Red Clay Advisors, LLC (d/b/a Red Clay Equity; d/b/a Red Clay Capital):a private equity firm dedicated to acquiring and building small businesses

RED CLAY EQUITY INVESTMENT STRATEGY AND APPROACH

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Microbuyouts. Red Clay invests private equity capital (and/or advises investors of private equity capital), primarily in the acquisition and growth of small businesses (with less than $3 million of earnings before interest, taxes, depreciation and amortization or "EBITDA") that are well established and fundamentally profitable.

These microbuyouts constitute a differentiated asset sub-class and are not adequately described as small buyouts. Relative to typical buyouts, microbuyouts involve significantly more company-building and business development (akin to venture capital) and significantly less financial leverage. Earnings growth plays a larger role in the microbuyout investment model, which incorporates some hybrid buyout / venture capital aspects and some unique aspects as well.

The microbuyout investment opportunity is compelling. While the private equity middle-market is saturated relative to the number of deals available, the microbuyout market is underserved and inefficient, with the potential for attractive investment returns relative to risk. Substantial small businesses are up to five times more numerous than larger businesses, with recent US economic census data counting approximately 500,000 firms with 20 to 99 employees, versus approximately 100,000 firms with 100 or more employees. In addition to being more numerous, small businesses present greater upside opportunities, as they are often undermanaged and/or undercapitalized and have more room to grow relative to larger firms. Despite these attractions, far fewer private equity firms are committed to acquiring small businesses. Because of these factors, smaller businesses can generally be purchased for lower multiples of earnings and can deliver higher returns if appropriate sourcing, screening, diligence, structuring, strategy, management and oversight disciplines are employed.

Typical situations in which Red Clay will invest include purchases of businesses from retiring founders and/or family owners, corporate divestitures, and sales initiated by other venture capital and private equity investors. With respect to industry preferences, Red Clay employs a generalist approach, typically focusing on manufacturing, industrial, retail, business services and consumer services. Geographically, Red Clay invests across the United States, but primarily in Eastern, Midwestern and Southeastern metropolitan areas.

Red Clay seeks to grow and/or consolidate the businesses it acquires and then harvest investment returns primarily through sales to, or mergers with, strategic buyers or middle-market private equity funds. Investments are managed with the goal of increasing equity value through earnings growth, valuation ratio expansion and conservative use of financial leverage.

America's Emerging Domestic Markets ("EDM"). Red Clay will have certain investment partnerships, including Red Clay Equity Partners, LP, that focus on microbuyout transactions in two areas of the emerging domestic market: (i) companies providing goods and services to growing ethnic minority and other underserved populations, and (ii) companies located in urban areas where legacy infrastructure, abundant labor and government programs create significant cost savings and logistical advantages.

Powerful macro-societal trends, such as increasing consumer buying power in certain US geographic markets (primarily urban areas) and certain demographic markets (growing ethnic minority populations), are creating compelling business and investment opportunities. Although ethnic minorities already represent 20% of all consumer purchasing power and are expected to account for 90% of all population growth to 2050, they are generally underserved as a market. From a geographic perspective, urban markets tend to have significantly higher percentages of young consumers and dramatically higher aggregate income densities, despite lower per-capita income. Furthermore, EDM companies in urban areas often enjoy location advantages (such as proximity to transportation arteries and hubs) and other potential cost advantages (such as low cost real estate, low cost labor, government subsidies, tax abatements and low cost funding).

Coincidentally, a large portion of all microbuyout targets falls within the EDM category by virtue of their typical industries, locations and employment profiles. For example, microbuyout targets tend to involve traditional industries (vs. high technology industries, for example) and therefore are often located in older urban neighborhoods in or near traditional metropolitan centers of industry. In addition, EDM microbuyout targets tend to suffer even greater neglect by the capital markets than other microbuyouts. Therefore EDM microbuyouts represent a particularly attractive investment segment within the general microbuyout category. Further, Red Clay has particularly strong EDM-relevant deal sourcing networks, EDM-relevant deal-making expertise and EDM-relevant experience accessing government program for business and investors. In light of these advantages, Red Clay believes that it can very effectively identify, acquire and grow EDM microbuyout businesses.

Red Clay explores EDM investing broadly and opportunistically, without rigid pre-determined criteria. Red Clay will, however, also invest in companies that are not necessarily located in or focused on EDM.

The Red Clay Approach. Red Clay is an active investor with an entrepreneurial but disciplined approach. Red Clay employs 5 key disciplines (described below) that it believes are essential for success in microbuyout investing. Within the context of these general disciplines, Red Clay employs specific processes, sourcing strategies, screening criteria, deal structuring techniques, vendor partnering approaches and oversight approaches that are also designed to address the challenges and opportunities particular to microbuyout investing. Red Clay's 5 Key Disciplines:

1. Be selective. Red Clay is highly selective, seeking to find opportunities that closely adhere to its investment criteria and that represent strong, stable businesses with a high likelihood of preservation of capital and growth.

2. Partner with strong management. Red Clay uses "CEO-led search" for deal sourcing whenever possible. In any case, Red Clay partners with incumbent or newly recruited management as early as possible in the investment process. Red Clay evaluates portfolio company managers with a focus on relevant industry expertise and relationships and alignment with Red Clay on thesis, goals, strategy and values.

3. Define an investment thesis and a 5-year strategic plan before buying. Red Clay strives not merely to buy good companies, but rather to buy only good companies for which it has validated a compelling but simple investment thesis and for which it has developed and validated a 5-year strategic plan, in order to lay the foundation for effective oversight.

4. Buy right. Unlike a venture investor, one of Red Clay's primary considerations is the preservation of capital. Red Clay pursues this not only by rigorously evaluating the sustainability of the businesses it acquires, but also by assiduously avoiding paying more than fair value for them. Red Clay pursues a value investing strategy and structures its transactions conservatively in order to lessen the risk of financial distress. Red Clay also uses creative structuring and leverages various EDM programs to minimize the overall cost of capital for its acquisitions and growth initiatives.

5. Manage actively and professionally. Microbuyout companies require close monitoring and significant investment of time and resources to cultivate. Although Red Clay avoids micro-managing operations in conflict with its portfolio company management teams, Red Clay plays a highly active role at the portfolio company board level in mapping strategy and monitoring progress and an even more hands-on role in certain key initiatives. In addition, Red Clay insists on implementing professional governance, reporting and information systems at each of its portfolio companies. Key metrics and milestones are identified, benchmarked, and tracked closely. Red Clay emphasizes real-time communication, as well as standard monthly reporting and review and quarterly board meetings. Red Clay also implements professional annual strategic planning and budgeting process for each portfolio company, no matter how small.

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