Alaris Equity Partners Income Trust : 2020 Annual Report

ANNUAL REPORT

FISCAL YEAR ENDED DECEMBER 31, 2020

www.alarisequitypartners.com

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ANNUAL REPORT 2020

President's Message.........................................................................................................................................................	3
About Alaris .....................................................................................................................................................................	4
Objective & Strategy ........................................................................................................................................................	4
Trust Conversion......................................................................................................................................................................	4
Investment Summary .......................................................................................................................................................	5
Private Company Partner Summaries...............................................................................................................................	6
Board of Directors ............................................................................................................................................................	7
2020 Financial Highlights..................................................................................................................................................	8
2020 Per Unit Highlights...................................................................................................................................................	9
Management Discussion & Analysis ................................................................................................................................	10
Income Trust Conversion........................................................................................................................................................	12
Overview ................................................................................................................................................................................	12
Results Of Operations.............................................................................................................................................................	13
Outlook	...................................................................................................................................................................................	18
Partner Updates .....................................................................................................................................................................	23
Liquidity and Capital Resources..............................................................................................................................................	29
Working Capital ......................................................................................................................................................................	31
Fnancial Instruments ..............................................................................................................................................................	32
Internal Controls Over Financial Reporting ............................................................................................................................	33
Summary of Contractual Obligations .....................................................................................................................................	33
Related Party Transactions.....................................................................................................................................................	33
Critical Accounting Estimates and Policies .............................................................................................................................	33
Recent Accounting Pronouncements .....................................................................................................................................	34
Summary of Annual & Quarterly Results................................................................................................................................	35
Outstanding Units ..................................................................................................................................................................	36
Income Taxes..........................................................................................................................................................................	36
Risk Factors.............................................................................................................................................................................	37
Forward-Looking Statements .................................................................................................................................................	55
Additional Information ...........................................................................................................................................................	56
Consolidated Financial Statements .................................................................................................................................	57
Independent Auditor's Report ...............................................................................................................................................	58
Consolidated statements of financial position.......................................................................................................................	63
Consolidated statements of comprehensive income.............................................................................................................	64
Consolidated statement of changes in equity........................................................................................................................	65
1.	Reporting entity ........................................................................................................................................................	68
2.	Statement of compliance ..........................................................................................................................................	68
3.	Significant accounting policies ..................................................................................................................................	70
4. Financial Risk Management Overview ......................................................................................................................	75
5.	Investments...............................................................................................................................................................	78
6.	Unitholders' Capital...................................................................................................................................................	86
7.	Loans and borrowings ...............................................................................................................................................	88
8.	Convertible debentures ............................................................................................................................................	89
9.	Unit-based payments ................................................................................................................................................	90
10.	Income Taxes.............................................................................................................................................................	91
11. Fair Value of Financial Instruments...........................................................................................................................	93
12.	Commitments............................................................................................................................................................	93
13.	Related Parties ..........................................................................................................................................................	94
14.	Subsequent Events ....................................................................................................................................................	94

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ANNUAL REPORT 2020

President's Message

While nobody could have foreseen the kind of year 2020 would become, looking back on the outcome for Alaris almost exactly one year after the world was essentially shut down by the virus, we are incredibly proud of how Alaris was able to perform. The stock market sold our stock heavily during the panic of the shutdown, believing that we were a proxy to the overall economy which was expected to be hit hard by the forced closures of so many businesses. What people understand better now is that we are actually a proxy to North America's required services and that our Partners were resilient and performed much better than expected, with an overall net positive reset. We move into 2021 with the best underlying fundamentals within our portfolio that we've had in our 17-year history. Based on our weighted average ECR, we have the largest average cashflow buffer at 70%, the lowest debt levels within our partner companies, eleventh straight year of net positive distribution resets, our best portfolio diversification ever with 20 partners - none more than 12% of our revenue and finally the company had its highest level of capital deployment in its history. I can't thank our staff enough for the incredible effort that has gone into this kind of performance, especially under less than ideal conditions.

With a Run Rate Payout Ratio now below 70%, there are a couple of factors that we expect will push that number even lower in the coming months. The first one is the continued improvements from PFGP who are showing improved performance indicators on a weekly basis. Getting PFGP back to 100% distributions and also making up the distributions that were missed is a large swing factor for Alaris.

The second factor is the growing contributions from the common equity portfolio that we have been building over the last two years. This facet of Alaris is one of the most exciting things that has transpired in our recent history. The addition of common equity along with our preferred equity on transactions has provided our unitholders with three benefits: 1) It is better aligning our risk profile on investments, allowing us to participate in all of the upside on companies during good times, helping to balance out the times where companies may struggle;

1. We believe that the common equity will provide a higher overall return than the preferred equity alone,

which is based on a look back analysis on our prior investments over the last 17 years. Early returns on our common equity have also shown this as Carey Electric, as one example, just paid us a common distribution equal to more than a 35% yield on our initial investment; and 3) The addition of common equity has allowed us to ramp up our capital deployment substantially by allowing us to be a larger portion of the capital structure to compete on deals where that's required, by removing the optics of being a debt provider as opposed to the equity investor that we are and by better aligning ourselves with the founders of our Partner companies by owning the same class of shares that they own.

Deploying over $350 million over the last twelve months during a pandemic has been a massive achievement for our team and will have a measurable affect on all of our performance measures for years to come. 2021 will see higher than average growth in revenue and earnings per unit because of the work done over these last six months. We also believe that we are extremely well positioned to keep that growth rate going as opportunities to deploy our capital keep coming in. Between our excess free cash flow that we generate, our expanded credit facility and the expected sale of a couple of our assets, we have the balance sheet capabilities to capitalize on those opportunities.

Steve King

CEO

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ANNUAL REPORT 2020

About Alaris

The Trust provides alternative financing for a diversified group of private businesses ("Private Company Partners") in exchange for distributions from the Private Company Partners, with the principal objective of generating stable and predictable cash flows for distribution payments to its unitholders. Distributions from the Private Company Partners are adjusted each year based on the percentage change of a "top line" financial performance measure such as gross revenue, gross margin or same-store sales and rank in priority to the owners' common equity position.

Objective & Strategy

Alaris is dedicated to creating long-term value for its unitholders.

Alaris' purpose, through its subsidiaries, is to provide non-control permanent equity to private companies to meet their business and capital objectives, which includes management buyouts, dividend recapitalization and growth and acquisitions. Alaris achieves this by investing its capital through its subsidiaries, into Private Company Partners primarily through preferred equity, in addition to common equity, subordinated debt and promissory notes. In exchange for the investments in preferred equity, subordinated debt and promissory notes, Alaris earns distributions, dividends and interest received in regular monthly or quarterly payments. These payments to Alaris are set for 12 months and are adjusted annually based on the "top-line" results of our Private Company Partners ("Partners"). Alaris creates long-term partnerships with companies that have a proven track record of stability and profitability in varying economic conditions. Alaris' preferred equity investments can also appreciate through the reset metric and a premium upon exit or redemption. In certain situations, Alaris also invests through owning a minority common equity position in our Partners and through which participates in the growth and distributions in proportion to our ownership percentage.

Our goal is to continue to diversify and increase our revenue streams by adding a select few new Partners each year in addition to providing follow-on capital to our existing Partners. Within our current revenue streams we aim to generate organic growth of 3-5% per year.

Trust Conversion

After receiving shareholder approval on August 31, 2020, Alaris Royalty Corp. converted to an income trust on September 1, 2020 and changed its name to "Alaris Equity Partners Income Trust" ("Alaris" or the "Trust"). The common shares of Alaris Royalty Corp. (AD) were delisted at the end of day on September 3, 2020 and the Trust units began trading on the TSX on September 4, 2020 under the symbol TSX: AD.UN

The conversion to the Trust resulted in a deemed disposition of the common shares in AD. Shareholders of AD received 1 trust unit of AD.UN for every 1 common share held in AD. The debentures outstanding continue to trade under the symbol AD.DB. The Trust believes the conversion will enhance long-term shareholder value as a result of:

• A materially simplified cross-border investment structure involving fewer foreign jurisdictions, which should reduce compliance and other administrative costs and Alaris' exposure to changes in foreign laws;
• Increasing the amount of cash available for distribution to unitholders and reducing the Payout Ratio; and
• Allowing Alaris to comply with applicable US legislation while maintaining an internal efficiency substantially consistent with Alaris' prior corporate structure.

As an income trust, Alaris is paying a trust distribution rather than a corporate dividend at a rate of $0.31 per quarter ($1.24 annually). The first trust distribution was declared in September 2020 and paid October 15, 2020 and quarterly distributions have been declared and paid at that same rate since then.

For more information, please visit our website at www.alarisequitypartners.com and search for documents under the "investor section" or visit www.sedar.com and search for documents under Alaris' corporate profile.

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ANNUAL REPORT 2020

Investment Summary

Alaris has approximately 85% of its fair value of investments

in US based companies.

Today, 40% of invested dollars are exposed to industrials, 30% to business services, 19% to consumer products and services and 11% consumer financial services.

Investment by Country

Investment by Industry Segment

	15%		19%
	40%
		11%
85%			30%

					Consumer Products/ Services
					Consumer Financial Services
	Canada		US		Business Services
			Industrial

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