February 22, 2018 | 3409-7 1© 2017 Provasi Capital Partners MEMBER FINRA/SIPC 3409-7 | 3250 – NLD – 2/20/2018
Investing in Residential Mortgage Notes for Portfolio Income
Investor PresentationFourth Quarter 2017
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Investors should carefully consider the investment objectives, risks, charges and expenses of Vertical Capital Income Fund. This and other important information about the Fund is contained in the Prospectus, which can be obtained by calling 866.655.3600 or visiting provasicapital.com/microsites/vertical-capital-income-fund. The prospectus should be read carefully before investing.
Investing involves risk including possible loss of principal. Vertical Capital Income Fund is a closed-end fund operated as an interval fund, which means shares are offered for purchase daily, but redemptions are limited. The Fund will conduct quarterly repurchase offers of from 5% to 25% of the Fund’s outstanding shares at net asset value. If the amount of liquidity available is exceeded, the Fund will pay out redemptions on a pro-rata basis. Even though the Fund will make quarterly repurchase offers, investors should consider the Fund’s shares to have limited liquidity.
The Fund invests substantially all its assets in groups or packages of income-producing loans secured by real estate, which are difficult to value. Up to 10% of the loans in the group or package may be delinquent or in default. The Fund will not purchase loans that currently are in foreclosure; however, loans acquired by the Fund may go into foreclosure subsequent to acquisition by the Fund. The Fund will acquire loans of borrowers with varying credit histories and may invest up to approximately 10% of its assets in loans that were classified as “sub-prime” at the time of origination.
Securities may be subject to prepayment risk because issuers are typically able to prepay principal. The Fund will not invest in real estate directly, but, because the Fund will invest the majority of its assets in securities secured by real estate, its portfolio will be significantly impacted by the performance of the real estate market and may experience more volatility and be exposed to greater risk than a more diversified portfolio. Quarterly repurchases by the Fund of its shares typically will be funded from available cash or sales of portfolio securities. The sale of securities to fund repurchases could reduce the market price of those securities, which in turn would reduce the Fund’s net asset value.
There is a risk that issuers and counterparties will not make payments on securities and other investments held by the Fund, resulting in losses to the Fund. In general, the price of a fixed income security falls when interest rates rise. A specific security can perform differently from the market as a whole for reasons related to the issuer, such as an individual’s economic situation.
The Barclays Capital U.S. Mortgage Backed Securities (MBS) Index covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The Barclays Capital U.S. Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The S&P 500 Index is a total return index that is reflective of the performance of large U.S. companies in general. Unmanaged index returns reflect reinvestment of dividends but do not reflect any fees, expenses or sales charges. Investors cannot directly invest in an index.
Vertical Capital Income Fund is distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Wholesale distribution services are provided by Provasi Capital Partners LP. Provasi Capital Partners LP and Oakline Advisors, LLC are not affiliated with Northern Lights Distributors, LLC. Provasi Capital Partners LP and Oakline Advisors, LLC are affiliated entities. This material has been prepared by Provasi Capital Partners LP on behalf of the issuer.
Provasi Capital Partners LP is a member of FINRA/SIPC.
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Investor Goals Remain the Same
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Goal 1: Goal 2: Goal 3:
Meaningful growth over time
Current income to help overcome inflation
Capital preservationto avoid dramatic downdrafts
There is no assurance that the Fund will achieve its investment objectives.
February 22, 2018 | 3409-7
Today’s Investment Challenges
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Yesterday’s strategies
will not solve
today’s investment
challenges.
1. Traditional solutions don’t work like they used to
Volatility creates an investment rollercoaster of producing, then giving back gains.
Near-zero interest rates for the past seven years have reduced the ability of fixed-income investments to mitigate risk and provide income.
2. Portfolio diversification is harder to achieve than ever before
Market globalization increases correlation of assets, making traditional allocationmodels less effective.
High-tech systems integration amplifies market swings and impacts investor portfolios in real time.
Automated investment algorithms can distort market reactions to global events, which may leadinvestors to make hasty decisions with damaging consequences.
3. Time often works against investors
Insufficient time to recover from a prolonged down market.
Market stress can make investors question whether to stick with an investment strategyfor the long haul.
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A Solution: ResidentialMortgage Notes
Residential mortgage notes are a privately tradedinvestment that traditionally has been inaccessibleto most investors.
As a relatively new asset class for individual investors, mortgages may offer the potential for:
• Income – Driven by regular mortgage paymentsby homeowners
• Capital appreciation – Created by the real estatevalue underlying the notes
• Downside protection – Secured by the value of the home
• Diversification – Asset class shows low correlationto traditional stocks and bonds
Why Residential Mortgages?
An investment in residential mortgage notes offers unique risks not found in traditional fixed income securities, including the risk of default by mortgage holders, prepayment risk, interest rate risk, and the risk that home values may change. These and other risks are outlined in the prospectus, which should be read carefully before investing.
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The Mortgage Market
Please note that the chart above is not intended to be a representation of the relative size of the primary (agency) or secondary (negotiated) market for wholeresidential mortgages. Current data as of December 2016 indicates that about 20% of residential mortgages are not available to be sold to agencies for various reasonsand thus would be considered eligible for the secondary market.
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Fund Overview
What is Vertical Capital Income Fund?An income-oriented Fund that invests primarily in individual performing
residential mortgage notes issued by banks and sold in the secondary
marketplace.
How is the Fund structured?The Fund is a continuously-offered, closed-end 1940-Act fund, featuring daily
pricing and daily purchases, transparency of holdings and quarterly redemption
periods.
Who manages the Fund?A team with extensive experience in real estate investment, development and
management provides in-depth credit analysis on hundreds of investment
opportunities, with support from analysts with extensive origination, collateral,
and underwriting experience in both acquisitions and dispositions of residential
mortgages and assets.
How can the Fund benefit investors?Investors may potentially benefit from an attractive stream of income and the
potential for capital appreciation in a strategy with low correlation to traditional
asset classes, serving as a new solution within a core fixed income portfolio.
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The Fund will not invest in real estate directly, but, because the Fund will invest the majority of its assets in securities secured by real estate, its portfolio will be significantly impacted by the performance of the real estate market and may experience more volatility and be exposed to greater risk than a more diversified portfolio.
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Investment Process
Security Selection
Collateral• Home Value• Location• Property Type• Quick Sale Value
Loan• Performing• Seasoned• First Lien • Interest Rate
Borrower• Payment History• FICO Score• Debt-to-Income• Prior Credit Events
There is no assurance that the Fund will achieve its investment objectives.
Portfolio Construction
Discount20% + to face value
DiversificationBy state and city
IncomeSteady, Predictable
CreditworthyLikelihood of repayment
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Investment Process
Three possible outcomes ...
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1. Payoff of Note
2. Sell Note to Third Party
3. Foreclosure / Real Estate Owned
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Process in Action
Fund Aggregate Fund Average
Acquisition Cost $135,738,675 $150,486
Acquisition Unpaid Balance $169,566,764 $187,990
Discount at Acquisition $33,828,090 $37,504
Aggregate Value of Homes $212,013,914 $235,049
Figures as of 12/31/2017.
Portfolio holdings are subject to change. Acquisition Cost represents the original cost of the mortgage notes acquired by the Fund. Acquisition Unpaid Balance represents the amount outstanding on the mortgage notes at the time of purchase by the Fund. Discount at Acquisition is the difference between the loan purchase price and unpaid balance at time of purchase. Aggregate Value of Homes is the total assigned market value of the homes represented by the notes in the portfolio.
Acquisition Price(as % of Unpaid Balance)
80.05%
Acquisition Price(as % of Collateral Value)
69.72%
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Growth of $10,000
Growth of a Hypothetical $10,000 Investment From Inception*
Past performance is neither indicative nor a guarantee of future results.
The Barclays Capital U.S. Mortgage Backed Securities (MBS) Index covers agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Investors cannot directly invest in an index and unmanaged index returns reflect reinvestment of dividends but do not reflect any fees, expenses or sales charges. Fund returns are at net asset value, reflect all fund expenses, and include reinvested dividends.
This hypothetical example is intended for illustrative purposes only, and is not intended as an offer or solicitation to adopt a particular investment strategy or to purchase or sell any security. Provasi Capital Partners does not represent, warrant or guarantee that this material is accurate, complete or suitable for any purpose and it should not be used as a basis for investment decisions. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon or used in substitution for the exercise of independent judgment.
*Fund inception was 12/30/2011.
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Summary
IncomeBy investing primarily in whole residential mortgage loans, the Fundoffers the potential for attractive income, as homeowners pay their mortgages regardless of the interest rate environment.
Reduced VolatilityThe Fund follows a strategy influenced by value investors Graham & Dodd, purchasing assets at a discount to face value and holding them until that value is realized, which may offer a margin of safety.
DiversificationWhole mortgage notes have historically shown low correlation to traditional asset classes such as stocks and bonds, and can serve as a diversifier for core income portfolio and equity portfolios alike.
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The Fund offers the potential for …
The Fund invests substantially all its assets in groups or packages of income-producing loans secured by real estate, which are difficult to value. Up to 10% of the loans in the group or package may be delinquent or in default. The Fund will not purchase loans that currently are in foreclosure; however, loans acquired by the Fund may go into foreclosure subsequent to acquisition by the Fund. The Fund will acquire loans of borrowers with varying credit histories and may invest up to approximately 10% of its assets in loans that were classified as “sub-prime” at the time of origination.
February 22, 2018 | 3409-7
Appendix
1 Fund Performance
2 Distributions and Portfolio Statistics
3 Portfolio Managers & Investment Team
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Fund Performance
Past performance is neither indicative nor a guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. The investment return and principal value of an investment will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. For performance information current to the most recent month-end, please go to provasicapital.com or call toll-free 866-655-3600.
1. Restated.2. The Adviser and the Fund have entered into an expense limitation and reimbursement agreement under which the Adviser has agreed contractually to waive its fees and to pay or absorb the ordinary annual operating expenses of the Fund (including offering expenses, but excluding interest, brokerage commissions, acquired fund fees and expenses and extraordinary expenses), through at least January 31, 2019, to ensure that the net annual Fund operating expenses will not exceed 1.85%, subject to possible recoupment from the Fund in future years. Without these waivers, the fund's returns would be lower.
Fund Operating Expenses – Prospectus dated January 19, 2018Class A Shares
Management Fees 1.25%
Interest Payments and Fees on Borrowed Funds 0.14%
Other Expenses
Distribution Fee 0.00%
Shareholder Servicing Expenses 0.25%
Remaining Other Expenses 1.22%
Total Annual Expenses 2.86%
Fee Waiver (0.87%)2
Total Annual Fund Expenses (after waiver) 1.99%
As of December 31, 2017 4Q2017 YTD 1 Year 3 Year 5 YearSince
Inception
Class A shares, At NAV 3.49% 6.76% 6.76% 9.09% 8.00% 8.80%
Class A shares, Max Sales Load -1.15% 1.94% 1.94% 7.42% 7.02% 7.97%
Barclays Capital U.S. Mortgage Backed Securities Index 0.15% 2.47% 2.47% 1.92% 2.05% 2.13%
Barclays U.S. Aggregate Bond Index 0.39% 3.54% 3.54% 2.30% 2.08% 2.45%
S&P 500 Index 6.64% 21.83% 21.83% 10.85% 16.18% 15.83%
Inception date: December 31, 2011
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Distributions and Risk/ReturnAs of 12/31/2017
Amount
Trailing 3 Months $0.15713
Trailing 1 Year $0.47672
Trailing 12-month Distribution Rate 3.82%
SEC 30-day Distribution Rate 2.69%
SEC Yield calculated according to SEC form N-1A. Trailing 12-month distribution rate is calculated by annualizing the sum of all income distributions over the preceding 12 months divided by the fund’s NAV at the date of publication. Had expenses not been reduced, the Fund’s SEC Yield would have been 1.97% as of 12/31/2017.
The Fund’s distribution rate may be affected by numerous factors, including changes in realized and projected market returns, Fund performance and other factors. There can be no assurance that an unanticipated change in market conditions or other unforeseen factors will not result in a change in the Fund’s distribution rate at a future time. The Fund’s distribution amounts may be calculated based on the ordinary income received from the underlying investments, and in certain cases, short-term capital gains realized from the disposition of investments. Long-term capital gains realized from dispositions of assets will be paid out annually. Distributions over the past 12 months reflect portfolio income only, and do not include a return of capital or income from loan proceeds or borrowing.
Data is calculated for the trailing 3-year period ending 12/31/2017, using monthly portfolio returns.
Alpha: A coefficient measuring risk-adjusted performance, factoring in the risk due to a specific investment, rather than the market. A high value implies exceeding expectations given its beta.Beta: A measure of the volatility of a given investment, relative to its benchmark. Beta > 1 is more volatile than the market; Beta < 1 is less volatile. R-squared: How an investment or a portfolio’s performance correlates with a benchmark; what portion of its performance can be explained by the performance of the market or index. Standard Deviation: A measure of volatility, by comparing the variability of an investment’s or portfolio’s returns.Sharpe Ratio: A measure of risk-adjusted return, comparing excess returns overa ‘risk-free’ rate such as Treasury bills.
Distributions (per share) 3-Year Risk/Return Measures
vs. BarCap MBS Index
vs. BarCap US Agg
Alpha 6.67 7.70
Beta 1.09 0.72
R-squared 12.85 13.86
VCAPXBarCap
MBS IndexBarCapUS Agg
Standard Dev. 5.40 1.78 2.81
Sharpe Ratio 1.52 0.80 0.64
February 22, 2018 | 3409-7
Investment Team
Katherine HawkinsVice President–Loan Acquisitions,Vertical Capital Income Fund7+ years, Beal Bank
David F. AisnerPortfolio Manager, Oakline Advisors, LLCMr. Aisner is also chief investment officer at Oakline Advisors, LLC, where he implements acquisition strategies across a broader investment platform. Mr. Aisnerearned a bachelor’s degree, double-majoring in Economics and Political Science, from Williams College and an MBA degree with a concentration in Real Estate from the University of Pennsylvania’s Wharton Schoolof Business
Robert J. ChapmanPortfolio Manager, Oakline Advisors, LLCMr. Chapman is also chairman of Vertical Capital Income Fund board of directors. Previously, Mr. Chapman was executive vice president and chief financial officer of AMLI Residential Properties Trust. Mr. Chapman received a BBA degree in Accounting and an MBA degree in Finance from the University of Cincinnati.
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Contact Us
For more information about Vertical Capital
Income Fund, please contact your
financial advisor.
Provasi Capital Partners
866.655.3600
provasicapital.com
Provasi Capital Partners
@ProvasiCapital
