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-801-1250 Fax: 212-599-2300 February 7th, 2011 Dear Brenner West Investor: Our performance 1 net of all fees for the fourth quarter of 2010, the full year 2010, and the inception-to-date period are as follows:
2010 Q4 Brenner West Capital Partners Brenner West Capital Qualified Partners Brenner West Capital Offshore Fund Russell 2000 (dividends reinvested) S&P 500 (dividends reinvested)
10.06% 10.04% 10.05% 16.25% 10.76%
24.85% 25.08% 25.10% 26.86% 15.06%
103.27% 97.53% 97.43% 24.06% 14.20%
Inception Date 8/1/05 11/3/05 11/3/05 8/1/05 8/1/05
1 Past performance cannot assure any level of future results. The performance information contained herein has been prepared by us or on our behalf, has not been independently audited or verified and is subject to year-end adjustments. The performance information is shown after deducting management fees (1.5% per annum) and performance allocations/fees (20% per annum). Fund performance results and market index returns reflect reinvestment of dividends and other earnings. Discussion of specific positions herein are for informational purposes and are not intended to be indicative of the overall composition or performance of our funds’ portfolio. Such positions may be increased, reduced or eliminated without further notice. Market index information shown herein is included to show the performance of our funds relative to well known market indices for the periods indicated and not as standards of comparison, since these are unmanaged, broadly based indices which differ in numerous respects from the portfolio composition of our funds. Market index information was compiled from sources that we believe to be reliable. No representation or guarantee is made hereby with respect to the accuracy or completeness of such data. The information contained herein is provided for informational purposes only, is not complete, and does not contain certain material information about our funds, including important disclosures and risk factors associated with an investment in our funds, and is subject to change without notice. This document is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, interests in our funds. No offer or solicitation may be made prior to the delivery of a definitive offering memorandum.
is not complete. and ample trading liquidity. the environment is ripe for potential buyouts or other valueunlocking catalysts of our companies given the easy credit conditions and high levels of cash currently held at larger corporations. and does not contain certain material information about our funds. we continue to be skeptical of an imminent return to meaningful growth. In the case of certain other investments. produced approximately one third of our total gains for the year. this is a testament to the nature of the inefficiencies that we have indentified since the financial crisis began. the funds benefited from gains in many other positions. and is subject to change without notice. a long position in Maxim Power (Toronto: MXG. an owner-oriented management team with a great track record. however. in many ways represents an ideal “full position” in our view given the large discount to intrinsic value. though we remain bullish on the company and retain a sizeable net position today. On the flip side. we are heartened that many of our core long positions remain attractive despite recent price appreciation. Further. though none represented more than ten percent of our total performance for 2010. the improved market environment has caused us to conservatively recalibrate our view of intrinsic value and we are excited about many of these positions. many are in companies that lack broad institutional support and are not well understood. As often is the case when investments appreciate. Broadly speaking. or a solicitation of any offer to buy. This document is not intended to be. nor should it be construed or used as an offer to sell. We had many winners in 2010. In addition to the contribution from gains in our LCAPA position.Overview We are pleased to report that the funds posted another year of strong performance in 2010. interests in our funds. the extraordinary discounts that were priced into many of our core long positions following the financial crisis began to narrow. . concentrated approach allows us to generate investment ideas that can work without a macroeconomic tailwind. As we begin 2011. We remain enthusiastic about the opportunity set. including important disclosures and risk factors associated with an investment in our funds.TO). Our position in Liberty Media Capital (Nasdaq: LCAPA). Our investment in LCAPA. No offer or solicitation may be made prior to the delivery of a definitive offering memorandum. In many cases. It has thus far also represented the rare case where virtually everything has gone right both inside and outside the company. In order to best capitalize on such an environment. Not surprisingly. net of associated hedges. which cost us more than one percentage point of performance during the year. One example is our position in Tetragon Financial Group (Amsterdam: TFG. Perhaps this is conservative.AS). As such. we had only one investment. we have trimmed or eliminated several successful investments in recent weeks and replaced them with a few select opportunities where we believe that both a large margin of safety and meaningful upside potential exists. as the turmoil of the last few years has created many bargains of the nature that we attempt to seek out. multiple embedded catalysts. The information contained herein is provided for informational purposes only. we have sold more than 65% of our original investment. which is described below. additional areas of value beneath the surface. we are carefully pruning the portfolio to ensure that our capital remains concentrated in positions where significant inefficiencies remain. but we believe that our opportunistic. assets which can be valued objectively and hedged where necessary. As for our view of the economy going forward.
our increasingly high quality threshold (when we find something that we feel is truly undervalued and compelling we want to own it for a longer period of time). Annual cash returns to the equity holders were projected to be in the mid-teens. or CLOs. Despite the difficult macroeconomic environment of the last few years. At $7. potential analyst coverage and the greater recognition of CLO equity as an attractive asset class should all help to close the vast discount to intrinsic value over the course of the year.One additional note on our 2010 performance is that it was achieved in a highly tax efficient manner. We see a clear path to a significantly increased NAV by the end of year and also anticipate continued growth thereafter. catalysts abound for shareholders during 2011: the potential reversal of a large. lacks analyst coverage and has only one partially relevant public comparable. as well as our desire to be tax efficient. is not complete.20 per share. No offer or solicitation may be made prior to the delivery of a definitive offering memorandum. Approximately 98% percent of our realized gains represented long-term capital gains for tax purposes. and does not contain certain material information about our funds. we have tended to hold positions a bit longer than we had during our first few years. These were the primary financing vehicles behind the leveraged buyout frenzy from 2005 – 2007. a substantial ongoing repurchase program. The information contained herein is provided for informational purposes only. investors have been slow to recognize the true asset value of the firm’s portfolio. nor should it be construed or used as an offer to sell. Tetragon has a market capitalization of $865 million and trades at only 76% of stated NAV of $9. As we have evolved as a fund over the five plus years that we have been in business. In addition. Tetragon owns equity tranches from 70 collateralized loan obligations. and is subject to change without notice. including important disclosures and risk factors associated with an investment in our funds. the company trades in Amsterdam. or a solicitation of any offer to buy. This document is not intended to be. Even as the global markets have recovered. partial hedge in the form of a short position in KKR Financial Corp (NYSE: KFN) which has similar assets and trades at a premium to its stated NAV.47 per share. One other note is that we have a small. the possibility of rising dividend payouts. . most CLOs have performed largely as anticipated and are currently generating record levels of cash flow to their equity holders. We believe that this is the case in part because. We believe NAV to be significantly understated because it is based on what very conservative valuation assumptions that are little changed from those adopted by the company in the depths of the financial crisis. while management is based in New York. Tetragon is emblematic of the type of investments we have targeted over the past few years in that it is a superficially complicated company that was discarded by investors during the financial crisis. interests in our funds. Tetragon Financial Group We initiated an investment in Tetragon Financial Group in February 2010 and today it ranks as one of our largest positions. A typical CLO raised financing from pension funds and insurance companies at low rates that were locked in for fifteen years and then invested those funds in the senior loans of companies undergoing a leveraged buyout. This slight evolution in tactics relates to the nature of the opportunities we have found in the last few years. off-balance sheet asset into NAV.
Outlook As discussed. Our current approach is to own call options on VIX futures as they offer several advantages versus the alternatives: they are highly liquid. and does not contain certain material information about our funds. or a solicitation of any offer to buy. including equity long exposure of 78%. we have decided to opportunistically allocate a small portion -typically less than 1% -. and short exposure of 13%. we continue to maintain hedges to address currency risk on both the long and short side of our portfolio. After much consideration. we do want to have some protection to cushion ourselves against the type of market decline experienced in 2008. While we believe that the quality of our ideas and the structure of the portfolio are such that we do not need to worry much about moderate declines in the market indexes. In addition. As for the current portfolio excluding the VIX options mentioned above. We look forward to speaking with our partners in 2011. No offer or solicitation may be made prior to the delivery of a definitive offering memorandum. and is subject to change without notice. we have added an additional feature to our portfolio to provide us a measure of partial insurance against a large market decline. Please do not hesitate to contact us. offer capped costs.of our capital annually to tail-risk hedges. nor should it be construed or used as an offer to sell. Sincerely. . This includes sixteen equity long positions and eight short positions. is not complete. we remain cautious about the macroeconomic environment. In addition to our usual careful monitoring of all of our investments. including important disclosures and risk factors associated with an investment in our funds. interests in our funds. we have total net exposure of 65%. Joshua Kaufman Craig Nerenberg The information contained herein is provided for informational purposes only. and performance tends to accelerate as the market declines steepen. This document is not intended to be.
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