ZAIS Opportunity Fund Performance ⁽¹⁾

Corporate Credit Investment Performance

Overview of Corporate Credit Funds ^(1),(2)

Mortgage Related Strategies Investment Performance

Overview of Mortgage Related Strategies ^(1),(2)

(*) The on-shore feeder fund in this master / feeder structure is consolidated for the periods indicated. The master fund and the off-shore feeder fund are not required to be consolidated for the periods indicated.

Broad Credit Investment Products Platform.   ZAIS Group is an active investor across a broad range of product sectors, including securitized credit and related investments. ZAIS Group’s current investments include, but are not limited to, non-agency RMBS, residential whole loans, agency MBS derivatives, CRE investments including CMBS, mezzanine loans and commercial properties, corporate CLOs, individual corporate debt securities, leveraged loans, and structured corporate synthetics. Within these products, ZAIS Group invests in senior, mezzanine and equity investments. ZAIS Group’s involvement in investing across the specialized credit market provides ZAIS Group with context for assessing cross-sector relative value. The depth of ZAIS Group’s credit insight can then be used to source what ZAIS Group believes are the most attractive investment opportunities.

Diverse Client Base and Product Mix.   Since its inception in 1997, ZAIS Group has built long-term relationships with an international investor base, including public and private pension funds, endowments, foundations, insurance companies, family offices, funds of funds, sovereign wealth funds and investment advisors. ZAIS Group manages assets using a range of strategies and investment vehicles, including hedge funds, separately managed accounts, structured vehicles as well as through the management of the ZFC REIT. ZAIS Group believes this broad client base and diverse suite of investment vehicles provides important diversification for its business. The chart set forth below provides a breakdown of our AUM by investor type.

AUM by Investor Type ⁽¹⁾⁽²⁾

ZAIS Group has also evolved as a customized investment management provider to its clients. By developing strong working relationships with its clients to identify their needs and investment parameters, ZAIS Group has increased its managed account offerings over the past seven years. In ZAIS Group’s experience, certain institutional investors demand more transparency, control, and liquidity in the current yield environment, and ZAIS Group can deliver those attributes through customized solutions. As of December 31, 2014, ZAIS Group managed over $1.7 billion in 17 managed accounts/funds of one.

For holdings from January 1, 2014 forward, ZAIS Group has revised its methodology for calculating AUM. Management believes the new methodology, which now includes assets in the warehouse phase for new structured vehicles and does not treat leverage and other operating liabilities as a reduction of AUM, more clearly reflects the total assets actively managed by ZAIS Group. In the above chart, AUM for years 2007 through 2010 are presented per the former methodology, AUM for years 2011 through 2013 are presented on a pro forma basis consistent with the revised methodology and AUM for 2014 is presented per the revised methodology.

Robust Proprietary Analytics Platform.   ZAIS Group has developed a proprietary analytics platform over the past 17 years. ZAIS Group has built a common loan-level model across RMBS and whole loans. ZAIS Group possesses comprehensive analytics and data infrastructure, which includes credit modeling, loan and securities valuation, loan data management and servicing oversight capabilities. ZAIS Group supports corporate loan and consumer loan level analytics to generate scenario analysis across the specialized credit markets. ZAIS Group maintains a private database of corporate CDO structures, including covenants, waterfall rules, portfolios, and performance. For RMBS, ZAIS Group maintains an advanced loan-level collateral performance database, feeding ZAIS Group’s proprietary loan-level mortgage credit models. ZAIS Group has built tools to provide transparency into the output of its mortgage credit models, thereby increasing their utilization and effectiveness across the firm. ZAIS Group’s analytics allow it to compare investments under various assumptions, such as different macroeconomic conditions, credit spread and market volatility observations, and default and recovery rates. Utilizing a common analytics platform for both securities and loans enables ZAIS Group to make relative value allocations across these sectors. ZAIS Group supports this platform with technology specialists and a dedicated analytics team.

In the CLO asset class, ZAIS Group believes that discrete differences among CLO managers and CLO structures are often mispriced by the market, creating a premium for credit selection. Approximately 90% of the tradable CLO universe is modeled internally. ZAIS Group places emphasis on identifying key structural features from transaction documentation, and incorporating the information into ZAIS Group’s investment selection process.

In the residential mortgage asset class, ZAIS Group believes that significant variances in risks and rewards among different classes of Non-Agency RMBS place a premium on prudent sector/security selection. ZAIS Group’s residential loan-level model incorporates updated credit bureau scores and a proprietary home price database, supporting RMBS and whole loan investment within a single platform.

Institutionalized Operations Infrastructure.   ZAIS Group has developed a significant operational platform with capacity in areas such as finance and accounting, administration, compliance, investor relations, trade execution, securities valuation, risk management and information technology. ZAIS Group currently manages the ZFC REIT, which is a publicly traded vehicle which is required to comply with the requirements of the Sarbanes-Oxley Act. ZAIS Group’s infrastructure provides it with a foundation for future growth.

Use of Investment Proceeds Received from the Business Combination

ZAIS intends to use a substantial portion of the proceeds from the Business Combination to pursue and explore opportunities to grow its residential mortgage business and to expand its corporate CLO business. ZAIS may acquire newly originated mortgage loans directly or on behalf of a fund or funds for which it serves as investment manager. ZAIS may either retain the loans for investment or may aggregate and securitize these newly originated loans into new issue RMBS to be sold either to a third party or to a fund or funds for which ZAIS serves as the investment manager. ZAIS may also invest in mortgage servicing rights and pursue opportunities to acquire mortgage origination businesses.

With the constrained lending environment within the traditional banking community, ZAIS sees an opportunity to build on its CLO business, which commenced in 2014 with two completed CLO transactions. ZAIS intends to deploy or reserve proceeds to launch new CLO transactions and to meet new risk retention requirements facing CLO collateral managers beginning in 2016. ZAIS also intends to consider exploring CLO collateral management agreement acquisition opportunities.

ZAIS is also evaluating other potential uses of proceeds from the Business Combination, including seeding an alternative investment vehicle structured as a mutual fund that would be advised or sub-advised by the Company, seeding a new commingled investment vehicle focused on the emerging credit trading opportunities arising from ongoing regulatory changes and originating or purchasing newly originated bridge loans for commercial real estate (CRE) and securitizing them into new CRE CLO securities or CMBS. There is no assurance that ZAIS will pursue any of these potential opportunities, that these opportunities can be adequately funded and that,  if pursued, the opportunities will generate significant revenue for ZAIS.

In addition to the foregoing, ZAIS anticipates utilizing up to $7 million of the proceeds of the Business Combination to fund its working capital requirements.

ZAIS’s Investment Strategies and Vehicles

As an asset manager, ZAIS Group uses its investment expertise to make investments on behalf of the ZAIS Managed Entities. As an alternative asset manager, ZAIS Group focuses on hedge funds, separately managed accounts and structured vehicles that generally make investments that are relatively illiquid in nature. ZAIS Group’s two hedge funds are “open-end” funds where new and existing fund investors can contribute capital on a periodic basis (typically monthly) and can redeem their capital on a periodic basis. These funds have an indefinite life as long as they have investors. ZAIS Group may also create hybrid private equity style funds that are “closed-end” funds where fund investors make capital commitments when the fund is formed and these commitments are drawn down as the fund makes investments. Capital is returned to fund investors on distribution dates after the investment period has ended (averaging three years) and there is a set termination date. In general, fund investors may not withdraw or redeem capital during the investment period and additional fund investors are not permitted to join the fund after the fund’s final closing date. ZAIS Group also manages separately managed accounts that are tailored to the investment objectives of investors. The investors in these managed accounts may generally contribute additional capital or withdraw capital with little or no notice. Structured vehicles such as CDOs or CLOs purchase debt or loans and finance the purchases through the issuance of new debt and equity notes. A series of notes are issued with different risk-return profiles based on their position in the capital structure and payment waterfall. The equity notes typically take the first loss and are entitled to any excess returns in the transaction. Should the credit quality of the portfolio deteriorate, the equity notes will often be cut off from any distributions in order to speed up amortization on the debt tranches. The chart below shows our AUM by strategy and form of investment vehicle.

Mortgage Strategies

ZAIS Group’s mortgage investment platform combines a skilled team of experienced mortgage investors with analytical and risk management systems focused on the residential and commercial mortgage sectors. ZAIS Group has organized its internal resources to address opportunities across the mortgage markets as such opportunities evolve. Over time, ZAIS Group has successfully positioned its platform to capitalize on market dislocations and the subsequent recovery of the mortgage securities and whole loan markets. ZAIS Group has built a fully integrated investment platform focused on analyzing and managing both securitized and whole loan assets. ZAIS Group’s mortgage team is actively engaged in asset selection, underwriting, and servicing processes. ZAIS Group believes these strategies are well suited to the current mortgage environment to capitalize on market conditions including limited mortgage credit availability. As of December 31, 2014, ZAIS Group has approximately $1.43 billion deployed in mortgage strategies.

Corporate Debt Strategies

ZAIS Group’s corporate credit expertise and proprietary analytics platform and experienced credit analysts allow ZAIS Group to provide solutions and insight to optimize portfolios backed by corporate debt. ZAIS Group believes, regardless of product form or credit ratings, that integrating a breadth of information across corporate credit markets can generate investment ideas and risk management processes capable of generating above average returns. ZAIS Group has consistently sought to offer its investors opportunities to capitalize on dislocated markets across the corporate credit spectrum. As of December 31, 2014, ZAIS Group has approximately $1.93 billion deployed in corporate debt strategies.

Multi-Strategy Vehicles

ZAIS Group also uses its credit expertise and analytics platform to manage four multi strategy funds that focus on various other specialized credit investments. Some of these multi strategy funds contain investments in mortgage and corporate debt strategies referred to above. As of December 31, 2014, ZAIS Group has approximately $770 million deployed in multi-strategy funds.

AUM by Strategy ⁽¹⁾

AUM by Vehicle Type ⁽¹⁾

Investment Operations and Information Technology

Since inception, ZAIS Group has developed proprietary, integrated analytics, trading, accounting, and portfolio management applications as a technological foundation for its businesses. These applications are maintained and supported by technology and analytics professionals located in the United States. ZAIS Group’s technology platform was initially developed at a time when vendor solutions were either unavailable or deemed inadequate to support its requirements. Going forward, for each new business ZAIS Group considers, the technological requirements and costs to support that business are included in the assessment of the investment opportunity. ZAIS Group is constantly evaluating whether to build or buy the requisite technology needed by its businesses.

Fee and Income Structure

For the management of its investment products and other vehicles, ZAIS Group receives fees and other income as follows:

Management Fees

Management fee income is typically based on a fixed annual percentage of assets ZAIS Group manages for each ZAIS Managed Entity, and it is intended to compensate ZAIS for the time and effort ZAIS Group expends in researching, and managing investments.

Hedge funds and accounts :  Management fees earned by ZAIS Group for funds and accounts with hedge fund-style fee arrangements generally range from 0.50% to 1.25%, annually, based on net asset value of these funds and accounts prior to the accrual of incentive fees/allocations.

Private equity funds and accounts :  Management fees earned by ZAIS Group for funds and accounts with private equity-style fee arrangements generally range from 0.25% to 0.50%, annually, based on either the net asset value of these funds and accounts prior to the accrual of incentive fees/allocations or on the amount of capital committed to these funds and accounts by its investors.

Structured Vehicles (CDOs) :  Management fees earned by ZAIS Group for the CDOs managed by ZAIS Group generally range from 0.15% to 0.50%, annually, and generally are based on the par value of the collateral and cash held in the CDOs.

ZFC REIT : Management fees earned by ZAIS Group for the ZFC REIT is 1.50%, annually, based on ZFC REIT's stockholders' equity, as defined in the amended and restated investment advisory agreement between ZAIS Group and ZFC REIT.

Incentive Income

In some cases, ZAIS Group receives incentive income when certain pre-agreed financial hurdles have been met.

Hedge funds and accounts :  For funds and accounts with hedge fund-style fee arrangements, incentive income earned by ZAIS Group generally ranges from 10% to 20% of the net realized and unrealized profits attributable to each investor, subject to a hurdle (if any) set forth in each respective entity’s operative agreement. Additionally, all of ZAIS Group’s funds and accounts with hedge fund-style fee arrangements are subject to a perpetual loss carry forward or perpetual “high-water mark,” meaning that the funds and accounts will not pay incentive fees/allocations to ZAIS Group with respect to positive investment performance generated for an investor in any year following negative investment performance until that loss is recouped, at which point an investor’s capital balance surpasses the high-water mark. The funds and accounts pay incentive fees/allocations to ZAIS Group on any net profits in excess of the high-water mark.

Private equity funds and accounts :  For funds and accounts with private equity-style fee arrangements, incentive income earned by ZAIS Group is generally 20% of all profits, subject to the return of contributed capital (and subordinate management fees, if any), and a preferred return as specified in each fund’s advisory agreement.

Structured Vehicles (CDOs) :  For CDOs, incentive income earned by ZAIS Group generally ranges from 10% to 20% of all profits, subject to the return of contributed capital (and subordinate management fees, if any), and a preferred return as specified in the respective CDO’s collateral management agreements.

Capital Invested In and Through ZAIS Group’s Products

As further alignment of ZAIS Group’s interests with those of its investors, ZAIS Group and various of its eligible professionals have invested capital in the products ZAIS Group sponsors and manages.

Regulatory and Compliance Matters

ZAIS Group is subject to extensive regulation by a number of regulators and self-regulatory organizations that have the authority to authorize, and in specific circumstances to limit, restrict or prohibit, regulated entities from carrying out particular activities if they fail to comply with applicable laws and regulations. A significant failure to comply could expose ZAIS Group to liability or reputational damage. Further, new legislation, heightened regulatory oversight of fundraising activities, changes in rules of self-regulatory organizations or exchanges or changes in the interpretation or enforcement of existing laws and regulations may directly affect ZAIS Group’s operations and profitability.

Rigorous legal and compliance analysis of ZAIS Group’s businesses and investments is ingrained in its culture. ZAIS Group strives to maintain a culture of compliance through the use of carefully tailored policies and procedures, monitoring and oversight, a code of ethics, compliance systems, communication of compliance guidance and employee education and training, including by making clear that doing business in compliance with applicable law and regulations is the responsibility of each of ZAIS Group’s employees. ZAIS Group has a compliance group that monitors ZAIS Group’s compliance with the regulatory requirements to which ZAIS Group is subject and manages ZAIS Group’s compliance policies and procedures. ZAIS Group’s Chief Compliance Officer supervises ZAIS Group’s compliance group, which is responsible for monitoring the regulatory and compliance matters that affect ZAIS Group’s activities. ZAIS Group’s compliance policies and procedures address a wide variety of regulatory and compliance obligations that arise under the various bodies of law that apply to ZAIS Group’s business. Senior management is involved in various aspects of ZAIS Group’s compliance program, including through active participation on relevant governance committees.

All employees are evaluated each year on a variety of performance criteria, one of which is their compliance record, including their contribution to fostering a culture of ethics and compliance. ZAIS Group’s Chief Compliance Officer reviews, contributes content as appropriate and approves each employee’s compliance performance review, to maintain the independence of this aspect of the annual performance review process. A failure to conduct business in compliance or to contribute to ZAIS Group’s culture of ethics and compliance can have a significant impact on incentive compensation.

United States

ZAIS Group is registered with the SEC as an investment adviser pursuant to the Advisers Act. The Advisers Act, together with the SEC’s regulations and interpretations thereunder, is a highly prescriptive regulatory statute. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censures to termination of an adviser’s registration.

Under the Advisers Act, an investment adviser (whether or not registered under the Advisers Act) owes fiduciary duties to its clients. These duties impose standards, requirements and limitations on, among other things, trading for proprietary, personal and client accounts; allocations of investment opportunities among clients; use of “soft dollars,” a practice that involves using client brokerage commissions to purchase research or other services that help managers make investment decisions; execution of transactions; and recommendations to clients. On behalf of its investment advisory clients, ZAIS Group makes decisions to buy and sell securities for each portfolio, selects broker dealers to execute trades and negotiates brokerage compensation.

The Advisers Act also imposes specific restrictions on an investment adviser’s ability to engage in principal and cross transactions. ZAIS Group policy permits cross trades so long as no client is disfavored. Generally, cross trades between clients will be permitted if: (1) third party bids are obtained to assess appropriate market values, (2) ZAIS Group receives any necessary client permissions following disclosure of certain material facts related to any such trade; and (3) complete records are maintained. Any cross trades involving assets for which third party bids are not available will only be executed after obtaining a reasonable, independent indicator of value and approval from the ZAIS Group Conflicts/Cross Trade Committee. ZAIS Group does not receive any special compensation for cross trades. While cross trades may create the appearance of a conflict of interest, ZAIS Group believes its cross trade procedures mitigate the potential conflict and provide all parties to the transaction with a fair and equitable price.

As a registered investment adviser, ZAIS Group is subject to many additional requirements that cover, among other things, disclosure of information about its business to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees ZAIS Group may charge; custody of client assets; client privacy; advertising; and solicitation of clients. The SEC has legal authority to inspect any investment adviser and typically inspects a registered adviser periodically to determine whether the adviser is conducting its activities in compliance with (i) applicable laws and regulations, (ii) disclosures made to clients and (iii) adequate systems, policies and procedures reasonably designed to prevent and detect violations.

Under the Advisers Act, ZAIS Group’s investment management agreements may not be assigned without the client’s consent. The term “assignment” is broadly defined and includes direct assignments as well as assignments that may be deemed to occur upon the transfer, directly or indirectly, of a controlling interest in ZAIS Group.

Section 28(e) of the Exchange Act provides a “safe harbor” to investment managers who use commission dollars generated by their advised accounts to obtain investment research and brokerage services that provide lawful and appropriate assistance to the manager in the performance of investment decision-making responsibilities. ZAIS Group, as a matter of policy, does not use “soft dollars” and so it has no incentive to select or recommend a broker or dealer based on any interest in receiving research or related services. Rather, ZAIS Group selects brokers based on its clients’ interest in receiving best execution.

With respect to certain investment vehicles, ZAIS Group is also registered with the CFTC as a CPO or CTA. ZAIS Group is also a member of the NFA, the commodity and futures industry self-regulatory organization that inspects CPOs and CTAs for compliance with the CFTC’s and its own rules and regulations. As with the Advisers Act, the CEA governs many aspects of ZAIS Group’s derivatives-related business.

ZAIS Group is also a member of two SEFs, each of which is a self-regulatory organization with its own rulebook, and with inspection and enforcement authority. The SEFs of which ZAIS Group is a member have contracted with the NFA to conduct compliance inspections of their members.

ZAIS Group’s mortgage-related business activities are regulated by the Consumer Financial Protection Bureau and state regulatory bodies in the states in which ZAIS Group carries out this business. If ZAIS Group commences securitizing the mortgages it acquires through its conduit business, ZAIS Group will become subject to a variety of obligations, including new SEC regulations concerning asset-backed securities and interactions with credit rating agencies.

ZAIS Group was examined by the NFA beginning in November 2014, as a new CFTC registrant.  The examination resulted in one finding concerning ZAIS Group’s business continuity plan, which was promptly updated. In connection with examinations by the SEC’s Office of Compliance Inspections and Examinations in 2009 and in 2011, ZAIS Group was made aware of certain issues that ZAIS Group chose to address voluntarily to allay concerns about certain practices, as well as to enhance its governance structure and compliance policies and procedures. In both instances, ZAIS Group engaged an independent advisory firm to conduct an internal examination of the issues presented. One of the examinations involved certain trading practices involving the packaging and distribution of certain CDOs. As a result of the independent advisory firm’s review and after considering its advice, ZAIS Group voluntarily decided to reimburse investors to satisfy itself they had not been even arguably disadvantaged, and ZAIS Group adopted policies and procedures to strengthen its compliance efforts in a number of respects. ZAIS Group also adopted a governance committee structure and a variety of other compliance policies and procedures to address related issues that were identified during the review. The second examination resulted from an anonymous allegation relating to the manner in which ZAIS Group acquired certain investment management agreements (“IMAs”) for certain CDO funds in September 2008. As a result of this review, the independent advisory firm concluded that ZAIS Group did not have any improper material advantage in bidding for the IMAs and that investors were not harmed, but that certain of ZAIS Group’s employees should have exhibited greater sensitivity to their fiduciary and other obligations to a prior employer, and been more meticulous in following bidding procedures. These conclusions resulted in a number of recommendations for strengthening certain of ZAIS Group’s policies and procedures and enhanced supervisions of certain employees. ZAIS Group also strengthened certain of its supervisory and compliance functions. The employees principally involved in this matter terminated their relationships with ZAIS Group in 2012.

United Kingdom

ZAIS Group (UK) Limited, a wholly owned subsidiary of ZAIS Group is authorized and regulated by the Financial Conduct Authority in the United Kingdom. Its regulatory authorizations fall within the framework established by the European Markets in Financial Instruments Directive (as implemented into English law) and encompass, among other things, the ability to advise on investments, manage investments and arrange deals in investments for non-retail clients. ZAIS Group (UK) Limited has exercised its right to provide these services to clients across the European Economic Area by passporting its regulatory authorizations into all other EEA member states.

ZAIS Group (UK) Limited does not hold client money and, on the basis of its size and systemic importance, the Financial Conduct Authority has assigned the firm a “C4” conduct classification and a “P3” prudential classification, which entail the lowest levels of supervision for authorized firms.

Competition

ZAIS Group competes in all aspects of its business with other investment management companies, including investment funds, hedge funds, private equity funds and traditional and non-traditional financial services companies, including commercial banks and insurance companies. ZAIS Group faces competition in the pursuit of outside investors for its funds. ZAIS Group also pursues investment opportunities for client accounts and for ZAIS Group alongside many competitors.

ZAIS Group competes for outside investors based on a variety of factors, including:

In order to grow its business, ZAIS Group must be able to compete effectively for outside investors. ZAIS Group must also effectively execute its investment strategies on behalf of its clients and itself. ZAIS Group’s ability to successfully implement its investment strategies is based on a variety of factors, including:

Many of ZAIS Group’s competitors are substantially larger and may possess greater financial and technical resources. Several of these competitors have recently raised, or are expected to raise, significant amounts of capital and many of them have similar investment objectives to ZAIS Group, which may create additional competition for investment opportunities. Some of these competitors may also have a lower cost of capital and access to funding sources that are not available to ZAIS Group, which may create competitive disadvantages for ZAIS Group with respect to investment opportunities. Some of these competitors may have higher risk tolerance, make different risk assessments or have lower return thresholds, which could allow them to consider a wider variety of investments, bid more aggressively for investments that ZAIS Group wants to make or accept legal or regulatory limitations or risks ZAIS Group would be unable or unwilling to accept. Moreover, an increase in the allocation of capital to alternative investment strategies by institutional and individual investors could lead to a reduction in the size and duration of pricing inefficiencies that many of ZAIS Group’s investment funds seek to exploit. Alternatively, a decrease in the allocation of capital to alternative investments strategies could intensify competition for that capital and lead to fee reductions and redemptions, as well as difficulty in raising new capital.

Competition is also intense for the attraction and retention of qualified employees. ZAIS Group’s ability to continue to compete effectively in its businesses will depend upon its ability to attract new employees and retain and motivate existing employees.

Properties

ZAIS’s principal executive offices are located in leased office space at Two Bridge Avenue, Red Bank, New Jersey. ZAIS also leases the space for its offices in London and Shanghai. ZAIS does not directly own any real property. ZAIS considers these facilities to be suitable and adequate for the management and operation of its business, although it will remain active in evaluating alternative options should the need arise.

Employees

ZAIS believes that one of the strengths and principal reasons for its success is the quality and dedication of its people. As of March 20, 2015, ZAIS employed over 120 individuals (subject to reduction upon the termination of business operations in Shanghai as described in Item 2.05), including over 45 investment professionals, located in ZAIS’s Red Bank, London and Shanghai offices.

Legal Proceedings

Although ZAIS may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise, ZAIS is currently not a party to any pending material legal proceedings.

Risk Factors

Except as provided below, the risk factors related to the Company’s business and operations are described in the Proxy Statement in the section entitled “Risk Factors” beginning on page 33, which is incorporated by reference herein.

ZAIS Group’s AUM has been subject to volatility.

Historically, ZAIS Group’s AUM has fluctuated from time to time. ZAIS Group’s AUM has declined significantly from its peak of $11.7 billion prior to the financial crisis in 2008 to $4.1 billion as of December 31, 2014, largely attributable to the return of investor capital from certain private equity style funds, the termination of certain CDOs managed by ZAIS Group, certain investor redemptions and the challenges of raising significant new assets to replace those assets being returned to investors. These challenges stem largely from structured credit products being disfavored by investors in the continuing low interest rate environment. In this environment, investor inflows have gravitated toward equity and macro managers as interest rates remained relatively flat, a trend that will likely continue until interest rates rise to a level presenting more attractive yields.

Further, ZAIS Group currently has additional funds representing total AUM of approximately $518 million that are winding down and are in liquidation. If ZAIS Group is unable to raise significant new assets to replace those that will be returned to investors its AUM would be subject to further decline resulting in a lower base of assets on which it charges management fees and may receive incentive income. This, in turn, would negatively impact ZAIS Group’s revenue and results of operations.

Poor performance of ZAIS Group’s funds would cause a decline in ZAIS Group’s revenue and results of operations, and would adversely affect ZAIS Group’s ability to raise capital for future funds.

ZAIS Group’s revenue is derived principally from two sources: (1) management fee income, based on the size of ZAIS Group’s funds and (2) incentive income, based on the performance of ZAIS Group’s funds. Although ZAIS Group believes that a portion of its revenue is consistent and recurring due to ZAIS Group’s investment strategy and the nature of ZAIS Group’s fees, a portion of ZAIS Group’s revenue and cash flow is variable, primarily due to the fact that the performance fees from ZAIS Group’s funds can vary from year to year. For the year ended December 31, 2014, performance fees were 74.6% of ZAIS Group’s total revenues, representing a 122.7% increase over the year ended December 31, 2013. For the years ended December 31, 2013 and December 31, 2012, performance fees were 49.9% and 76.7% of ZAIS Group’s total revenues, respectively. In the event that any of ZAIS Group’s funds perform poorly, ZAIS Group’s revenue and results of operations will decline, and it will likely be more difficult for ZAIS Group to raise new capital. In addition, fund investors may withdraw their investments in ZAIS Group’s funds as a result of poor performance of ZAIS Group’s funds or otherwise. ZAIS Group’s investors and potential investors continually assess ZAIS Group’s funds’ performance and ZAIS Group’s ability to raise capital.

A significant portion of ZAIS Group’s AUM is or may be derived from a small number of clients, the loss of which could significantly reduce ZAIS Group’s management fees and have a material adverse effect on ZAIS Group’s results of operations.

Certain of ZAIS Group’s strategies are or may derive a significant portion of their total AUM from assets of a single client or a small number of clients. As of December 31, 2014, two investors accounted for approximately 23% of ZAIS Group’s AUM and ZAIS Group’s 10 largest investors accounted for approximately 51% of ZAIS Group’s AUM. If any such clients withdraw all or a portion of their AUM, ZAIS Group’s business would be significantly affected, which would negatively impact ZAIS Group’s management fees and could have a material adverse effect on ZAIS Group’s results of operations and financial condition.

Risks Related to ZAIS Group’s Funds and Managed Accounts

Dependence on leverage by certain of ZAIS Group’s funds subjects them to potential volatility and contractions in the debt financing markets and could adversely affect ZAIS Group’s ability to achieve attractive rates of return on those investments.

Certain of ZAIS Group’s funds use leverage, and ZAIS Group’s ability to achieve attractive rates of return on investments in those funds will depend on ZAIS Group’s ability to access sufficient sources of indebtedness at attractive rates. ZAIS Group’s funds may choose to use leverage as part of their respective investment programs. As of December 31, 2014, ZAIS Group served as investment manager to three funds utilizing various degrees of leverage. These funds had combined AUM of $1.3 billion. The weighted average leverage ratio of these funds is approximately 94.42% (based on net asset value), with one fund accounting for a majority of the leverage employed. The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss to investors. A fund may borrow money from time to time to make investments or may enter into derivative transactions that have embedded leverage. The interest expense and other costs incurred in connection with such borrowing or embedded leverage may not be recovered by returns on such investments and may be lost, and the timing and magnitude of such losses may be accelerated or exacerbated, in the event of a decline in the market value of such investments. Gains realized with borrowed funds may cause the fund’s net asset value to increase at a faster rate than would be the case without borrowings. However, if investment results fail to cover the cost of borrowings, the fund’s net asset value could also decrease faster than if there had been no borrowings. An increase in interest rates could also decrease the value of fixed-rate debt investments that ZAIS Group’s funds make. Any of the foregoing circumstances could have a material adverse effect on ZAIS Group’s business, results of operations and financial condition.

If ZAIS Group’s funds or the issuers or companies in which ZAIS Group’s funds invest raise capital in the structured credit, leveraged loan or high yield bond markets, the results of their operations may suffer if such markets experience dislocations, contractions or volatility. Any such events could adversely impact the availability of credit to businesses generally and could lead to an overall weakening of the U.S. and global economies. Any economic downturn could adversely affect the financial resources of ZAIS Group’s funds and their investments (in particular those investments that depend on credit from third parties or that otherwise participate in the credit markets) and their ability to make principal and interest payments on, or refinance, outstanding debt when due. Moreover, these events could affect the terms of available debt financing with, for example, higher rates, higher equity requirements or more restrictive covenants.

The absence of available sources of sufficient debt financing for extended periods of time or an increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive to finance those investments. Certain investments may also be financed through borrowings on fund-level debt facilities, which may or may not be available for a refinancing at the end of their respective terms. In addition, the interest payments on the indebtedness used to finance ZAIS Group’s funds’ investments are generally deductible expenses for applicable income tax purposes, but may be subject to limitations with respect to timing or amount under applicable tax law and policy. Any change in such tax law or policy to eliminate or substantially limit the availability of these income tax deductions may reduce the after-tax rates of return on the affected investments for certain investors, which may have an adverse impact on ZAIS Group’s businesses and financial results.

If the markets make it difficult or impossible to refinance debt that is maturing in the near term, some of ZAIS Group’s investee companies may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection. Any of the foregoing circumstances could have a material adverse effect on ZAIS Group’s business, results of operations and financial condition.

Certain of ZAIS Group’s funds invest in RMBS and residential mortgage loans that are subject to particular risks.

Certain of ZAIS Group’s funds invest in RMBS and residential mortgage loans. These loans may be either retained or securitized, the securities of which may be sold to third party investors. As of December 31, 2014, ZAIS Group served as investment manager to 8 funds investing in RMBS or residential mortgage loans. These funds have combined AUM of approximately $1.43 billion.

Holders of RMBS or residential mortgage loans that underlie RMBS generally bear risks inherent in investment in structured credit and leveraged loans. In particular, the rate of defaults and losses will be affected by a number of factors, including general economic conditions, the unemployment rate, the level of interest rates, the availability of mortgage credit, local conditions in the geographic area where the related mortgaged property is located, the terms of the loan, the borrower’s equity in the mortgaged property and the financial circumstances of the borrower. Further, a region’s economic condition and housing market may be directly, or indirectly, adversely affected by natural disasters or civil disturbances such as earthquakes, hurricanes, fires, floods, eruptions or riots. The above factors may have a larger effect depending on the composition of the residential mortgage loans that underlie an RMBS. For example, an RMBS may invest in subprime, non-conforming mortgage loans, balloon mortgage loans, interest only mortgage loans, adjustable-rate mortgage loans, and negatively amortizing mortgage loans, all of which may be subject to greater risks than traditional fixed rate mortgage loans. The residential mortgage loans underlying an RMBS may not be diversified in terms of geography, interest rates or terms.

Foreclosure.   Residential mortgage foreclosure rates increased significantly in connection with the crisis in the credit markets that began in 2007 – 2008. This trend negatively impacted the financial and capital markets generally and the mortgage-lending and mortgage-investment industry segments more specifically. If a residential mortgage loan is in default, foreclosure of such residential mortgage loan may be a lengthy and difficult process, and may involve significant expenses. Furthermore, the market for defaulted residential mortgage loans or foreclosed properties may be very limited. In the event that ZAIS Group invests in residential mortgage loans that are subsequently foreclosed on, ZAIS Group would likely lose some or all of its investment, which could have a material adverse effect on ZAIS Group’s performance and profitability.

Underwriting.   Defaults may result from substandard underwriting and purchasing guidelines or the failure of the loan originator to comply with good or adequate origination guidelines. The applicable originator’s underwriting standards and any applicable purchasing guidelines may not identify or appropriately assess the risk that the interest and principal payments due on a mortgage loan will be repaid when due, or at all, or whether the market value of the related mortgaged property will be sufficient to otherwise provide for recovery of such amounts. In addition, with respect to any exceptions made to the applicable originator’s underwriting standards in originating a mortgage loan, those exceptions may be subjective and may increase the risk that principal and interest amounts may not be received or recovered and compensating factors, if any, which may be the premise for making an exception to the underwriting standards may not, in fact, compensate for any additional risk. No assurance can be given that any of the mortgage loans that ZAIS Group acquires from an originator will comply with such originator’s underwriting guidelines or that any mortgage loans will have compensating factors in the event that those mortgage loans do not comply with the related originator’s underwriting guidelines. Mortgage loans owned by ZAIS Group’s funds either directly or through RMBS may have been originated with less stringent underwriting guidelines than mortgage loans being originated in the current environment.

Prepayment.   The rate of prepayments of newly originated residential mortgage loans will be sensitive to prevailing interest rates. Generally, if prevailing interest rates decline, mortgage prepayments may increase if refinancing is available at lower interest rates. If prevailing interest rates rise, prepayments on the mortgage loans may decrease. However, an expansion of credit could result in an increase in refinancing activity even in a rising interest rate environment if credit standards are relaxed and underwriting guidelines expanded. Prepayments also may occur as a result of solicitations of the borrowers by mortgage loan lenders. In addition, the timing of prepayments of principal may also be affected by liquidations of or insurance payments on the mortgage loan, or repurchases by the related originator for breaches of representations and warranties or defective documentation. An increase in prepayments has a negative effect on the value of mortgage loans due to the loss of future interest payments.

Liability of Ownership.   Ownership of residential mortgage loans also includes the potential of certain legal risks of ownership, including assignee liabilities. The Truth in Lending Act provides that subsequent purchasers of residential mortgage loans originated in violation of certain requirements specified in the Truth in Lending Act may have liability for such violations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) also prohibits lenders from originating residential mortgage loans unless the lender determines that the borrower has a reasonable ability to repay the loan. This requirement has been codified in the “ability-to-repay” rules (collectively, the “ATR Rules”) under the Truth in Lending Act (“Regulation Z”). The ATR Rules, among other things, require that originators follow certain procedures and obtain certain documents in order to make a reasonable, good faith determination of a borrower’s ability to repay a residential mortgage loan. In addition, the U.S. Consumer Financial Protection Bureau has issued regulations, which became effective January 2014, specifying the standards for a “qualified mortgage” that would have the benefit of a safe harbor from liability under the ATR Rules if certain requirements are satisfied, or a rebuttable presumption from such liability if only certain of these requirements are satisfied. Interest-only loans, hybrid mortgage loans and balloon loans, as well as loans with a debt-to-income ratio exceeding 43% in general do not constitute qualified mortgages. Possible liabilities that could be required to be paid by an assignee of a mortgage loan include actual damages suffered by the borrower, litigation costs (which could exceed the principal amount of a mortgage loan), statutory damages and special statutory damages. A borrower may also assert a violation of the ATR Rules as a defense in a foreclosure action. Various state and local legislatures may adopt similar or more onerous provisions in the future. ZAIS Group is unable to predict how these laws and regulations relating to assignee liability may affect the ability of the fund to successfully complete exit strategies that utilize securitization. In addition, the qualified mortgage rule may adversely affect the market generally for mortgage-backed securities, if investors are not willing to invest in pools of mortgage loans that do not satisfy the qualified mortgage requirement.

Third Party Service Providers.   Mortgage loans are subject to risks of loss related to the third party service providers, including from violations of consumer protection laws, servicing protocols and servicing errors, including errors in the recordation of mortgage loans, or other factors that may cause foreclosure delays. Loan modifications by servicers may impact the value of mortgage loans.

Certain of ZAIS Group’s funds invest in commercial related mortgage assets that are subject to particular risks.

ZAIS Group’s funds invest in a variety of assets backed by commercial mortgages including CMBS, commercial real estate mortgages and mezzanine loans and direct commercial property ownership. As of December 31, 2014, ZAIS Group served as an investment manager to eight funds investing in CMBS, commercial real estate mortgages and mezzanine loans and direct commercial property ownership. The fair market value of the CMBS, commercial real estate mortgages and mezzanine loans and direct commercial property ownership held by these funds was approximately $56.5 million as of December 31, 2014.

The value of the commercial mortgage loans and the assets backed by commercial mortgages will be influenced by the rate of delinquencies and defaults experienced on the commercial mortgage loans and by the severity of loss incurred as result of such defaults. The factors influencing delinquencies, defaults and loss severity include: (i) economic and real estate market conditions by industry sectors (e.g., multifamily, retail, office, etc.); (ii) the terms and structure of the mortgage loans; and (iii) any specific limits to legal and financial recourse upon a default under the terms of the mortgage loan.

Exercise of foreclosure and other remedies may involve lengthy delays and additional legal and other related expenses on top of potentially declining property values. In certain circumstances, the creditors may also become liable upon taking title to an asset for environmental or structural damage existing at the property.

Commercial mortgage loans are generally viewed as having a greater risk of loss through delinquency and foreclosure than investing in the securities of single family residences. The ability of a borrower to repay a loan secured by income-producing property typically is dependent primarily upon the successful operation and operating income of such property (i.e., the ability of tenants to make lease payments, the ability of a property to attract and retain tenants, and the ability of the owner to maintain the property, minimize operating expenses and comply with applicable zoning and other laws) rather than upon the existence of independent income or assets of the borrower. Many commercial mortgage loans provide recourse only to specific assets, such as the property, and not against the borrower's other assets or personal guarantees.

Commercial mortgage loans generally do not fully amortize, which can necessitate a sale of the property or refinancing of the remaining “balloon” amount at or prior to maturity of the mortgage loan. Accordingly, investors in commercial mortgage loans and CMBS bear the risk that the borrower will be unable to refinance or otherwise repay the mortgage at maturity, thereby increasing the likelihood of a default on the borrower's obligation.

The repayment of a commercial mortgage loan is typically dependent upon the ability of the related mortgaged property to produce cash flow through the collection of rents. Even the liquidation value of a commercial property is determined, in substantial part, by the amount of the mortgaged property’s cash flow (or its potential to generate cash flow). However, net operating income and cash flow are often based on assumptions regarding tenant behavior and market conditions. Net operating income and cash flow can be volatile over time and may be insufficient to cover debt service on the mortgage loan at any given time. Lenders typically look to the debt service coverage ratio (that is, the ratio of net cash flow to debt service) of a mortgage loan secured by income-producing property as an important measure of the risk of default of that mortgage loan.

The net operating income, cash flow and property value of a commercial mortgage property may be adversely affected by a large number of factors specific to the property, such as:

A decline in the real estate market or in the financial condition of a major tenant will tend to have a more immediate effect on the net operating income of mortgaged properties with short-term revenue sources, such as short-term or month-to-month leases or leases with termination options, and may lead to higher rates of delinquency or defaults under the related mortgage loans.

In addition, underwritten or adjusted cash flows, by their nature, are speculative and are based upon certain assumptions and projections, including with respect to matters such as tenancy and rental income. The failure of these assumptions or projections in whole or in part could cause the underwritten or adjusted cash flows to vary substantially from the actual cash flows of a mortgaged property.

A portion of ZAIS Group’s revenue and cash flow is variable, which may impact ZAIS Group’s ability to achieve steady earnings growth on a quarterly basis and may cause volatility of Class A Common Stock.

Although ZAIS Group believes that a portion of its revenue is consistent and recurring due to ZAIS Group’s investment strategy and the nature of ZAIS Group’s fees, a portion of ZAIS Group’s revenue and cash flow is variable, primarily due to the fact that the performance fees from ZAIS Group’s funds can vary from year to year. For the year ended December 31, 2014, performance fees were 74.6% of ZAIS Group’s total revenues, representing a 122.7% increase over the year ended December 31, 2013. For the years ended December 31, 2013 and December 31, 2012, performance fees were 49.9% and 76.7% of ZAIS Group’s total revenues, respectively. Additionally, ZAIS Group may also experience fluctuations in ZAIS Group’s results from quarter to quarter and year to year due to a number of other factors, including changes in the values of ZAIS Group’s funds’ investments, changes in ZAIS Group’s operating expenses, the degree to which it encounters competition and general economic and market conditions. Such variability may lead to volatility in the trading price of Class A Common Stock. Moreover, ZAIS Group’s results for a particular period are not indicative of ZAIS Group’s performance in a future period.

Selected Historical Financial Information

The following table sets forth selected historical financial information of ZGP as of the dates and for the periods indicated. The financial information for ZGP as of and for the years ended December 31, 2014, 2013 and 2012 has been derived from ZGP’s audited financial statements for such periods, audited by KPMG LLP, independent registered public accountants.

You should read the following selected financial information in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes incorporated by reference in this Current Report on Form 8-K.

(1) Our calculations of Distributable Earnings and Adjusted EBITDA may not be directly comparable to other similar non-GAAP financial measures reported by other asset managers. ZGP believes that Distributable Earnings and Adjusted EBITDA are useful benchmarks for measuring ZGP's performance. Management also believes that investors should review the same supplemental financial measures that management uses to analyze the business. These measures supplement and should be considered in addition to and not in lieu of the results of operations prepared in accordance with GAAP. Refer to the "Supplemental Financial Information" included in the notes to the consolidated financial statements incorporated by reference in this Current Report on Form 8-K for more information on the differences between ZGP’s financial results reported pursuant to GAAP and its financial results reported as supplemental data. For reconciliations of ZGP's Distributable Earnings and Adjusted EBITDA to the most comparable GAAP measures, please see "ZGP Management's Discussion and Analysis of Financial Condition and Results of Operations Distributable Earnings and Adjusted EBITDA Reconciliations."