June 30, 2018

Dear Partner,

Summertime is here in Upstate New York! I trust you and your family are enjoying the warmer weather and the great outdoors. It has been an exciting and productive year since Bonhoeffer was founded, and I’m thankful for your partnership as we celebrate our one-year anniversary!

The fund has underperformed the international benchmark (MSCI ACWI ex-US) over the last quarter, declining by 1.4% while the index declined by 0.8%. The fund outperformed emerging market benchmark (MSCI EM Index) which declined by 8.0%. The decline was primarily due to our exposure to emerging markets currently around 75% of the portfolio.

The YTD performance of Bonhoeffer is a loss of 2.6% versus a decline of 2.8% for the MSCI ACWI ex-US and a loss of 6.7% for the MSCI EM Index. As of June 30, our securities have an average earnings/ cash yield of 18.4% and an average EV/EBITDA of 3.1.

Please mark your calendar for our annual meeting to be held in New York City on Tuesday, September 11, 2018. Details will follow for all of our limited partners. We will also have a limited number of seats for prospective investors. If you would like more information on this even, please stay tuned or email us at [email protected].

Bonhoeffer Fund Portfolio Overview Our fund’s investments have not changed much over the last quarter. The largest countries represented in our portfolio remain , South Africa, Philippines, Hong Kong, Italy, and Norway. The largest industries in which Bonhoeffer is invested include: consumer products, distribution, transaction processing, real estate, telecom, and media.

Since my last letter, we have only sold one position and purchased one new position. Our newest holding is an example of a compound mispricing, which I will detail in this letter.

At Bonhoeffer, we endeavor to find opportunities in areas of neglect. Current areas of neglect include selected emerging markets, as well as companies that are surviving in areas of technological change and in noncyclical parts of cyclical businesses.

In this letter, I will be describing how the three methods described in detail over the past three letters (compound mispricings, mischaracterized firms, and private LBOs (or spread businesses)) are distributed in the portfolio, the expected returns, the benchmarks, and how Bonhoeffer fits into an investment portfolio. I will also provide an overview of a current holding, KT Corporation, in the case study at the end of this letter.

Value-unlocking Event: Taeyoung Engineering & Construction Preferred One of our holdings, Taeyoung Engineering & Construction Preferred, has experienced an event due to market movements in its stock. Taeyoung E&C is a Korean holding company that holds a controlling stake in Korea’s largest broadcaster, Broadcasting System Media. It is also an engineering and construction company. The preferred shares trade at a discount to the common shares, as is typical for Korean preferred shares. In April, Taeyoung E&C’s preferred stock doubled in price over a few weeks’ period for no apparent economic reason. This has happened two other times over the past three years and, in each case, the rise in price was short lived and the shares returned to a reasonable valuation within a few months. Recognizing the opportunity at hand, we sold the shares for twice as much as we purchased them.

Bonhoeffer Strategies and Portfolio Distribution Bonhoeffer Fund is focused on finding and securing opportunities with higher expected returns in unusual places. The three strategies we employ to accomplish this are compound mispricings (taking advantage of inefficiencies at the security or capital-structure level), mischaracterized firms, and public LBOs (taking advantage of inefficiencies at the underlying firm level). Some specific areas where we have found mischaracterized firms include firms in growing segments of mature businesses, noncyclical segments of cyclical sectors, firms with changing business models, and good businesses in countries that have had a historically questionable reputation in some investors’ minds. We have also found public LBOs in leveraged businesses and spread businesses, where financing can be obtained at low rates versus the rate of return being earned on its assets.

As of June 30, 10 of our investments were compound mispricings, 15 were mischaracterized firms, 6 were public LBOs, 14 were in mischaracterized countries, and 6 were in consolidating industries. All of our investments have one of these strategic characteristics; but most of them have more than one. Another attractive characteristic is that many of these businesses are in consolidating industries with high levels of synergies upon consolidation.

Expected Returns Today the expected returns for core asset classes—like stocks and bonds—are low. US stocks have an expected return of 5 to 7% if we have no valuation changes; and bonds have an expected return of 3% per year. International stocks may have an additional percentage of expected return.

If we look at other alternative asset classes, we can obtain higher returns like with triple- lease real estate (high single-digit to low-teens rate of return), infrastructure (low- to mid-teens rate of return) or specialty lending (low-double-digit rate of return). Our fund is aiming for market-beating returns (index plus 500 basis points (bps)) net to the investor over time. This implies a rate of return of index plus 700 bps before fees. You may recall that Benjamin Graham considers 500 bps over the index to be the expected return that makes security selection worthwhile for an individual investor.1 Each individual position in

1 pg. 15, Benjamin Graham, The Intelligent Investor, Fourth Edition, 1973 Bonhoeffer Fund has an expected return in excess of these benchmarks, thereby providing a margin of safety when some of our positions do not perform as expected.

Pricing is going to help us achieve these rates of return. The portfolio’s average earnings/free cash flow is 17.7% as of June 30, 2018. If these firms do not grow or shrink and return all the earnings/free cash flow to investors, then the return should be 17.7% before fees and around 16% net. However, these firms will not return all of the earnings/free cash flows (as some will be retained for growth), so the actual return of capital will be lower. Since all of these firms are growing, the earnings/cash flows should be growing over time along with the valuations. This growth will provide an additional margin of safety to achieve our target rate of return. There will also be some event-driven aspect of the portfolio, as illustrated by this quarter’s and Q4 2017’s value-unlocking events. In general, the portfolio will follow the overall trend of equity markets worldwide.

Benchmarking How should our performance be measured? This depends upon the role of Bonhoeffer in your portfolio. Given Bonhoeffer’s unique holdings, I think two benchmarks are appropriate: first, an international equity rate of return benchmark; second, a weighted average of emerging markets and developed markets equity rate of returns benchmark. The emerging market benchmark will include a risk not seen in developed markets, namely capital flow risk.

Capital flow risk is present in situations where the equity market has a majority of international investors, which is common in emerging markets and was common in the United States market in the 19th century. In these markets, the market returns are affected by flows into and out of the market by developed-market investors. This risk can be transmitted across emerging markets by one event in specific markets. An example of this is the Asian financial crisis in the late 1990s.

The most broadly based non-US benchmark is the MSCI ACWI ex-US index. For the emerging markets index, the MSCI emerging market indices will be used.

As stated in previous letters, Bonhoeffer is a specialty fund and will probably have more volatility than the S&P 500; thus it is on the higher end of the risk spectrum of investments between short-term bonds to emerging markets equity. Therefore, for most investors Bonhoeffer will be a supplemental holding providing a non-correlated way to generate above-average returns.

It is my hope that this letter provides some insight into the thought process behind the Bonhoeffer Fund and highlights the amount of thought and due diligence we are putting into investing your money. As always, if you would like to discuss any of this in deeper detail, then please do not hesitate to reach out. Until then, thank you again for your time and confidence in our work.

Warm Regards, Keith D. Smith, CFA

BCM CASE STUDY

Compound Mispricing Case Study: KT Corp (NYSE:KT)

In this case study, I will focus on a compound mispricing in a company called KT Corporation (NYSE:KT). KT Corp is Korea’s largest incumbent fixed-line company. It is the second largest mobile telecommunications firm in Korea. KT Corp also owns excess real estate that it is in the process of developing. KT owns BC Card (the largest payment card network in Korea, with over 40 million cards and 2.6 million merchants), 50% of KT Skylife (Korea’s only satellite TV provider), and various other firms in the entertainment content, call center, manpower supply, advertising, and security monitoring businesses.

Most analysts have a declining of operating income in their forecast despite the stabilization of KT’s telecom revenue over the past three years. There is additional upside from Internet Protocol television (IPTV), content, and real estate growth which, in combination with the stabilization of the telecom revenues, can actually increase revenues and cash flows over the next few years. The CEO is also incentivized (his bonus payments are tied) to increase EBITDA and the KT stock price in excess of the KOSPI average.

The sum of the parts here is compelling, along with the general corporate governance improvements in South Korea. For one of the cheapest telecom firms in the world at 1.3x EBITDA, KT has a stabilized telecom customer base and some interesting growth opportunities in content, IPTV, and real estate. The telecom business has turned the corner in that the subscriber growth has returned; and with the roll out of 5G, KT should be a key player in the next generation of mobile services. KT’s IPTV offering continues to grow and this, in combination with content development and agency business and the ownership of KT Skylife, has made KT a key player in Korean media. BC Card and real estate development are also providing growth opportunities for this legacy Korean telecom player. KT is also Korea’s only FSS satellite owner and operator.

The major portion of KT’s cash flows comes from landline telecom, wireless, IPTV, and broadband services, the “quad play” in cable language. The Korean mobile market has three current players and thus has a better competitive position than in the markets with more players. The government has tried to encourage a fourth player to enter the market, but no player has been interested to date. KT’s wireless subscribers are increasing (6% growth) but ARPUs are declining (3% decline). KT has gained market share over the past three years from SK Telecom. KT is the number two wireless player with a 31.4% market share (20 million subscribers) and is in a good position with the largest amount of infrastructure locations for the deployment of 5G (over 90% of the telephone poles and 80% of the cable ducts for the existing wireless network). 5G requires more cell locations closer together, so KT is in a good position, versus SK & LG Uplus, to lease these locations to their competitors.

KT is the legacy wireline player in Korea, with 11.2 million lines, and the number one wireline player, with a 41.3% share. Korea, like all other countries, has a declining legacy phone line business with growing broadband and IPTV businesses. Although the combined wireline revenue (phone and broadband) declined year over year, it was up slightly quarter over quarter.

The media (IPTV) and content segments of the business are up significantly, as KT has grown IPTV subscribers by 6% in 2016 to 7.4 million subscribers and expanded in the digital media and music and video entertainment content businesses. The largest parts of the content business are Nasmedia, a publicly traded digital media representation business, KT (Genie) Music, which produces and distributes music in Korea, and KT HiTel, a t-commerce and content distribution platform. The HiTel platform is used by KT and other third- parties like Korean home shopping firms. T-commerce includes voice and augmented reality shopping and payment processing, along with related data analytics. The media/content segment grew by 16% in 2017.

In other segments, the BC Card business is down slightly year over year. The real estate development business is progressing nicely, increasing revenue by 13% over 2016 revenues, and management is expected to increase the value of real estate by 6% per year over the next two years. KT Skytel, KT’s satellite TV business, added 26,800 subscribers over 2016, a 0.6% increase. In summary, overall KT revenues were up modestly for 2017, and KT is expected to modestly increase revenue over the next few years.

The current CEO, Hwang Chang-Gyo, appointed in late 2013, was the former CEO of the Samsung Electronics chip division and the former CTO of Korea as the head of Strategic &D Planning in the Ministry of Knowledge Economy. His current salary is ₩573m with a 2017 bonus of ₩1500m based upon reaching EBITDA targets along with increases in KT share price in excess of the KOSPI. This level of compensation is comparable to the compensation for the CEO of SK Telecom and LG Uplus.

Another note here is that the equity valuation is the same as when Hwang was hired in December 2013 despite increasing EBITDA by 44% and reducing KT’s debt by 64%. This has led to KT being the cheapest telecom firm in the world, with an EV/EBITDA of less than 1.3x when excess real estate and investments are removed for the EV.

KT Corp currently sells at 1.3x EBITDA on a “look through” basis (this valuation includes a 30% discount for non-telco-owned KT subsidiaries and only includes excess real estate not required for KT’s operations) and is at a discount to other Asian incumbent telcos (which trade at a 3.5x EBITDA multiple) and other European and US stabilized telcos (which trade at 5 to 6x EBITDA). The potential upside if KT traded at these multiples would be 120% and 237% respectively. If KT can show it has the characteristics of other quad plays over the next few years, then a more appropriate multiple may be the quad multiple of 8 to 10x EBITDA, a 380% increase from current price.

Considering these parameters, in my view KT Corp is a cheap and growing turnaround with a possibility of becoming a compounder if they can integrate the telecom/media businesses they own. They can also spin- off or monetize the other non-telecom businesses they own over time.

Disclaimer

This letter does not contain all the information that is material to a prospective investor in the Bonhoeffer Fund, L.P. (the “Fund”).

Not an Offer – The information set forth in this letter is being made available to generally describe the philosophies of the Fund. The letter does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services. Such an offer may only be made to accredited investors by means of delivery of a confidential private placement memorandum, or other similar materials that contain a description of material terms relating to such investment. The information published and the opinions expressed herein are provided for informational purposes only.

No Advice – Nothing contained herein constitutes financial, legal, tax, or other advice. The Fund makes no representation that the information and opinions expressed herein are accurate, complete or current. The information contained herein is current as of the date hereof but may become outdated or change.

Risks – An investment in the Fund is speculative due to a variety of risks and considerations as detailed in the Confidential Private Placement Memorandum of the Fund, and this letter is qualified in its entirety by the more complete information contained therein and in the related subscription materials.

No Recommendation – The mention of or reference to specific companies, strategies or instruments in this letter should not be interpreted as a recommendation or opinion that you should make any purchase or sale or participate in any transaction.