Jz Capital Regulatory News (JZCP)

JZ CAPITAL PARTNERS LIMITED

(Registration No. 48761)

Registered Office:

2ND FLOOR, REGENCY COURT, GLATEGNY ESPLANADE, ST. PETER PORT,

GUERNSEY, GY1 3NQ, CHANNEL ISLANDS.

___________________________

TELEPHONE: + 44 1481 720321

FACSIMILE: + 44 1481 716117

E-MAIL: JZCP@bfgl.com

30 November 2010

JZ Capital Partners

Proposed amendment to the Advisory Agreement relating to the management of the Company's assets and the putting in place of specific carry arrangements with The Europe Fund

And

Approval of Fund A Investment Documents

The Board has published a circular (the "Circular") giving further details of proposals to amend the Advisory Agreement with its Investment Adviser and to enter into a co-investment agreement with Fund A, a new fund being raised by Jay Jordan and David Zalaznick. Terms used in the circular have the same meaning as this announcement.

Introduction

The Company's corporate objectives are to create a portfolio of investments in businesses providing a superior overall return on investment comprised of a current yield and significant capital appreciation. The main driver for the achievement of these objectives lies in JZCP's Micro-Cap investment strategy.

The most recent interim results referred to:

i. the evolution of the investment strategy for Europe; and

ii. the proposals for an agreement with Fund A, to co-invest up to US$150 million alongside the Company on a 50:50 basis in equity investments in US Micro-Cap Buyouts.

Since the Company's most recent interim results, JZCP (in conjunction with Round Table Healthcare Partners ("Round Table")) participated in the purchase of Salter Labs, Inc., a manufacturer of single and multi-use respiratory medical products and equipment for the homecare, hospital and sleep disorder markets. JZCP purchased US$6 million of 15% subordinated notes (representing 30% of the issued notes), US$15 million of preferred stock (representing 20% of the issued preferred stock), and approximately 18% of the company's common stock. JZCP's total investment was US$22 million. We are excited to be partners with Round Table, who has an excellent record in purchasing, managing and selling healthcare businesses.

With respect to both the European strategy and the co-invest arrangements with Fund A, certain developments which are currently envisaged involve proposals which constitute Related Party Transactions ("JZCP Related Party Transactions") for which Shareholder approval is required. 

The purpose of the Circular is to provide Shareholders with details of, and background to the JZCP Related Party Transactions, to explain why the JZCP Related Party Transactions are in the best interests of the Shareholders, to explain why the Board is seeking Shareholder approval and to recommend that shareholders vote in favour of the Resolutions set out in the notice of general meeting.

Background to the Company and the Investment Adviser

The Company is a Guernsey-incorporated closed-ended investment company. The Company's investment adviser is Jordan/Zalaznick Advisers, Inc ("JZAI"), a well-seasoned team of highly skilled professionals led by Jay Jordan and David Zalaznick. JZAI's role is governed by the terms of the Advisory Agreement and in summary is that of an investor/partner working closely with management of portfolio companies to provide strategic counsel, arrange capital for expansion and advise on acquisitions and mergers. JZAI works closely with The Jordan Company LP, a New York based private investment limited partnership, which was founded by David Zalaznick and Jay Jordan.

As discussed further below, Jay Jordan and David Zalaznick are also members of Fund A, Fund A GP, Fund A Manager and the Company's new European venture, The Europe Fund.

1. The Europe Fund Related Party Transaction

Background to The Europe Fund

The Company made a proposal to its Shareholders earlier this year to vary its investment strategy in order to pursue its ambition to invest in European Micro Cap companies and build a European investment portfolio. At the Company's most recent AGM, the Shareholders granted their approval to the Company investing up to 20 per cent of its portfolio outside of the United States specifically so as to allow investment in EuroMicrocap Fund 2010 LP ("The Europe Fund"), a new fund then being promoted by the principals of JZ International Limited ("JZI"), the European private equity platform founded in 1999 by David Zalaznick, Jay Jordan and Jock Green-Armytage.

As explained to Shareholders at that time, any investment by the Company in The Europe Fund was to be on the basis that the Company did not suffer the double payment of fees. This was to have been achieved by the Europe Fund not charging such fees to the Company (but only to third party investors).

The Europe Fund was established with the view to raising €250 million to €300 million with the Company committing €30 million, drawable at the average rate of €5 million per year over six years and the remainder being provided by third party investors. 

The Europe Fund intends to invest principally in equity in pan-European buy-outs focussing on UK, Netherlands, Germany, Spain and Italy. The Europe Fund may also make debt investments in its portfolio companies, provided that such investment does not exceed 30% of the fund's capital commitments.

Initial and proposed investments by The Europe Fund

The Europe Fund has found that the fundraising process had been slower than expected. However the deal flow introduced by its investment manager has been very robust and the opportunities very compelling. 

The fund was presented with its first investment opportunity in July of this year and so that this investment opportunity was not missed, JZCP invested in The Europe Fund as the sole institutional investor ahead of The Europe Fund's full capitalisation.

This initial investment saw The Europe Fund acquiring a 65 per cent interest in Factor Energia, a leading energy services business in the recently deregulated electricity market in Spain. Based on the maximum consideration, the historic transaction multiple is 6.5x 2009 EBITDA, a very reasonable multiple for a business enjoying strong growth. 

In addition, a number of other investment opportunities in Spain are under letter of intent to JZI. These opportunities are likely to require funding before there is any likelihood that The Europe Fund will be fully capitalised and in a position to invest in these deals.

The Europe Fund investment constitution

Given the position in respect of capitalising The Europe Fund, as we reported in the Company's most recent interim results, it is proposed that The Europe Fund should be a fund in which the only investors are the Company and (as to not more than 25 per cent.) David Zalaznick, Jay Jordan and potentially the JZI team and which is managed by the JZI team (through JZI or another affiliate of JZAI).

It is possible that third-party investors could be admitted to the fund in due course if it is felt appropriate to spread risk or size demands it, but only with the approval of the board. The Company, David Zalaznick and Jay Jordan (and, if applicable, the JZI team) will invest in The Europe Fund on identical terms.

Proposed Amendment to the Advisory Agreement

In view of The Europe Fund not having third-party investors and in order to avoid rewarding or penalising the management teams of both the Company and The Europe Fund and their respective portfolios, it is no longer felt appropriate that no capital incentive fee ("Carry") is payable to the JZI management team by the Company under The Europe Fund arrangements. This is because, whilst the JZI team managing The Europe Fund would share in the 20% Carry payable under the Advisory Agreement, such Carry is based on the performance of the Company's overall investment portfolio and not limited to the European assets which the JZI team will be managing. We, therefore, propose ring fencing the two parts of the Company's investment portfolio (US and Europe) in relation to the payment of Carry.

It is therefore proposed that the payment of the Carry under the Advisory Agreement be amended such that it excludes the Company's assets in The Europe Fund. There will be no change to the basis on which the rate of fees are calculated. This will be achieved by: (a) putting in place a specific Carry arrangement for The Europe Fund (whereby The Europe Fund pays to JZI fees based solely on the performance of The Europe Fund's assets); and (b) amending the Carry arrangements in the Advisory Agreement so that they exclude the performance of The Europe Fund's assets. And in so doing, the "no double fees" concept, which was explained in the Company's most recent annual report, will be upheld. 

The Directors believe that the opportunity to participate in investment opportunities in Europe, which JZI can make available and the diversification that this offers is in the best interests of Shareholders. The Directors are encouraged by the quality of the first investment in Europe. The Directors believe that the proposed amendments to the Advisory Agreement will ensure a clear delineation between the Carry deserved by each of the JZAI and JZI investment teams and will incentivise them both in their own right by ring-fencing the two parts of the investment portfolio for the purpose of calculating and paying Carry and as such are in the best interests of Shareholders.

The proposed change to the Advisory Agreement and the carry arrangements of The Europe Fund is considered a Related Party Transaction under the Listing Rules as it is a variation to an existing agreement with a related party ("The Europe Fund Related Party Transaction") and requires approval of the Ordinary Shareholders. In the event that the Ordinary Shareholders do not approve these changes the Carry will continue to be paid pursuant to the terms of the Advisory Agreement (i.e. that the Carry payable will not differentiate between the Company's overall investment portfolio and the European assets and the respective management teams to whom it should be awarded) and no separate Carry will be payable for The Europe Fund. 

Approval of The Europe Fund Related Party Transaction

The Europe Fund Related Party Transaction will be subject to shareholder approval pursuant to Resolution 1 to be proposed as an ordinary resolution at the General Meeting of the Company which has been convened, pursuant to the notice of general meeting contained in the Circular. Only the Ordinary Shareholders are entitled to vote on Resolution 1 at the General Meeting. The Europe Fund Related Parties have undertaken not to vote on Resolution 1 at the General Meeting and have taken all reasonable steps to ensure that their associates will not vote on Resolution 1 at the General Meeting.

The general meeting will be held at 10.30 a.m. on 23 December 2010 at 2nd Floor Regency Court, Glategny Esplanade, St Peter Port, Guernsey GY1 3NQ.

2. Fund A Related Party Transaction

Background to the co-invest arrangements with Fund A

The Company's prospectus in May 2009 and the most recent interim results outlined plans for JZAI to launch a new limited partnership ("Fund A") to co-invest up to US$150 million alongside the Company on a 50:50 basis in future equity investments in US Micro-Cap Buyouts particularly through new Platform Companies (Testing Services Holdings, Inc., Industrial Services Solutions Holdings Corporation, Sensors Solutions Holdings Corporation, Specialty Foods and Tri-Water Holdings Corporation) which the Company recently set up for strategic build ups in five targeted sectors. 

The primary intention is for JZCP and Fund A to invest in equity, meaning common equity and its typical associated components, preferred equity and sometimes sub-debt. However JZCP will also be entitled, on its own or with Fund A, to invest in senior or other debt in investee companies. Further information on the co-investment arrangements with Fund A are explained below.

The Board believes that the Company has a satisfactory spread of investment risk. Nonetheless, the Board considers that by dividing US Micro-Cap equity investment opportunities between the Company and Fund A it will have the benefit of further mitigating against concentration risk in the Company's investment portfolio. 

Jay Jordan and David Zalaznick comprise the senior personnel of the general partner of Fund A ("Fund A GP"), the manager of Fund A ("Fund A Manager") and Fund A's senior investment team. JZAI, the Company's Investment Adviser, is party to the co-investment arrangements. 

Status of capitalisation of and co-investment arrangements with Fund A

JZAI have now established Fund A and the Company proposes to enter into the summary of principal terms of Fund A's investment strategy (the "Summary of Principal Terms") and the accompanying terms and conditions on which the parties will co-invest together (the "Memorandum of Understanding"). As explained further below, entry into these documents is conditional on Shareholder approval.

To date, Fund A has raised US$47 million, of which US$25 million has been committed by Jay Jordan and David Zalaznick. This should enable JZCP and Fund A to co-invest for the time being in the proportions of approximately 3:1 unless and until Fund A raises further capital.

Upon receipt of Shareholder approval, the documents will, once executed, have retrospective effect from 30 April 2010. They will also include qualifying investments made from that date, namely investments in and through the Platform Companies as well as Salter Labs, Inc. on the approximate ratio as between the Company and Fund A of 3:1, although the terms of the co-investment arrangement include transitional 'phasing-in' provisions to enable and oblige Fund A (as it reaches a capitalisation of US$150 million) to increase its co-investment ratio with JZCP until 31 May 2011 to a ratio of up to 50:50.

The Company also proposes to sign up to a co-investment letter with the Investment Adviser, pursuant to which the Company will acknowledge the recommendation by the Investment Adviser for the Company to participate in investments with Fund A the "Co-Investment Letter"). 

Platform Companies and further capitalisation

An important part of JZCP's US Micro-Cap investment strategy is based on the five new Platform Companies and their strategic build up. If this strategy evolves as planned it could involve a total investment requirement of some US$600 million by various investors, including JZCP. The Company would expect, as with the majority of its US Micro-Cap investments, to be investing alongside its Bolder partners, Edgewater. Although the Company's balance sheet has a strong element of liquidity it may struggle to find 50 per cent. of such an investment programme. Therefore, access to the capital of a like-minded co-investor is welcome in this regard as well as potentially permitting the Company to diminish the concentration risk in its portfolio.

Approval of Fund A Investment Documents

As mentioned in the Company's 2010 Annual Report, Jay Jordan and David Zalaznick as founders and principals of JZAI and JZI, may be perceived to benefit from a proposed arrangement that would divert existing uncommitted funds into a new fund managed by them. The same can be considered of their own investment in Fund A. In addition, they will receive financial reward for advising Fund A. For this reason, the proposed co-investment with Fund A is considered a Related Party Transaction and requires approval of the Ordinary Shareholders. In the event that the Shareholders do not approve the entry into the Fund A Investment documents, the Company will not be subject to the co-investment arrangements with Fund A and may not have the benefit of being able to further mitigate against concentration risk in its investment portfolio.

Approval of Fund A Related Party Transaction

The co-invest arrangement with Fund A is a Related Party Transaction ("Fund A Related Party Transaction"). The proposed Fund A Related Party Transaction will be subject to shareholder approval pursuant to Resolution 2 to be proposed as an ordinary resolution at the General Meeting. Only the Ordinary Shareholders are entitled to vote on Resolution 2 at the General Meeting. The Fund A Related Parties have undertaken not to vote on Resolution 2 at the General Meeting and have taken all reasonable steps to ensure that their associates will not vote on Resolution 2 at the General Meeting.

The Resolutions are not inter-conditional and should one fail to be passed, this will not prevent the other from either being proposed or approved.

A copy of the Circular has been forwarded to the Financial Services Authority and submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.Hemscott.com/nsm.do.

Enquiries

Butterfied Fulcrum Group (Guernsey) Limited

Tel: 01481 720 321