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CONFIDENTIAL – DO NOT DISTRIBUTE
Private Credit OverviewMay 2019
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Presenters
Jonathan Marotta, Managing Director, Private Credit
Arthur King, Vice President, Private Credit
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I. Introduction to Crescent Capital Group
II. Private Credit Overview
III. Considerations for Manager / Strategy Selection in Private Credit
IV. Private Credit Investor Outlook
V. Summary and Q&A
Table of Contents
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CONFIDENTIAL – DO NOT DISTRIBUTE
I. Introduction to Crescent Capital Group
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Private Markets$15.6
Public Markets$9.0
Crescent Capital Group Platform
5 (1) AUM is preliminary as of December 31, 2018Past performance is not a guarantee of future results.
($ in billions)
Strong Growth in AUMBelow Investment Grade Corporate Credit Mix (1) Global Investor Base
($ in billions) ($ in billions)
Crescent seeks to deliver attractive returns with less volatility, lower default rates and higher recovery than the market average
Founded: 1991AUM: $24B+Employees: 165+Offices: 4 Client Base:
• Independent credit firm with complementary strategies
• Primarily focused on below investment grade credit
• Prioritizes capital preservation and high current income
• Depth and breadth of investment professionals
• Long track record of demonstrated performance through multiple cycles
• Crescent Mezzanine and Crescent Direct Lending have experienced a Historical Net Loss Ratio of less than 20 bps and 10 bps, respectively
Facts Highlights
North America $19.3
• ~95% Institutional Investor Base• Over 450 Client Relationships• No Investor >5%
North America$18.2
Asia$3.9
Europe and RoW$2.5
+
$8
$24
2011 2018
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Dynamic Organization
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Information is current as of December 31, 2018
Dedicated Investment Professionals Operations Team / Administration
• 80+ investment team members• 50+ Private Credit and 30+ Public Credit professionals• Strong sourcing, structuring and portfolio management
• 85+ operations and administrative team members• Pursues highest risk management / compliance standards• Provides best-in-class support functions
Management Committee
• Includes Managing Partners and leaders within Investment Management, Investor Relations, Legal, and Operations
Local Market Presence Across Four Offices
London
BostonNew York
Los AngelesHeadquarters
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• Strong market presence and relationships
• Robust, proprietary sourcing
• Proven, disciplined investment approach
• Experience across multiple cycles
• Long‐standing, over 25‐year track record with U.S. Private Strategies having deployed over $17 billion(1)
The Crescent Competitive Advantage in Private Credit
1
2
3
4
5
Past performance is not indicative of future results. As used here, Private Credit refers to Crescent’s experience in the asset class generally and not to the proposed partnership structure with its specific investment objectives, which does not have a track record.(1) Inclusive of Crescent Direct Lending and Crescent Mezzanine deployed capital. As of December 31, 2018.
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2019-2020 Crescent Fundraising Timeline
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Strategy 1Q’19 2Q’19 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20 4Q’20
Crescent European Specialty LendingLending CESL II
Crescent BDC, Inc. CBDC
Crescent Private Credit Partners CPCP I
Crescent Direct Lending CDL III(Tentative)
Crescent MezzanineMezz VIII(Tentative)
Currently Fundraising
Projected to Begin Fundraising
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Strong Market Presence and Robust, Proprietary Sourcing
Select Sponsor Relationships Private Credit Deal Flow by Year
Num
ber o
f Dea
ls Re
view
edIncludes investment opportunities from Crescent Mezzanine, Crescent Direct Lending and Crescent European Specialty Lending. As of December 31, 2018.
16(2%)
37(3%)
34 (3%)
37(2%)
30 (2%)
35 (2%)
735
1,165
1,299
1,524
1,399
1,532
‐
200
400
600
800
1,000
1,200
1,400
1,600
2013 2014 2015 2016 2017 2018
Deals Completed
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II. Private Credit Overview
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• Strategies where manager sources debt investment opportunities directly from a company (sponsor-less) or through a private equity firm acquiring the company (sponsored)
• Investment instrument typically structured as a loan or a bond; negotiation is led by the credit manager
• Return normally created from structuring fees, contracted cash or capitalized interest, prepayment penalties and, in some cases, equity enhancements
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What is Private Credit?
1
2
3
(Also Called Private Debt or Direct Lending)
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Why Private Credit?
Pros:
• Customized, flexible solutions
• Certainty of execution and terms
• Privacy / no disclosure requirements
• Partnership-based lender approach
• Sometimes the only option
Cons:
• Generally higher coupon
BORROWERS’ PERSPECTIVEINVESTORS’ PERSPECTIVE
Pros:
• Significant yield premium
• Lead due diligence process and legal documentation
• Generally better credit terms
• Enhanced reporting and monitoring tools
• Access to management and Board
• More control in downside case scenarios
Cons:
• Generally lower liquidity
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Preqin; S&P LCD.
Middle-Market Lending Opportunity
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• Continued growth in global buyout dry powder • Bank share of the leveraged loan market has declined from 30% in 2000 to 12% in 2016 • Smaller banks have curtailed lending meaningfully since 2008• Only 54% of small business lending is addressed by small-to-medium sized banks
Non‐Bank Investors
Banks & Securities Firms
Aggregate Ca
pital R
aised ($ in billions)
ANNUAL PRIVATE CAPITAL RAISED BY ASSET CLASS BANKS WITHDRAWING FROM LOAN MARKET (1994-2018)
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$409 $410
$213 $187 $239 $244$329
$421 $417$522 $565
$459
$74 $100
$24 $42$45 $68
$76
$79 $104
$115$134
$123$142
$147
$53 $58$77
$89
$110
$121$140
$132
$132
$137$44$41
$15 $33
$27$33
$49
$44$61
$67$77
$94
$14$18
$21 $13$11
$26
$36
$32$40
$24
$23
$20
0
100
200
300
400
500
600
700
800
900
1000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Private Equity Private Debt Real Estate Infrastructure Natural Resources
& of Leveraged
Loa
n Market
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Leveraged Buyouts: Purchase Price and Leverage Trends
• Leveraged buyout purchase price multiples are at historical highs
PURCHASE PRICE AND LEVERAGE MULTIPLES
5.2x4.2x 4.0x 3.4x 3.7x 4.2x 4.6x 5.4x 5.3x 6.1x
5.0x3.9x 4.6x 4.9x 5.1x 5.3x 5.7x 5.6x 5.4x 5.7x 5.8x
7.8x7.0x 6.6x
5.9x6.5x
7.0x 7.2x
8.3x 8.3x
9.5x9.0x
7.7x8.4x 8.6x 8.6x 8.7x
9.6x10.1x 9.9x
10.6x 10.3x
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Leverage Equity
Source: S&P LCD.
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Leveraged Buyouts: Equity Contribution Trends
• High level of equity contributions provide a substantial valuation cushion to debt investors
EQUITY CONTRIBUTION
27% 28%32%
34% 35%37%
35%33%
30% 31% 31%
39%
46%41%
38% 38%36% 37%
40% 41% 41% 43%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: S&P LCD.
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Type of Private Credit Strategies
Capital Structure Focus
Geography/Industry Focus
Sponsored vs Non‐Sponsored
Target Company Size
Use of Proceeds
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Capital Structure Focus
Direct Lending Funds• Senior Secured• Stretch Senior (Unitranche)Mezzanine Funds• Junior Lien• Unsecured• SubordinatedOpportunistic• Holdco / Preferred• Structured Equity• Distressed
PRIVATE CREDIT FUNDS SAMPLE CAPITAL STRUCTURES
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0xSenior / Junior Structure Unitranche Structure
Senior SecuredLoans
Junior Lien /Unsecured
Unitranche
Equity Capital
EquityCapital
30‐50%Equity
Cushions
Higher Risk /Return
Lower Risk /Return
EBITDAMultiple
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11Senior Loans Unitranche Loans Junior Loans Preferred Securities
Position in Cap Structure Senior Opco Debt Senior Opco Debt Junior Opco Debt Subordinated/ Holdco
Asset Collateral 1st lien 1st lien Junior Lien / Unsecured Unsecured
Current Income Cash Interest Cash Interest Primarily Cash Interest Primarily in Kind
Floating or Fixed Rate Floating Floating Fixed or Floating Fixed
Indicative Coupon LIBOR + 4-6% LIBOR + 5-7% LIBOR + 7.5-9.5% 10-15%
Upfront Fee 1-3% 2-3% 2-4% 2-4%
Call Protection None Yes Yes Yes
Maturity 4 – 7 years 4 – 7 years 7 – 10 years 10+ years
Equity Upside None Potential Potential Potential
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Capital Structure Focus (cont’d)
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Geography / Industry Focus
Industry/Sector FocusGeographic Focus
Developed World Emerging Markets
Country- or Region- Specific:North America
Western EuropeMiddle EastAsia Pacific
Corporate Credit Energy & Power
Real Estate Technology
Infrastructure Structured Products
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Sponsored vs Non-Sponsored
Private Equity Sponsored Investment Strategy
Non-Sponsored Investment Strategy
• Defined and consistent sourcing channels
• Incremental resources for credit due diligence
• Enhanced governance and controls
• Aligned investment horizons and realization incentives
• Broader access to capital and managerial resources
• Requires a larger sourcing platform with local presence and
more office locations
• More direct communication with management/founders
• Potentially higher upside with more equity exposure
• Generally higher risk
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Target Company Size
Smaller(<$25mm EBITDA)
• Growth-oriented companies
• Less sophisticated managerial controls
• Fewer available sources of capital
• Better pricing / covenant packages
Middle-Market($25-$200mm EBITDA)
• Greater scale and stronger market positions
• More revenue diversification
• Greater balance sheet flexibility
• Deeper management teams
Larger(>$200mm EBITDA)
• Economies of scale and revenue diversification
• Longer operating history
• Broad access to capital
• Stronger managerial controls
• Lower pricing / looser terms
PORTFOLIO COMPANY SIZE CONSIDERATIONS
Higher Risk Lower Risk
Higher Return Lower Return
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Use of Proceeds
Leveraged Buyouts
Mergers & Acquisitions
Refinancings
Dividend Recaps
Rescue Capital / Takeover
Growth Capital
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III. Considerations for Manager / Strategy Selection in Private Credit
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• Investors should first determine the level of risk they are willing to take
• Investors should be careful about over-relying on presented track record data
– The success is not based on investment pace, but rather on capacity to recover capital and generate
returns
– No reliable benchmark data available as investment strategies / styles vary considerably
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Manager Selection ConsiderationsGreatest Challenge: Fully Gauge the Level of Risk Taken by Each Manager Being Considered
1
2
23
Source: Preqin
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Manager Selection Considerations
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Average Current and Target Allocations by Private Debt by Type
Source: Preqin
Institutional investors’ plans for allocations in the near term
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Experienced investment team
Strong market presence and relationships
Robust, proprietary sourcing
Proven, disciplined investment approach
Quality of due diligence
Stable strategy over long term
Prudent portfolio construction
Strong track record across multiple cycles
Co‐investment opportunities
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Manager Selection Criteria
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• Size of the overall market opportunity• Strategic focus by investment type, geography, industry, etc.
Opportunity Set
• Extent of due diligence process• Committee approval processes• Percentage of transactions approved for investment
Decision Process
• Reporting rights / Board representation• Access to management and owners• Frequency and quality of internal discussions
Monitoring
• Investment Returns• Default Rates• Recovery Rates
Key Performance Metrics • Direct vs agented sourcing model• Sponsored vs non‐sponsored focus• Breadth and depth of relationships
Origination
• Position in capital structure / cash vs PIK coupon
• Transaction role and credit terms negotiation
Structuring
Credit Investment Process – What to watch for?
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SponsorTrack Record
• Due diligence is a critical component of the investment process • Includes assessment of management, business model, industry trends and financial performance• Focus on cash flow stability and downside case scenarios
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Diligence, Diligence, Diligence
Past Performance
Demo‐graphic trends
Barriers to Entry
Revenue Cyclicality
Fixed vs Variable Costs
Capex Requirements
Switching Costs
RegulatoryCompliance
Competitive Advantages
Product Concentration
SupplierConcentration
Financial Analysis
Competitive Landscape
Management Team
Go‐to‐MarketStrategy
Labor Relations
ESG Issues
Exit Strategy
Product Liability
Seasonality
Working Capital DynamicsInput Cost
ManagementPricing Strategy
IndustryTrends
ForexExposure
Customer Retention
Employee Turnover
InventoryManagement
DistributionChannels
ReceivablesAging
SponsorFundCycle
GeographicFootprint
SegmentProfitability
Capacity Utilization
SAMPLE FOCUS AREAS OF CREDIT DUE DILIGENCE
EBITDAAdjustments
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• Interest rate
– Cash vs PIK
– Floating vs fixed
• Upfront transaction fee
• Redemption premiums
• Equity component (strategy-specific)
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Portfolio Construction
• Diversification by issuer, industry, geography
• Foreign exchange exposure and hedging
• Attachment point, leverage, equity cushions
• Interest and fixed charge coverage ratios
• Transaction role (sole vs lead vs non-lead)
• Covenant and reporting packages
• Asset-based leverage (strategy-specific)
Typical Return Components Portfolio Characteristics
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Important to understand regional regulatory environment and credit protection laws
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Credit Terms and Legal Documentation
KEY COVENANTS TO WATCH FOR
Debt Incurrence Asset Liens Acquisitions
Dividends / Restricted Payments Asset Sales Change of Control
Protectiv
eCo
vena
nts
Mainten
ance
Cove
nants
Covenant‐Lite Covenant‐Loose Springing
Change of Jurisdiction
Definition of EBITDA
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• Lack of representative or reliable benchmarks
• Confusion on definition of terms (e.g., unitranche fund)
• Benchmarks should ideally be adjusted for multiple key factors
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Benchmarking
Private Fund Benchmarks Public Index-Based Benchmarks
Capital Structure Focus
Geographic/ Industry Focus
Target Company
Size
Levered vs Unlevered
Sponsored vs
Non‐Sponsored
Vintage Year and Pace of Investment
Strategy Shift
VolatilityConsiderations
Periodic vs Inception‐To‐Date Returns
Public Market Equivalent
Methodology
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Pitfalls to Avoid
High Team Turnover
No Investment Experience During a Full Cycle
Cherry‐Picked Track Records
Off‐Market Claims on Covenants, Pricing, Leverage, etc.
Unrealistic Co‐Investment Promotion
Manager More Focused on AUM Growth Than Constructing Quality Portfolios
Sourcing Reliant on Agent / Syndication
Aggressive Use of Fund Leverage
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IV. Private Credit Investor Outlook
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Private Credit Investor Outlook
Source: Preqin
Proportion of institutional investors allocating to each alternative asset class
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Private debt investors by source of allocation
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Private Credit Investor Outlook
Investors in private debt by type
Source: Preqin
Investors in private debt by location
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Private Credit Investor Outlook
Fund types that investors view as presenting the best opportunities for the next 12 months
Regions that investors view as presenting the best opportunities for the next 12 months
1 Includes commercial real estate senior loans, receivables finance, and multi-strategy credit Source: Preqin
1
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Private Credit Investor Outlook
Recommended allocations to private debt from consultants (2018)
Source: Preqin
Private debt recommendations for 2018 from consultants by strategy
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CONFIDENTIAL – DO NOT DISTRIBUTE
V. Summary and Q&A
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Summary• Private credit is an attractive asset class given its significant yield premiums, better credit terms and enhanced controls
relative to the traditional fixed income markets
• Demand for private credit from borrowers should continue to have strong tailwinds given the growth in global buyout dry powder and declining participation in the loan market by traditional banks
• Successful private credit managers
– Have the capacity to source broadly and stay selective
– Stay focused on company’s underlying credit fundamentals
– Disciplined in deploying capital during various macro and investment environments
• Investors across the globe are increasingly allocating assets to private credit from various “buckets” (private equity, fixed income, alternatives, etc.), with many creating from a separate private debt allocation.
• Crescent is an experienced private credit manager with multiple private credit strategies, a large dedicated team of investment professionals and a 25+ year track record of delivering attractive, risk-adjusted returns
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Certain Risk FactorsNature of Debt Securities. Debt and structured equity investments in highly leveraged companies involve a high degree of riskwith no certainty of any return of capital. The debt securities in which Crescent Funds and strategies (“Crescent Funds”) investmay be unsecured and subordinated to substantial amounts of senior debt, all or a portion which may be secured, may not beprotected by financial covenants or limitations on additional debt, may have limited liquidity and may not be rated by a creditrating agency.
Financial Markets. Instability in the securities markets may increase the risk inherent in Crescent Funds’ investments in that theability of portfolio companies to refinance or redeem debt and structured equity securities held by Crescent Funds may dependon their ability to sell new securities in the market.
Conflicts of Interest. Crescent and its affiliates manage multiple funds and accounts. Key personnel will devote somebusiness time to managing those other funds and accounts. Obligations to certain funds and accounts could in certaincircumstances adversely affect the price paid or received for investments by Crescent Funds or the size or the portion ofinvestments purchased by other Crescent Funds.
Interest Rate Fluctuations. Interest rate fluctuations may negatively impact Crescent Funds’ investment opportunities and therate of return on invested capital. An increase in interest rates would make it more expensive for portfolio companies tofinance operations and indirectly affect the credit quality of Crescent Funds’ investments.
Lack of Diversification and Reliance on Portfolio Company Management. Crescent Funds may invest in a limited number ofinvestments and may be concentrated in only a few industries. Therefore, the aggregate return of Crescent Funds may beadversely affected by the negative performance of a relatively few investments. The manager monitors portfolio companyperformance; however, it is primarily the responsibility of portfolio company management to operate a portfolio company on aday to day basis and there is no assurance that such management will perform in accordance with Crescent Funds’expectations.
No Market for Interests in Crescent Funds and Restrictions on Transfer. Crescent Funds’ interests (“Interests”) have not beenregistered under the United States Securities Act of 1933, as amended (the “1933 Act”), the securities laws of any state orthe securities laws of any other jurisdiction, and, therefore, cannot be resold unless they are subsequently registered underthe 1933 Act and other applicable securities laws or an exemption from registration is available. It is not contemplated thatregistration of Interests under the 1933 Act or other securities laws will ever be effected. There is no public market for theInterests, and none is expected to develop. An investor in a Crescent Fund is generally not permitted to assign its Interestswithout the prior written consent of Crescent, and any such assignment is subject to the terms and conditions of the operativedocuments of the relevant Crescent Funds . Investors must be prepared to bear the risks of owning their Interests for anextended period of time and the risk of loss of the entire investment.
Competitive Debt Environment. Crescent Funds compete with the public debt and equity markets and with other investors forsuitable investment opportunities. There can be no assurance that Crescent Funds will be able to locate and completeinvestments, fully invest its committed capital or satisfy its rate of return objectives.
Foreign Investments. Investments in non-U.S. companies involve risks not typically associated with the more developed U.S.capital markets, including risks relating to currency exchange, differences between the U.S. and foreign securities markets,differences in corporate and creditors’ rights laws and economic, and political risks.
Dependence Upon Key Personnel. Decisions with respect to the investments and management of Crescent Funds will bemade exclusively by the Crescent management team. Investors generally have no right to take part in the management ofCrescent Funds and do not have an opportunity to evaluate the specific investments made by mezzanine funds or theirterms. The success of Crescent Funds depends significantly upon the skill and expertise of the principal members of theCrescent management team. The departure of any of those principal members could have a material adverse effect onmezzanine funds.
No Assurance of Investment Return. There can be no assurance that Crescent Funds will be able to generate returns for itsinvestors or that the returns will be commensurate with the risks of investing in the type of companies and transactions describedherein. Accordingly, an investment in Crescent Funds should only be considered by persons who can afford a loss of their entireinvestment. Past activities or investment return results of investment entities associated with the Crescent management team orits principal members, including their prior funds, provide no assurance of future success or return results. The fees andexpenses charged in connection with an investment in Crescent Funds may be higher than the fees and expenses of otherinvestment alternatives and may offset profits.
Use of Leverage. Certain Crescent Funds may leverage the cost of its investments. To the extent Crescent Funds purchasessecurities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are notused. If the interest expense on borrowings were to exceed the net return on the portfolio of securities purchased with borrowedfunds, Crescent Funds’ use of leverage would result in a lower rate of return than if Crescent Funds were not leveraged.Overall, the use of leverage, while providing the opportunity for higher returns, also increases volatility and the risk of loss.
No Regulatory Approval. The Crescent Funds have not been approved or disapproved by any securities regulatory authority ofany state, by the Securities and Exchange Commission, or any similar authority in another jurisdiction.
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