Harnessing The Key Drivers Powering Private Equity Buyout Funds Through Public Equity

Overview of the KraneShares Man Buyout Beta Index ETF (Ticker: BUYO)

Date: 10/08/2024

Product Suite

China Focused

Thematic Equity

• KWEB Internet & E-Commerce*
• KURE Healthcare
• KGRN Clean Technology*
• KSTR STAR Market*
• KTEC Hang Seng Tech
• KPRO 100% KWEB Defined Outcome
• KBUF 90% KWEB Defined Outcome

Core Equity

• KBA MSCI China A 50
• KALL MSCI All China
• KCAI China Onshore Alpha Index

Options Income

• KLIP China Internet & Covered Call

Climate Aligned

Carbon

• KRBN Global Carbon Strategy
• KEUA European Carbon Allowance
• KCCA California Carbon Allowance

Equity

• KSEA Ocean Engagement

Fixed Income

• KCSH Sustainable Ultra Short Duration

Alternatives

Fixed Income

• IVOL Quadratic Interest Rate Volatility & Inflation Hedge
• BNDD Quadratic Deflation ETF

Managed Futures

• KMLM Mount Lucas Managed Futures

Equity

• KSPY Hedgeye Hedged Equity
• BUYO Man Buyout Beta Index

Global

Asia Fixed Income

• KHYB Asia High Income USD Bond

Global Equity

• KARS Electric Vehicles & Future Mobility*
• OBOR One Belt One Road
• KLXY Global Luxury
• AGIX Artificial Intelligence & Technology

EM Equity

• KEMX MSCI Emerging Markets ex China
• KEMQ Emerging Markets Consumer Tech
• KEM Dynamic Emerging Markets

US Equity

• KVLE Value Line® Dynamic Dividend Equity

*Strategy also available in UCITS

Introduction to KraneShares

About KraneShares

Krane Funds Advisors, LLC is a specialist investment manager focused on China, Climate, and Alternative assets. KraneShares seeks to provide innovative, high conviction, and first to market strategies. The firm was founded in 2013 and manages for institutions and individuals globally. In 2017, KraneShares formed a strategic partnership with China International Capital Corporation (CICC) when they acquired a majority ownership stake. The firm is a signatory of the United Nations-supported Principles for Responsible Investment (UN PRI).

Introduction to Man Group

Man Group is a global alternative investment management firm focused on pursuing outperformance for sophisticated clients via their Systematic, Discretionary and Solutions offerings. Powered by talent and advanced technology, their single and multi-manager investment strategies are underpinned by deep research and span public and private markets, across all major asset classes, with a significant focus on alternatives. Man Group takes a partnership approach to working with clients, establishing deep connections and creating tailored solutions to meet their investment goals and those of the millions of retirees and savers they represent. Headquartered in London, they manage $178.2 billion and operate across multiple offices globally. Man Group plc is listed on the London Stock Exchange under the ticker EMG.LN and is a constituent of the FTSE 250 Index.

Key Statistics

• $178.2bn Assets Under Management
• 475+ Investment Professionals
• $7tn Notional Traded Globally
• 63% Assets in Alternatives
• 37% Assets in Long-only
• 650+ Systematic Researchers and Technologists
• 140+ Actively Managed Strategies

KraneShares Man Buyout Beta Index ETF (BUYO)

Investment Strategy

The KraneShares Man Buyout Beta Index ETF (Ticker: BUYO) seeks to track the performance of the Man Buyout Beta Index, which is designed to provide exposure to a subset of public equities that feature the key characteristics of companies held in PE/buyout funds. The Index employs a systematic approach to select a portfolio of small to mid-cap stocks from the Russell 2500 Index, targeting industries favored by PE firms as well as companies that are similar in size and display similar company-specific characteristics as those in traditional PE funds.

KraneShares Man Buyout Beta Index ETF Features

• Seeks to identify methodologies that buyout funds use to target takeover candidates and apply them to public equities to achieve similar results, such as delivering potentially higher long-term returns and diversification.
• BUYO targets small to mid-cap public companies included in the Russell 2500 Index that exhibit the following characteristics:
  1. Belong to sectors favored by PE buyout funds, including Information Technology, Consumer Discretionary, Industrials, and Health Care.
  2. Match the profile of the types of companies in which PE buyout funds tend to invest by screening for fundamental metrics, including: valuation, growth, profitability, cash management, debt capacity, business uncertainty and risk, industry dynamics and informed investor views.
• Utilizes Man Group's data-driven investment strategy, which has been used since 2018 in the Model that underpins the Index.
• Intraday liquidity, lower management fee relative to traditional PE funds, and full daily holdings transparency.

About Man Group

• Man Group is a global alternative investment management firm focused on pursuing outperformance for sophisticated clients via Systematic, Discretionary, and Solutions offerings.
• Man Group's investment strategies are underpinned by deep research and span public and private markets, across all major asset classes, with a significant focus on alternatives.
• Man Group has a large institutional client base, including sovereign wealth funds, endowments, and pension funds, managing around USD 178.2 billion.

PE is popular among investors, but… has characteristics that can be improved upon

Leading reasons why investors like PE

• Strong Historical Returns
• Potential Diversification*
• Long-Term Value Creation

BUT… Some common frustrations with PE

• High Fees + Subpar Distinction between Alpha & Beta
• Long Time To Deploy Committed Capital
• Illiquid + Long Lockups
• Cyclicality In Distributions

As money flows into PE, supply-demand imbalance has led the PE industry to hoard record levels of cash

With a seemingly insufficient number of attractive, appropriately valued private companies, PE firms can turn to public markets for deals

Value of dry powder of PE companies in the U.S. from 2018 to 2023 (in billion U.S. dollars)

Year	Value ($ Billion)
2018	675
2019	780
2020	922
2021	939
2022	1,170
2023	1,270

Number of US Public to Private Takeout Deals

Year	# of Deals
2015	39
2016	54
2017	57
2018	50
2019	43
2020	39
2021	53
2022	53
2023	51

What Types Of Companies Do PE Firms Buy?

The same fundamentals that attract buyout firms to private companies also exist in public companies

We believe…

• Public equities are a reasonable proxy for the beta in buyout funds, and a nuanced public equity portfolio can potentially serve as a closer proxy for buyout fund performance.
• Proxy for PE alpha may be achievable by investing in public companies that closely resemble the companies in buyout funds and avoiding the industries and types of companies buyout funds typically do not target.
• It is important to invest in companies that 1) are similar in size to those in buyout funds, 2) belong to the same industries as those in buyout funds, and 3) display similar company-specific characteristics as those in buyout funds.

Target Sectors

Information Technology, Consumer Discretionary, Industrials, Health Care

(-) Underweight: Financials, Utilities

Company Characteristics Targeted

• Smaller: $100M-$10B common deal target
• Cheaper: Focus on free cash flow yield
• More Profitable: Operating margins important
• Cash Disciplined: Board oversight, less CapEX, Debt repayment
• Higher Growth: Top-line focus
• Leveraged: Significant debt in deals

Many of the performance drivers that benefit buyout companies are also found in select public companies

…But identifying those companies and harnessing that alpha requires a nuanced approach

Components of PE Return

Sub-Components of PE Return

Component	Description
Leverage	Return amplifier; tax benefits
Industry Selection	Analyze industry trends, competitive dynamics
Valuation	Identify undervalued assets
Growth	Focus on increasing revenue
Cash Management	Cost reductions emphasized
Profitability	Need profits to pay down debt
Stability	Visibility / predictability of key fundamentals
Corp. Relationships	Analysis of ecosystem surrounding a company
Size	Less efficient pricing among smaller companies, potential hidden gems
Strategy	Control strategic decisions, e.g., replacing management
Exit	Facilitate high-value exit/sale
Incentives	Enhance management incentives/upside
Acquisitions	Inorganic growth

Key Definitions

• BETA: As long-only equity portfolios, PEs' significant portion of total return is driven by broad macroeconomic influences or beta, that similarly impact public companies. Heightened leverage levels in PEs amplify this. David Swensen (former Yale CIO): deals driven by financial engineering alone are simply "turbo-charged equity"
• True Alpha = idiosyncratic return driver employed by skilled PE managers, cannot be easily replicated in the public market (due primarily to lack of control over corporate decisions)
• "Replicable Alpha" = return source requires skill but is replicable

There is a strong correlation between the Russell 2500 Index and PE, but can PE's other return drivers be captured?

There is a 75% correlation between the total returns of PE and the public equity market using the Preqin Private Equity ex-Venture Capital Index and the Russell 2500 Index as the proxies for private and public equity.

Key Points

• The PE Industry uses comparable public companies to value its portfolios
• Both public and private companies are exposed to the same macroeconomic, industry-specific, and other top-down trends
• Private equity investments benefit from "return smoothing", which if applied to the Russell 2500 Index, would increase correlation even more
• Can a filtered Russell 2500 Index provide a more correlated return profile to PE?

Russell 2500 Index 2023 Price Chart

Price movement on a quarterly basis (example of "return smoothing"):

• Q1 2023: +4%
• Q2 2023: +5%
• Q3 2023: -5%
• Q4 2023: +13%

Can applying PE selection criteria to public equities produce a similar return profile as traditional PE funds?

Yes, PE-like returns can be generated using public equities according to institutional investors/Limited Partners (LPs), academics, and sellside firms.

Harvard Business School

"The passive replicating strategy represents an economically large improvement in risk- and liquidity-adjusted returns over direct allocations to private equity funds, which charge average fees of 6% per year."

GPIF (largest pension in the world)

"The long-term performance of a replicating portfolio…tracks closely with the Cambridge Associates Global PE Index (US Buyout)."

Deutsche Bank

"Our replication model provides attractive risk-adjusted return profiles compared to existing PE benchmark indices."

Introducing BUYO

A systematic approach to target public companies that have similar attributes to private equity targets

BUYO Index Construction Process

Russell 2500 Index Equity Universe

The Russell 2500 Index is used as the initial starting point for the Index Universe.

Industries Favored by PE

Stocks that belong to specific sectors and industries that are not targets for traditional buyout deals are then excluded from the Russell 2500 Index to create the index universe.

Screen For Stocks Matching Buyout Criteria

Identifying companies that match the profile of the types of companies in which buyout funds tend to invest. This is a systematic process driven by eight higher level models, each of which is comprised of multiple underlying signals.

BUYO

The weight for each constituent is capped at 5%.

BUYO currently has more exposure to Information Technology, a sector currently favored by PE firms, compared to the Russell 2500 Index

Sector Exposure

Sector	BUYO (%)	Russell 2500 Index (%)
Information Technology	~26	~11
Industrials	~21	~22
Consumer Discretionary	~12	~15
Healthcare	~11	~13
Materials	~10	~4
Financials	~8	~16
Consumer Staples	~5	~3
Communication Services	~5	~2
Utilities	~2	~3
Energy	~2	~5
Real Estate	~0	~8

BUYO avoids "obvious" stocks: the largest, most expensive, least profitable, most cash-flow-intensive public companies

Fundamental

Screen	Exclusion Criteria
Valuation	MOST Expensive
Profitability	LEAST Profitable
Debt Capacity	LEAST Leveraged
Cash Management	LEAST Efficient
Growth	LOWEST Growers

Additional PE Alpha Proxies

Screen	Exclusion Criteria
Business Uncertainty	MOST Uncertain
Industry Dynamics	LEAST Attractive
Informed Investor Views	LEAST Favorable

BUYO leverages a potential key advantage over private market investors: dynamic public market information may be predictive of future fundamentals.

How does BUYO fit in your portfolio?

According to recent data, major endowments typically allocate around 20-40% of their portfolios to private equity, with some top institutions like Ivy League Universities reaching as high as 36.7% of their total investment, reflecting a significant portion of their overall portfolio allocation to private equity.

BUYO Use Cases

• Institutional investors seeking potential liquid beta to the PE buyout asset class while awaiting placement in traditional PE funds
• Investors desiring highly correlated liquid alternative exposure to the buyout market
• Investors looking to implement a more endowment-like asset allocation that includes a healthy weighting to PE-like strategies

Richest Universities in the United States in fiscal year 2023, by endowment fund market value & percentage allocation to PE/VC

(Chart showing Harvard, University of Texas, Yale, Stanford, Princeton, MIT, University of Pennsylvania, Texas A&M, University of Michigan, University of California — ranked by total fund value and PE/VC allocation %)

Why BUYO?

• Multi-faceted approach to creating an investable beta for buyouts, targeting the actual drivers of buyout fund performance
• Not statistical replication or indirect exposure to PE performance drivers, like some peers
• Sub-advisor has 6+ year live Liquid PE track record & 35+ years of experience in systematic investing
• Fundamentally-based, disciplined, systematic approach
• Broad diversification* across sectors, industries, and companies; sophisticated risk management
• Leverages data science and research capabilities, and broader infrastructure and resources of Man Group, a $178.2B investment manager
• Automated vintage diversification* and exposure to PE return drivers without the PE fees

*Diversification does not ensure a profit or guarantee against a loss.

KraneShares Man Buyout Beta Index ETF

Investment Strategy

The KraneShares Man Buyout Beta Index ETF (Ticker: BUYO) seeks to track the performance of the Man Buyout Beta Index, which is designed to provide exposure to a subset of public equities that feature the key characteristics of companies held in PE/buyout funds. The Index employs a systematic approach to select a portfolio of small to mid-cap stocks from the Russell 2500 Index, targeting industries favored by PE firms as well as companies that are similar in size and display similar company-specific characteristics as those in traditional PE funds.

Fund Details (as of 10/08/2024)

Detail	Value
Primary Exchange	NYSE
CUSIP	500767348
ISIN	US5007673487
Total Annual Fund Operating Expense	0.89%
Inception Date	10/08/2024
Distribution Frequency	Annual
Underlying Index	Man Buyout Beta Index
Number of Holdings	259

Top 10 Holdings (as of 10/08/2024)

Company	Ticker	%
ELASTIC NV	ESTC	1.32
ENCOMPASS HEALTH CORP	EHC	1.32
NEWS CORP - CLASS A	NWSA	1.30
QIAGEN N.V.	QGEN	1.23
NUTANIX INC - A	NTNX	1.17
Q2 HOLDINGS INC	QTWO	1.16
TELADOC HEALTH INC	TDOC	1.15
PACKAGING CORP OF AMERICA	PKG	1.03
PENTAIR PLC	PNR	1.03
ELEMENT SOLUTIONS INC	ESI	1.00

BUYO Performance History as of 09/30/2024

(No performance data available — fund recently launched)

Index Definitions

Russell 2500 Index: The Russell 2500 Index measures the performance of the 2,500 smallest companies in the Russell 3000 Index.

Preqin Private Equity ex-Venture Capital Index: The Preqin Private Equity ex-Venture Capital Index represents the returns on committed capital in private equity partnerships. It includes the amount of money invested in these partnerships and the returns that outstanding commitments would generate if invested risk-free.

Term Definitions

Free cash flow yield (FCFY): Free cash flow yield is a financial metric that compares a company's cash flow to its overall valuation. It's a key indicator of a company's financial health and performance, and is used by investors to assess how well a company can meet its financial obligations.

Operating margins: In business, operating margin—also known as operating income margin, operating profit margin, EBIT margin and return on sales—is the ratio of operating income to net sales, usually expressed in percent. Net profit measures the profitability of ventures after accounting for all costs.

Capital Expenditure (CAPEX): Capital expenditure or capital expense is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land.

Alpha: Alpha is a financial term that measures how well an investment strategy, portfolio manager, or trader has performed relative to a benchmark or the market. It's also known as excess return or abnormal rate of return.

Beta: Beta measures an investment's volatility relative to the market and is used to quantify its risk. It's calculated as the slope of a security's returns regressed against a benchmark market index.

Important Notes

Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' full and summary prospectus, which may be obtained by visiting www.kraneshares.com/buyo. Read the prospectus carefully before investing.

Risk Disclosures

Investing involves risk, including possible loss of principal. There can be no assurance that a Fund will achieve its stated objectives. Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index.

The Underlying Index uses Numeric models in its methodology, which depend on various data sources that may be inaccurate or incomplete, rendering the models potentially unreliable. Historical market data may not predict future price movements, and unusual market events can lead to unexpected outcomes.

The Fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund's gains or losses.

The Fund is new and does not yet have a significant number of shares outstanding. If the Fund does not grow in size, it will be at greater risk than larger funds of wider bid-ask spreads for its shares, trading at a greater premium or discount to NAV, liquidation and/or a trading halt. BUYO is non-diversified.

ETF shares are bought and sold on an exchange at market price (not NAV) and are not individually redeemed from the Fund.

The KraneShares ETFs and KFA Funds ETFs are distributed by SEI Investments Distribution Company (SIDCO), 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Funds, or any sub-advisers for the Funds.