seems to me to be very unorthodox that the partners make their money back by selling their interest instead; especially via an IPO.
> 
> There needs to be more discussion on how partners get their cash back and the method Jonathan proposed is not the only way and might not be the most advisable way. 
> 
> 3. What are the business prospects?: Jonathan said that 2016 so far has been a lousy year. Why will 2017 be different? Same with 2018? It would be nice to know what the future prospects of BHR are before we put anymore money into it. Otherwise we are just giving them the resources to just keep trying and hoping something will be different. 
> 
> 4. What are the projected carries on deals we already have?: We never seem to discuss this topic. BHR has Didi, Henniges and CATL (a Chinese battery manufacturer) which are all companies that are doing well and ready for BHR to exit from. How much do we think these exits will generate in carry? What will we do with that cash? 
> 
> BHR has never described this in detail. I think part of the reason is that they don't want to be beholden to projections they make in case they don't meet them. However, we don't even have a range. For instance, will Henniges potentially generate a carry of $10 million to be split among the partners or will it generate $100 million? Just even knowing the range could make a huge difference in how we think of BHR! What about Didi and CATL? What sort of carry can we expect there? 
> 
> Discussion about future carries also begs the question of how a carry will be parceled out. We could learn a lot about how Jonathan thinks about BHR just by having him walk through these scenarios and showing where the money will go and how much each partner will get. This sort of discussion can fundamentally change how we appraise BHR. 
> 
> 
> Those are just some thought I had. Please let me know if you have any questions.
> 
> Best,
> Mike
> 
> -- 
> Michael R. Leonard
> Vice President, Operations Department
> Thornton Group LLC
> 14 Beacon Street, Suite 804A
> Boston, MA 02108
> Office: 617-248-9440
> Mobile: 781-454-9227