FEASIBILITY STUDY For Establishing A

1. FEASIBILITY STUDYFor Establishing A Private Equity Venture Fund Company in Mongolia Presented by Dennis Grubb Ulaanbaatar, October 13, 2004

2. INVESTOR COMMUNITY SURVEY REGULATORY ENVIRONMENT DRAFT OFFERING MEMORANDUM MACROECONOMIC LANDSCAPE PE INVESTMENT OPPORTUNITIES • Companies With High • Sales & Growth Rates • Due Diligence • Financial Analysis • Investment Risks • Competitive Returns • Sufficient Number of • Attractive Companies • - Need for PE Investments • Investment Objectives • Interest to Invest in PE • Capital Availability for PE • Investments • Systemic Risks • Expected IRR vs. potential • rates • Accounting & Reporting • Legal Matters & Rule of Law • Capital Markets Functioning • Rules & Regulations • Corporate Governance Issues • Domestic & Foreign Tax • Considerations • Portfolio Structure • Fund Design & Size • Investment Strategy • LPA/GPA • Fund Management Firm • Fund Administration • Distribution & Fees • Selling & Placement • Agents • Competitive Position • Mongolian Opportunity • Attractive Industries/Sectors • Economic Growth • Business Environment • Other countries comparisons PRODUCE MEMORANDUM Yes Positive Regulatory Environment Yes yes PRODUCE MEMORANDUM Fund Capitalization Yes Yes No Positive Regulatory Environment Deal Flow Yes Yes No yes PRODUCE MEMORANDUM Fund Capitalization Market Opportunity Yes Yes No No Positive Regulatory Environment Deal Flow Yes No yes PRODUCE MEMORANDUM Fund Capitalization Yes No Positive Regulatory Environment yes PRODUCE MEMORANDUM

3. MACROECONOMIC LANDSCAPE • Mongolian Opportunity PE • Economic Growth • Business Environment • Attractive Sectors • Conclusions GDP growth 5%, informal sector 35% of GDP, USD/MNT rate, Per capita income $448, savings rate 24%, Inflation rate 4.7%, MNGCI 28000, Mining, Cashmere, Tourism Is there a market opportunity? Yes

4. ATTRACTIVE SECTORS

5. INVESTMENT OPPORTUNITIES • Sector Analysis and Company Focus Sec • Due Diligence Process • Financial Analysis • Investment Risks • Conclusions MGL 13/50, DD = I, EDGAR, IAS, Ratios, IPO, PEG Are there sufficient deals? Yes

6. FINANCIAL ANALYSIS Performance Indicators Financial Ratios Financial Forecasts • Sales volume • Capacity utilization • Gross profit margin • Fixed cost analysis • Variable cost • analysis • Profitability • Gross Margin • Operating Margin • Profit Before Tax Margin • Net Margin • Return on Assets • Return on Equity • Liquidity • Quick Ratio (receivables, cash/total liabilities) • Current Ratio (current assets/total liabilities) • Leverage • Total Liabilities/Net Worth • Efficiency • Sales/Total Assets • Sales/Net Fixed Assets • Sales/Inventory • Sales/Net Receivables • Sales forecasts • Cost of sales • forecasts • Gross margin • forecasts

7. VALUATION Income approach Cost approach Market approach • DCF (Discounted cash • flow) analysis • CF(1)/(1+r) • + CF(2)/(1+r)2 • + CF(3)/(1+r)3 • + CF(4)/(1+r)4 • + CF(5)+Exit Value /(1+r)5 • _________________________________ • = Present Value of Equity • Net asset value • NAV = Total Assets – Total Liabilities • - Adjustment by revaluing certain assets at market value - - Obtaining adjusted net asset value by subtracting the liabilities from the adjusted assets • Comparable • transactions analysis • Price-to-earnings • multiple • Price-to-book multiple

8. INVESTMENT RISKS

9. INVESTOR INTEREST • Investment Objectives • Interest to Invest in Private Equity • Capital Availability for Private Equity Investments • Systemic Risks • Expected IRR and Competitive Returns • Conclusions Rates, Yields, ROI, MSE, MNT Could the PE fund be capitalized? Yes

10. PEF EXPECTED IRR VS EXISTING COMPETITIVE RATE STRUCTURES

11. Assumptions used in estimations of the expected IRR on a 5-year investment in Software company XYZ

12. HYPOTHETICAL COMPANY • Company XYZ operates in Mongolia in the software business • Company XYZ is a publicly traded company • Projected balance sheet and income statement are stated in US $ • PEF makes investment in Year 0 by buying 20% of XYZ shares • Capital stock consists of 100,000 shares at $100 each • Investment is held 5 years • Exit at the end of Year 5 through selling at the Stock Exchange • Price per share doubles at the end of Year 5

13. PROJECTED BALANCE SHEET • Cash grows at 5% per year and through reinvestment of net profit • Inventory grows at 5% per year • Receivables reduce at 10% per year • Fixed assets grow at 5% per year • Accounts payable grow at 15% per year • Current liabilities grow at 10% per year • Long-term debt grows

14. Software company XYZ projected balance sheet

15. PROJECTED INCOME STATEMENT • Sales grow at 20% per year • Cost of sales grows at 19% per year • Gross margin = Sales – Cost of sales • Operating expenses grow proportionately at 19% per year • Operating margin = Gross margin – Operating expenses • Non-operating income grows at 15% per year • Non-operating expenses grow proportionately at 15% per year • Profit before tax = Operating margin + Non-operating income – Non-operating expenses • Tax equals 40% of Profit before tax • Net profit = Profit before tax – Tax • Dividend payout: 60% of Net profit • Plowback: 30% • Retain: 10%

16. Software company XYZ projected income statement

17. REGULATORY ENVIRONMENT • Company Law of 1999 • Securities Law 2002 • Accounting and Reporting • Legal Matters and The Rule of Law • Capital Markets • Corporate Governance • Tax Considerations • Conclusions Article 5 (CL), Provision 26 (SL), IAS, ABA, MSE, MSEC, 15/30%, VAT Is the regulatory environment conducive to creating a local PE fund? Caution

18. EXAMPLE OFFERING MEMORANDUM • Portfolio Structure • Fund Design & Size • Investment Strategy • LPA/GPA • Fund Management Firm • Fund Administration • Distribution & Fees • Selling & Placement Agents • Competitive Position

19. PE FUND EXAMPLES Kula Fund • Countries: Pacific Islands (Cook Islands, Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu). • Total investment $11.4 million • Financed by: ADB, EIB, IFC, etc. • Investment objectives: • Provide risk capital to private sector • Assist business with a sustainable competitive advantage with higher than average returns, sales and profitability • Focus on most sectors: agro-processing, fishing and fish-processing, warehouse retailing, mining services, printing, palm oil production, and aviation charter services. • Investment policy: • Invest equity capital between $200,000 and $2 million; exit after 3-7 years • Be a supportive minority shareholder • Meaningful financial contribution from sponsors • Be an active Board member • Contribute to the profitability of the company • Meet international health, environment and safety standards • Successful divestments: IRRs of 26-27% • Return on invested capital: 30% so far, additional 10% to be achieved • A follow-on fund to be raised in 2005 Central Asia Small Enterprise Assistance Fund • Countries: Kazakhstan, Uzbekistan, Tajikistan, Turkmenistan, and Kyrgyzstan • Total initial investment $8.6 million • Financed by: USAID, IFIs (IFC, ADB) • Investment objectives: • Risk capital to medium and small enterprises • Provide business and management services • Investments between $200,000 and $1.5 million per business for a stake between 20% and 49% • Minority equity participations often combined with quasi-equity financial instruments and subordinated debt • Investment is combined with technical assistance provided through local offices • Investment policy • Enterprises that have difficulty securing funds from conventional commercial sources due to their small size or location is less developed capital markets • Entrepreneurs who are able to develop growing and profitable businesses and comply with all laws • Businesses who have developed a product in a niche market with a sustainable competitive advantage • Businesses with a positive impact on the local community • Companies in which at least 51% of ownership interest is held by locally resident nationals

20. RECOMMENDATION • Post Feasibility Study-Ad hoc Committee • “In Principle” Investor Commitments • Establish Closed or Limited Liability Management Company • MSE by default OSF/EPRC/USAID/ADB/KFW/IFC/EBRD, MLI, LPA/GPA, $10-12 m, 10-40%, 25-70%, IPO/SI, 10-25, 3/5/7

21. Thank you for your attention.