Montrose Capricorn Finance Fund Suspension Update, January 31st 2009

CAPRICORN FINANCE UPDATE

30 January 2009

Dear Investor

Introduction
The objective of this letter is to update investors in the Finance Funds of the Capricorn Fund PCC Limited (the “Company”) on the current status of the Finance Fund. This letter includes a comment on the market environment and the liquidity status of the Finance Fund. The last formal advice to investors was sent on 11 November 2008. When we wrote that letter there had been continued forced deleveraging across all asset class and this in turn resulted in significant redemptions across the hedge fund industry. The decrease in liquidity continues to be one of the key factors facing the hedge fund industry at present and the position continues to deteriorate. We closely track the underlying funds in the portfolio in terms of liquidity (and our right to access that liquidity). Over the recent months more and more of the underlying funds that make up the Finance Fund have restricted liquidity in some way or another. Restrictions include suspending redemptions, implementing additional lock up periods or going into a run off mode whereby they pay off assets as and when they liquidate them.

The underlying managers continue to experience pressures, with returns on loans and asset prices on loans being marked lower to reflect the increase in risk premiums across most asset classes.

Furthermore, managers are ensuring that outstanding loans and any assets which are held as collateral are being valued at levels which reflect the current market realities and as the private lending market is illiquid ascertaining realistic prices is proving very difficult.

It should be noted that the vast majority of the losses incurred by our underlying managers are mark to market losses and represent unrealised losses. However with the accelerating weakening in the economic picture globally, it is unclear as to what portion of the unrealised losses may be crystallised in the future.

Impact of Exchange Rates
The borrowings have been increased by the appreciation of the US Dollar in recent months. The portfolio of the Finance Fund is invested in US Dollar asset, while a large proportion of the Fund’s investors hold Euro and Sterling classes. The effect of the appreciating Dollar has led to increased borrowings in the Finance Fund. Although the foreign exchange risk has to date been hedged out in terms of the profit and loss on a monthly basis this Dollar appreciation has been funded through increased borrowings

Funds with Exposure to the Petters Group
We continue to monitor the situation closely. There has been no further formal announcement of substance relating to the investigation. We have as a result of discussions and investigations, in particular with the key lead manager of the investment action group based in the USA , increased the provision to funds with Petters involvement, by way of a special reserve to 50%. This special reserve was effected in December. The bulk of the negative returns of the Finance Fund for December was due to this special reserve.

Other Managers
The manager which made a provision on a loan as a result of a fraud in January and February 2007 has made some progress in recovering this and has reported that it has obtained summary judgement in the court action and placed one of the principal parties involved in the fraud in bankruptcy. We will continue to update you on the recovery process.

Longer Term Outlook
In an attempt to give you some perspective on the Finance Fund, it is our view that there is a temporary liquidity squeeze on the majority of asset backed lending funds which have essentially forced them to temporarily suspend redemptions and restructure their liquidity terms. However, looking ahead, we remain of the view that there are valid reasons as to why it is still ultimately a sustainable strategy:   

• Notwithstanding the illiquidity faced by asset backed lending funds, they are not forced sellers of assets. They are holding a portfolio of loans on their books and ultimately these loans will mature. These loans are self liquidating. However, during times of distress the funds would only be in a position to pay back investors once the loans are finalised/completed.

• Notwithstanding that the interest rate regime is moving towards zero across the developed world, traditional lenders such as banks are not lending as they are repairing their balance sheets. As such there is opportunity for asset based lenders to secure good rates of return.

• Banks where they are lending, are slow in undertaking the administration to providing loans. Asset based lenders by contrast can be much quicker.

• The regulatory environment penalises traditional bank lending to small size borrowers, but our underlying managers are not affected by this.

In conclusion there are managers who will ultimately be in a position to raise margins, obtain better security, seek out the best deals, whilst at the same time increasing market share. However, in the short to medium term, liquidity remains the issue.

Estimated Timetable
By way of reminder, the Finance Fund is currently suspended and is in the process of liquidating assets which involves redemption of all the underlying investments. Proceeds from these redemptions have to be used to first pay off the small amount of borrowings that the Finance Fund has. Thereafter proceeds from redemptions will be returned to investors. For clarity sake please note that investors will be paid out on a pro-rata basis as soon as proceeds are forthcoming from the underlying Funds. Proceeds are paid out in accordance with the election effected by you in our letter dated 11 November 2008. Unfortunately the liquidity profile of all Funds is much worse than it was in November 2008. As such we are not in a position to provide a date as to when the first payment will be made until we actually receive redemption proceeds from the managers.

As soon as we have ascertained as to when payments will commence, we will notify investors.

Private and Confidential: this communication is directed solely to the current investors of the US Dollar, Sterling and Euro Finance Funds and should not be reproduced, distributed or disseminated to any third party. If you are not the intended recipient of this note, destroy it immediately or return it to Montrose Asset Management Ltd, PO Box 673, Trafalgar Court, St Peter Port, Guernsey, GY1 3SW .

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