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Jonathan,

It was so nice to see you yesterday. I'm sorry we didn't have more time to spend together. It sounds like you are making good progress.

I suggest you try to close on the investment with your lead investor as quickly as possible. This can be done in one of two ways:

Alternative 1: The investor can invest in the RMB Fund, with the understanding and agreement that its financial commitment will only be allocated to those investments made by the RMB Fund in which a SOE is also co-investing. We've been involved in many situations where the proceeds invested in a fund by a particular investor are restricted to certain types of fund investments (typically involving US pension plans and limitations under ERISA). This approach will involve special accounting considerations and allocations, but certainly we can move forward this way without the need to create a new fund.

Alternative 2: We can form a "Special Situations Fund" that will make investments only where there is a side-by-side co-investment by a SOE.

There would seem to be two important factors to consider here. In Alternative 1, the accounting and related mechanics would certainly be more difficult as a result of allocating only certain-but not all-fund investments to the capital account of your lead investor. We would also need to disclose in the PPM that a portion of the investment funds under management are being held in a separate "sidecar" and can be allocated only to those investments where there is a side-by-side co-investment by a SOE. The mechanics may be complex; the disclosure is simple and straightforward. However, there are also related issues associated with Alternative 2, as we would need to once again form and authorize entirely new entities to serve as the fund vehicles which, in China, is far more time-consuming and difficult than it is here in the United States. We would also need to create a separate PPM and Subscription Documents, although those documents would be largely based on the existing PPM and related documents of the RMB Fund (which I assume are at a very advanced stage). I would be happy to explain both of these alternatives to you and your team in more detail.

It would appear to be important that you move forward quickly (and carefully) with this investor, as getting this fund off the ground (whether it be the existing RMB Fund or a new Special Situations Fund) and operational appears likely to lead to additional investments by others, including the Bank of China.

In terms of the deals that you have in the pipeline, I suggest that you try to advance them to the stage where the details of each transaction have been agreed upon and are reflected in a letter of intent or memorandum of understanding (or even a definitive purchase agreement) that sets forth the precise terms of the deal, including price, valuation, structure, timing and principal conditions to closing. We will also need to conduct due diligence, review all tax and regulatory aspects of each deal and prepare and negotiate definitive transaction documentation. But that can all be done after you enter into a detailed letter of intent or MOU with the target companies. If you can do this, then you will need to provide related information about the pipeline transactions to your investors. If you are unable to get to the stage where you have a letter of intent or MOU in place, then I would simply not discuss these particular opportunities until they have advanced to a stage where the related acquisitions become what we would characterize as "probable" of happening. I would also like to understand a bit more about the Indonesian investment that you are considering, as that would seem to diverge from your stated core investment strategy. You can certainly pursue that acquisition, but I believe it would make sense to modify your existing disclosure and expressly permit the fund to invest up to a specified percentage of its AUM in early stage companies, which would be structured as venture capital investments (in contrast to more traditional private equity investments).

I would be pleased to help you with the completion of the proposed initial investment in the fund by the lead investor. This will, in all likelihood will involve the negotiation and execution of a related side letter with the investor. I say this because, in my experience, all initial lead investors end up requesting special, preferential terms, and these terms will need to be negotiated and reflected in a separate agreement, which we commonly refer to as a side letter. In the event you ultimately agree to pay the lead investor a portion of the carried interest, I strongly recommend that we provide such investor with the economic equivalent of such a stake, by agreeing to pay it a specified portion of the carried interest as and when earned by the general partner-rather than bringing the new investor directly into the general partner. I would also expect the lead investor to request a reduced management fee. I prepared a detailed outline several months ago of the various considerations under side letters with lead investors that I would be pleased to share with you, and we can also address all of these items with you if and when appropriate. We can also help you with the related matters such as preparing the related subscription documents and revising the PPM or creating a new PPM (depending on whether Alternative 1 or Alternative 2 is chosen). Of course, you may want to use Fangda Partners for these matters, given that the related documentation will be in Chinese and that they have taken the lead on the RMB Fund. But, if you prefer, we can take the lead through my Beijing office and get this all done quickly and efficiently.

I would also be pleased to guide you from a legal perspective through the process involving completion of the pipeline investments, if you would like my assistance. I believe you know that my main area of focus involves cross-border M&A, and given our extensive knowledge of the two funds, I have a good sense of what you need to do to complete these transactions and bring these deals into the fund, as well as of the related legal considerations and disclosure obligations to your prospective investors.

We are committed to helping you with BHR in any way you deem appropriate, and I would very much like to see BHR become a resounding success.

Please let me know if there is anything I can do for you. I hope to see you soon in Beijing.

With my best regards,
Andrew

_____________________
Andrew Hulsh
Partner

Dechert LLP
1095 Avenue of the Americas
New York, NY 10036
+1 212 698 3810 Direct
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andrew.hulsh@dechert.com<mailto:andrew.hulsh@dechert.com>
dechert.com <http://www.dechert.com/>

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