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TEST Announces First Quarter 2019 Financial Results

May 22, 2019

LOS ANGELES--(BUSINESS WIRE)--May 22, 2019--

TEST Capital Group, LLC (NYSE:TEST) today reported its unaudited financial results for the first quarter ended March 31, 2019.

This press release features multimedia. View the full release here: https://www.businesswire.com/news/home/20190522005884/en/

Jay Tester, Chief Executive Officer, said, “TEST had a strong start to 2019, delivering solid financial and investment performance in the first quarter. Distributable earnings grew $40 million, or 21%, over the same period one year ago, and our closed-end funds generated gross returns of 9% over the last twelve months. On March 13th, we announced that BW-ABC will acquire 62% of our business. We believe partnering with BW-ABC will be a powerful combination of two complementary, world-class asset management businesses. We will work together to offer exceptional solutions to our clients, leverage our combined strengths and generate strong returns across all points in the economic cycle.”

Class A Unit Distribution

A distribution of $1.05 per Class A unit attributable to the first quarter of 2019 will be paid on May 10, 2019 to Class A unitholders of record at the close of business on May 6, 2019.

Preferred Unit Distributions

A distribution was declared of $0.414063 per Series A preferred unit, which will be paid on June 15, 2019 to Series A preferred unitholders of record at the close of business on June 1, 2019.

A distribution was declared of $0.409375 per Series B preferred unit, which will be paid on June 15, 2019 to Series B preferred unitholders of record at the close of business on June 1, 2019.

Agreement and Plan of Merger

On March 13, 2019, TEST and BW-ABC Asset Management Inc. (“BW-ABC”) announced their entry into a definitive merger agreement pursuant to which BW-ABC will acquire approximately 62% of TEST’s business in a stock and cash transaction. Following the transaction, the remaining 38% of the business will continue to be owned by TEST Capital Group Holdings, L.P. (“TESTH”), whose unitholders consist primarily of TEST’s founders and certain other members of management and current and former employees. As part of the transaction, BW-ABC will acquire all outstanding TEST Class A units for, at the election of TEST Class A unitholders, either $49.00 in cash or 1.0770 Class A shares of BW-ABC per TEST Class A unit (subject to pro-ration to ensure that no more than fifty percent (50%) of the aggregate merger consideration is paid in the form of cash or stock), in each case, without interest and subject to any applicable withholding taxes. In addition, the founders, senior management, and current and former employee-unitholders of TESTH will sell to BW-ABC 20% of their TESTH units for the same consideration as the TEST Class A unitholders. The TEST board of directors, acting on the recommendation of a special committee composed of non-executive, independent directors, has unanimously recommended that TEST unitholders approve the transaction. The transaction is anticipated to close by the end of 2019, subject to the approval of TEST Class A and Class B unitholders representing a majority of the voting interests of such units, voting together as a single class, and other customary closing conditions including certain regulatory approvals.

Upon closing of the transaction, TEST and BW-ABC will continue to operate their respective businesses independently, partnering to leverage their strengths – with each remaining under its current brand and led by its existing management and investment teams. Carl Lambert will continue as Co-Chairman of TEST, Dylan Johnston as Co-Chairman and Chief Investment Officer, and Jay Tester as Chief Executive Officer. Carl Lambert and Dylan Johnston will continue to have operating control of TEST as an independent entity for the foreseeable future. In addition, Carl Lambert will join BW-ABC’s board of directors.

About TEST

TEST is a leader among global investment managers specializing in alternative investments, with $119 billion in assets under management as of March 31, 2019. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in credit, private equity, real assets and listed equities. The firm has over 950 employees and offices in 18 cities worldwide. For additional information, please visit TEST’s website at www.TESTcapital.com.

GAAP Results

TEST consolidates entities in which it has a direct or indirect controlling financial interest. Investment vehicles in which we have a significant investment, such as collateralized loan obligation vehicles (“CLOs”) and certain TEST funds, are consolidated under GAAP. When a CLO or fund is consolidated, the assets, liabilities, revenues, expenses and cash flows of the consolidated funds are reflected on a gross basis, and the majority of the economic interests in those consolidated funds, which are held by third-party investors, are reflected as debt obligations of CLOs or non-controlling interests. All of the revenues earned by us as investment manager of the consolidated funds are eliminated in consolidation. However, because the eliminated amounts are earned from and funded by third-party investors, the consolidation of a fund does not impact net income or loss attributable to TEST.

Total revenues decreased $70.9 million, or 21.0%, to $266.4 million for the first quarter of 2019, from $337.3 million for the first quarter of 2018, reflecting lower management fees and incentive income.

Total expenses decreased $13.5 million, or 5.4%, to $237.5 million for the first quarter of 2019, from $251.0 million for the first quarter of 2018, primarily reflecting lower incentive income compensation expense, partially offset by higher compensation and benefits and general and administrative expenses.

Total other income increased $102.5 million, to $160.0 million for the first quarter of 2019, from income of $57.5 million for the first quarter of 2018. The increase primarily reflected variations in returns on our fund investments between periods.

Net income attributable to TEST Class A unitholders decreased $5.4 million, or 10.2%, to $47.3 million for the first quarter of 2019, from $52.7 million for the first quarter of 2018, primarily reflecting lower operating profits, partially offset by higher returns on our fund investments.

Operating Metrics

Assets Under Management

Assets under management were $118.6 billion as of March 31, 2019, $119.6 billion as of December 31, 2018 and $121.4 billion as of March 31, 2018. The $1.0 billion decrease since December 31, 2018 primarily reflected $3.3 billion of net outflows from open-end funds and $2.6 billion of distributions to closed-end fund investors and uncalled capital commitments, partially offset by $3.1 billion in market-value gains and $1.9 billion attributable to DoubleLine.

The $2.8 billion decrease in AUM since March 31, 2018 primarily reflected $7.6 billion of distributions to closed-end fund investors and uncalled commitments, $5.6 billion of net outflows from open-end funds, and $1.3 billion of unfavorable foreign-currency translation, partially offset by $7.1 billion of capital commitments to closed-end funds, $2.6 billion in market-value gains and $2.2 billion attributable to DoubleLine. Commitments to closed-end funds included $1.4 billion for TEST Power Opportunities Fund V (“Power V”), $1.3 billion for TEST Special Situations Fund II, $1.1 billion for CLOs, $1.1 billion for TEST Transportation Infrastructure Fund (“TIF”), $0.8 billion for our Middle Market Direct Lending strategy, $0.6 billion for our Real Estate Debt strategy and $0.6 billion for our Emerging Markets Debt strategy. Distributions to closed-end fund investors included $3.6 billion from Credit funds, $1.6 billion from Real Asset funds and $1.4 billion from Private Equity funds.

Management Fee-generating Assets Under Management

Management fee-generating AUM, a forward-looking metric, was $100.3 billion as of March 31, 2019, $98.1 billion as of December 31, 2018 and $102.0 billion as of March 31, 2018. The $2.2 billion increase since December 31, 2018 primarily reflected $2.5 billion in market-value gains, $1.9 billion attributable to DoubleLine, $1.3 billion from the start of the investment period for Power V in April 2019 and $0.6 billion from capital drawn by funds that pay fees based on drawn capital, NAV or cost basis, partially offset by $3.3 billion of net outflows from open-end funds and $0.5 billion attributable to closed-end funds in liquidation.

The $1.7 billion decrease in management fee-generating AUM since March 31, 2018 primarily reflected $5.6 billion of net outflows from open-end funds, $4.4 billion attributable to closed-end funds in liquidation, $1.2 billion in unfavorable foreign-currency translation and $0.5 billion of distributions by closed-end funds that pay fees based on NAV. These decreases were partially offset by $3.1 billion from capital drawn by closed-end funds that pay fees based on drawn capital, NAV or cost basis, an aggregate $3.0 billion from the start of the investment period for TIF in December 2018, Power V in April 2019 and new CLOs, $2.2 billion attributable to DoubleLine, $1.5 billion in market-value gains, and $0.6 billion of net inflows to evergreen funds.

Incentive-creating Assets Under Management

Incentive-creating AUM was $34.4 billion as of March 31, 2019, $34.6 billion as of December 31, 2018 and $33.0 billion as of March 31, 2018. The $0.2 billion decrease since December 31, 2018 reflected $1.6 billion in distributions, partially offset by an aggregate $1.4 billion primarily attributable to drawdowns, contributions and market-value gains. The $1.4 billion increase since March 31, 2018 reflected an aggregate $7.8 billion in drawdowns, contributions and market-value gains, partially offset by an aggregate decline of $6.4 billion primarily attributable to distributions.

Of the $34.4 billion in incentive-creating AUM as of March 31, 2019, $21.3 billion (or 62%) was generating incentives at the fund level, as compared with $19.9 billion (60%) of the $33.0 billion of incentive-creating AUM as of March 31, 2018.

Accrued Incentives (Fund Level) and Incentives Created (Fund Level)

Accrued incentives (fund level) were $1,424.9 million as of March 31, 2019, $1,722.1 million as of December 31, 2018 and $1,796.0 million as of March 31, 2018. The first quarter of 2019 reflected $88.0 million of incentives created (fund level) and $385.2 million of incentive income recognized.

Accrued incentives (fund level), net of incentive income compensation expense (“net accrued incentives”), were $678.5 million as of March 31, 2019, $811.8 million as of December 31, 2018, and $868.0 million as of March 31, 2018. The portion of net accrued incentives represented by funds that were currently paying incentives as of March 31, 2019, December 31, 2018 and March 31, 2018 was $201.5 million (or 30%), $237.0 million (29%) and $197.3 million (23%), respectively, with the remainder arising from funds that as of that date were not at the stage of their cash distribution waterfall where TEST was entitled to receive incentives, other than certain tax-related distributions.

Uncalled Capital Commitments

Uncalled capital commitments were $18.3 billion as of March 31, 2019, $19.5 billion as of December 31, 2018, and $19.6 billion as of March 31, 2018. Invested capital during the quarter and 12 months ended March 31, 2019 aggregated $2.3 billion and $10.2 billion, respectively, as compared with $2.2 billion and $7.7 billion for the comparable prior-year periods.

Non-GAAP Results

Distributable Earnings Revenues

Distributable earnings revenues increased $125.4 million, or 26.3%, to $602.7 million for the first quarter of 2019, from $477.3 million for the first quarter of 2018, as further described below.

Management Fees

Management fees decreased $12.8 million, or 6.3%, to $190.1 million for the first quarter of 2019, from $202.9 million for the first quarter of 2018. The decrease reflected an aggregate decline of $30.9 million primarily attributable to closed-end funds in liquidation and open-end funds, partially offset by an aggregate increase of $18.1 million principally from closed-end funds that pay management fees based on drawn capital, NAV or cost basis.

Incentive Income

Incentive income increased $149.6 million, or 63.5%, to $385.2 million for the first quarter of 2019, from $235.6 million for the first quarter of 2018. The first quarter of 2019 included regular and tax-related incentive income of $83.4 million and $301.8 million, respectively, as compared to $131.9 million and $103.7 million in the first quarter of 2018, respectively.

Realized Investment Income Proceeds

Realized investment income proceeds decreased $11.4 million, or 29.4%, to $27.4 million for the first quarter of 2019, from $38.8 million for the first quarter of 2018, primarily reflecting lower proceeds from our Private Equity investments.

Adjusted Expenses

Compensation and Benefits

Compensation and benefits expense increased $8.4 million, or 8.0%, to $113.2 million for the first quarter of 2019, from $104.8 million for the first quarter of 2018, primarily reflecting an unfavorable change in phantom equity expense stemming largely from each period’s change in the Class A unit trading price, as well as higher expenses related to employee benefits.

Incentive Income Compensation

Incentive income compensation expense increased $77.3 million, or 59.3%, to $207.7 million for the first quarter of 2019, from $130.4 million for the first quarter of 2018, reflecting the growth in incentive income.

General and Administrative

General and administrative expense decreased $2.5 million, or 6.7%, to $34.9 million for the first quarter of 2019, from $37.4 million for the first quarter of 2018, primarily reflecting lower placement fees associated with fundraising activities.

Depreciation and Amortization

Depreciation and amortization expense increased $0.1 million, or 4.3%, to $2.4 million for the first quarter of 2019, from $2.3 million for the first quarter of 2018.

Interest Expense, Net

Interest expense, net decreased $2.5 million, or 73.5%, to $0.9 million for the first quarter of 2019, from $3.4 million for the first quarter of 2018. The decrease was primarily driven by higher interest income.

Preferred Unit Distributions

The first quarter of 2019 included Series A and Series B preferred unit distributions of $6.8 million in the aggregate, as compared with $0 for the first quarter of 2018, reflecting the issuances of our Series A and Series B preferred units in the second and third quarters of 2018, respectively.

Distributable Earnings

Distributable earnings increased $39.9 million, or 20.6%, to $233.9 million for the first quarter of 2019, from $194.0 million for the first quarter of 2018. The increase reflected $72.4 million in higher net incentive income, partially offset by $18.9 million in lower fee-related earnings and $11.4 million in lower realized investment income proceeds. The portion of distributable earnings attributable to our Class A units was $1.46 and $1.18 per unit for the first quarters of 2019 and 2018, respectively, reflecting distributable earnings per Operating Group unit of $1.49 and $1.24, respectively, less costs borne by Class A unitholders for professional fees and other expenses, cash taxes attributable to the Intermediate Holding Companies, and amounts payable pursuant to the tax receivable agreement.

Fee-related Earnings

Fee-related earnings decreased $18.9 million, or 32.3%, to $39.6 million for the first quarter of 2019, from $58.5 million for the first quarter of 2018, primarily reflecting $12.8 million in lower management fees and $8.4 million in higher compensation and benefits expense, partially offset by $2.5 million in lower general and administrative expense.

The effective tax rates applicable to fee-related earnings for the first quarters of 2019 and 2018 were 6% and 4%, respectively, resulting from full-year effective tax rates of 6% for both periods. The rate used for interim fiscal periods is based on the estimated full-year effective tax rate, which is subject to change as the year progresses. In general, the annual effective tax rate increases as annual fee-related earnings increase, and vice versa.

Capital and Liquidity

As of March 31, 2019, TEST and its operating subsidiaries had $1.0 billion of cash and U.S. Treasury and other securities, and $746 million of outstanding debt, which included no borrowings outstanding against its $500 million revolving credit facility. As of March 31, 2019, TEST’s investments in funds and companies on a non-GAAP basis had a carrying value of $1.7 billion, with the 20% investment in DoubleLine carried at $33 million based on cost, as adjusted under the equity method of accounting. Net accrued incentives (fund level) represented an additional $679 million as of that date.

Forward-Looking Statements and Information

This release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, which reflect the current views of TEST, with respect to, among other things, its future results of operations and financial performance. In some cases, you can identify forward-looking statements and information by words such as “anticipate,” “approximately,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “seek,” “should,” “will” and “would” or the negative version of these words or other comparable or similar words. These statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those indicated in these statements. Forward-looking statements are based on TEST’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Such forward-looking statements and information are subject to risks and uncertainties and assumptions relating to TEST’s operations, financial results, financial condition, business prospects, growth strategy and liquidity.

In addition to factors previously disclosed in BW-ABC’s and TEST’s reports filed with securities regulators in Canada and the United States and those identified elsewhere in this release, the following factors, among others, could cause actual results to differ materially from forward-looking statements and information or historical performance: the occurrence of any event, change or other circumstances that could give rise to the right of one or both of BW-ABC and TEST to terminate the definitive merger agreement between BW-ABC and TEST; the outcome of any legal proceedings that may be instituted against BW-ABC, TEST or their respective unitholders, shareholders or directors; the ability to obtain regulatory approvals and meet other closing conditions to the merger, including the risk that regulatory approvals required for the merger are not obtained or are obtained subject to conditions that are not anticipated or that are material and adverse to BW-ABC’s or TEST’s business; a delay in closing the merger; the ability to obtain approval by TEST’s unitholders on the expected terms and schedule; business disruptions from the proposed merger that will harm BW-ABC’s or TEST’s business, including current plans and operations; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger; certain restrictions during the pendency of the merger that may impact BW-ABC’s or TEST’s ability to pursue certain business opportunities or strategic transactions; the ability of BW-ABC or TEST to retain and hire key personnel; uncertainty as to the long-term value of the Class A shares of BW-ABC following the merger; the continued availability of capital and financing following the merger; the business, economic and political conditions in the markets in which BW-ABC and TEST operate; changes in TEST’s or BW-ABC’s anticipated revenue and income, which are inherently volatile; changes in the value of TEST’s or BW-ABC’s investments; the pace of TEST’s or BW-ABC’s raising of new funds; changes in assets under management; the timing and receipt of, and impact of taxes on, carried interest; distributions from and liquidation of TEST’s existing funds; the amount and timing of distributions on TEST’s preferred units and Class A units; changes in TEST’s operating or other expenses; the degree to which TEST or BW-ABC encounters competition; and general political, economic and market conditions.

Any forward-looking statements and information speak only as of the date of this release or as of the date they were made, and except as required by law, neither BW-ABC nor TEST undertakes any obligation to update forward-looking statements and information. For a more detailed discussion of these factors, also see the information under the caption “Business Environment and Risks” in BW-ABC’s most recent report on Form 40-F for the year ended December 31, 2018, and under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in TEST’s most recent report on Form 10-K for the year ended December 31, 2018, and in each case any material updates to these factors contained in any of BW-ABC’s or TEST’s future filings.

As for the forward-looking statements and information that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given these uncertainties, you should not place any reliance on these forward-looking statements and information.

This release and its contents do not constitute and should not be construed as (a) a recommendation to buy, (b) an offer to buy or solicitation of an offer to buy, (c) an offer to sell or (d) advice in relation to, any securities of TEST or securities of any TEST investment fund.

Important Additional Information and Where to Find It

In connection with the proposed merger, BW-ABC will file with the SEC a registration statement on Form F-4 that will include the consent solicitation statement of TEST and a prospectus of BW-ABC, as well as other relevant documents regarding the proposed transaction. A definitive consent solicitation statement/prospectus will also be sent to TEST’s unitholders. This release does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.

INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE CONSENT SOLICITATION STATEMENT/PROSPECTUS REGARDING THE MERGER WHEN IT BECOMES AVAILABLE AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.

A free copy of the consent solicitation statement/prospectus, as well as other filings containing information about TEST and BW-ABC, may be obtained at the SEC’s Internet site (http://www.sec.gov). You will also be able to obtain these documents, free of charge, from TEST by accessing TEST’s website at ir.TESTcapital.com or from BW-ABC by accessing BW-ABC’s website at bam.BW-ABC.com/reports-and-filings. Copies of the consent solicitation statement/prospectus can also be obtained, free of charge, by directing a request to TEST Investor Relations at Unitholders – Investor Relations, TEST Capital Management, L.P., 333 South Grand Ave., 28th Floor, Los Angeles, CA 90071, by calling (213) 830-6483 or by sending an e-mail to investorrelations@TESTcapital.com or to BW-ABC Investor Relations by calling (416) 359-8647 or by sending an e-mail to enquiries@BW-ABC.com.

TEST and certain of its directors and executive officers may be deemed to be participants in the solicitation of proxies from TEST unitholders in respect of the transaction described in the consent solicitation statement/prospectus. Information regarding TEST’s directors and executive officers is contained in TEST’s Annual Report on Form 10-K for the year ended December 31, 2018, which is filed with the SEC. Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the consent solicitation statement/prospectus regarding the proposed merger when it becomes available. Free copies of this document may be obtained as described in the preceding paragraph.

Investor Relations Website

Investors and others should note that TEST uses the Unitholders – Investor Relations section of its corporate website to announce material information to investors and the marketplace. While not all of the information that TEST posts on its corporate website is of a material nature, some information could be deemed to be material. Accordingly, TEST encourages investors, the media, and others interested in TEST to review the information that it shares on its corporate website at the Unitholders – Investor Relations section of the TEST website, ir.TESTcapital.com. Information contained on, or available through, our website is not incorporated by reference into this document.

GLOSSARY

Accrued incentives (fund level) represents the incentive income that would be paid to us if the funds were liquidated at their reported values as of the date of the financial statements. Incentives created (fund level) refers to the gross amount of potential incentives generated by the funds during the period, and includes our pro-rata portion of performance fees attributable to our minority interest in DoubleLine earned in the period. We refer to the amount of accrued incentives recognized as revenue by us as incentive income. Amounts recognized by us as incentive income are no longer included in accrued incentives (fund level), the term we use for remaining fund-level accruals. Incentives created (fund level), incentive income and accrued incentives (fund level) are presented gross, without deduction for direct compensation expense that is owed to our investment professionals associated with the particular fund when we earn the incentive income. We call that charge “incentive income compensation expense.” Incentive income compensation expense varies by the investment strategy and vintage of the particular fund, among many factors.

Assets under management (“AUM”) generally refers to the assets we manage and equals the NAV of the assets we manage, the leverage on which management fees are charged, the undrawn capital that we are entitled to call from investors in our funds pursuant to their capital commitments, and our pro-rata portion of AUM managed by DoubleLine in which we hold a minority ownership interest. For our CLOs, AUM represents the aggregate par value of collateral assets and principal cash, for our publicly-traded BDCs, gross assets (including assets acquired with leverage), net of cash, and for DoubleLine funds, NAV. Our AUM includes amounts for which we charge no management fees.

Class A units refer to the common units of TEST designated as Class A units.

Consolidated funds refers to the funds and CLOs that TEST is required to consolidate as of the respective reporting date.

Distributable earnings (“DE”) is a non-GAAP performance measure of profitability for our investment management business. DE reflects our realized earnings, after deducting preferred unit distributions, at the Operating Group level without the effects of the consolidated funds for the purpose of, among other things, assisting in the determination of equity distributions from the Operating Group. However, the declaration, payment and determination of the amount of equity distributions, if any, is at the sole discretion of our board of directors, which may change our distribution policy at any time. DE revenues include the portion of the earnings from management fees and performance fees attributable to our 20% ownership interest in DoubleLine, which are reflected as investment income in our GAAP statements of operations. DE excludes (a) unrealized incentive income and the associated incentive income compensation expense, (b) unrealized gains and losses resulting from foreign-currency transactions and hedging activities, and (c) excludes investment income or loss, which is largely non-cash in nature, and includes the portion of income or loss on distributions received from funds and companies. DE also excludes (a) non-cash equity-based compensation expense, (b) acquisition-related items, including amortization of intangibles, changes in the contingent consideration liability and costs related to the BW-ABC transaction, (c) income taxes and other income or expense applicable to TEST or its Intermediate Holding Companies, and (d) non-controlling interests. In addition, any make-whole premium charges related to the repayment of debt are, for DE purposes, amortized through the original maturity date of the repaid debt.

Distributable earnings-Class A, or distributable earnings per Class A unit, is a non-GAAP performance measure calculated to provide Class A unitholders with a measure that shows the portion of DE attributable to their ownership. Distributable earnings-Class A represents DE, including the effect of (a) the TESTH non-controlling interest, (b) expenses such as current income tax expense applicable to TEST or its Intermediate Holding Companies, and (c) amounts payable under a tax receivable agreement. The income tax expense included in distributable earnings-Class A represents the implied current provision for income taxes calculated using an approach similar to that which is used in calculating the income tax provision for GAAP.

Fee-related earnings (“FRE”) is a non-GAAP performance measure that we use to monitor the baseline earnings of our business. FRE is a component of DE and is comprised of management fees (“fee revenues”) less operating expenses other than incentive income compensation expense and non-cash equity-based compensation expense. FRE is considered baseline because it excludes all non-management fee revenue sources and applies all cash compensation and benefits other than incentive income compensation expense, as well as all general and administrative expenses, to management fees, even though those expenses also support the generation of incentive and realized investment income proceeds. FRE is presented before income taxes.

Fee-related earnings-Class A, or fee-related earnings per Class A unit, is a non-GAAP performance measure calculated to provide Class A unitholders with a measure that shows the portion of FRE attributable to their ownership. Fee-related earnings-Class A represents FRE including the effect of (a) the TESTH non-controlling interest, (b) other income or expenses, such as income tax expense, applicable to TEST or its Intermediate Holding Companies and (c) any Operating Group income taxes attributable to TEST. Fee-related earnings-Class A income taxes is calculated excluding any incentive income or investment income (loss).

Incentive income is generally recognized for our closed-end funds only after the fund has distributed all contributed capital plus an annual preferred return (commonly referred to as the European-style waterfall) and, for our evergreen funds, on an annual basis up to 20% of the year’s profits, subject to a high-water mark or hurdle rate. For non-GAAP reporting, incentive income also includes the portion of the performance fees attributable to our minority equity interest in DoubleLine earned in the period.

Intermediate Holding Companies collectively refers to the subsidiaries wholly owned by us.

Invested capital reflects deployed capital, whether involving drawn or recycled equity capital, or borrowings from fund-level credit facilities. This metric is used in connection with incentive-creating closed-end funds and certain evergreen funds.

Management fees are recognized over the period in which our investment advisory services are performed and for non-GAAP reporting include the portion of the earnings from management fees attributable to our minority equity interest in DoubleLine.

Net asset value (“NAV”) refers to the value of all the assets of a fund (including cash and accrued interest and dividends) less all liabilities of the fund (including accrued expenses and any reserves established by us, in our discretion, for contingent liabilities) without reduction for accrued incentives (fund level) because they are reflected in the partners’ capital of the fund.

TEST, TEST, we, us, our or the Company refers to TEST Capital Group, LLC and, where applicable, its subsidiaries and affiliates.

TEST Operating Group (“Operating Group”) refers collectively to the entities in which we have a minority economic interest and indirect control that either (i) act as or control the general partners and investment advisers of our funds or (ii) hold interests in other entities or investments generating income for us.

Preferred units or preferred unitholders refer to the Series A and Series B preferred units of TEST or Series A and Series B preferred unitholders, respectively, unless otherwise specified.

Relevant Benchmark refers, with respect to:

Sharpe Ratio refers to a metric used to calculate risk-adjusted return. The Sharpe Ratio is the ratio of excess return to volatility, with excess return defined as the return above that of a riskless asset (based on the three-month U.S. Treasury bill, or for our European Senior Loan product, the Euro Overnight Index Average) divided by the standard deviation of such return. A higher Sharpe Ratio indicates a return that is higher than would be expected for the level of risk compared to the risk-free rate.

Uncalled capital commitments represent undrawn capital commitments by partners (including TEST as general partner) of our closed-end funds through their investment periods and certain evergreen funds. If a fund distributes capital during its investment period, that capital is typically subject to possible recall, in which case it is included in uncalled capital commitments.

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SOURCE: TEST Capital Group, LLC

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