THE SYNEIDESIS GROUP Spring 2014 Impact Investing’s 40 Year Evolution 1st Wave SRI 1970’s – 1990’s: SRI…Religion as innovator, Vietnam, apartheid, environment Wave Blended Return The 2000’s Today • “IMPACT AND/OR RETURNS” • “RETURNS FROM IMPACT” • • SRI funds & shareholder activism • Awareness, debate, and education • Microfinance • Network: GiiN Recognize the breadth of “impactful” strategies and asset classes • CRA • Metrics: IRIS/GiiRs • Scale and big levers • Community banking & CDFIs • JPM report • • Clean Air Act • Kyoto carbon credits Transition from “ideal” to reality • • Clean Water Act • MFI Nobel Prize & IPOs … • SOX & NOX cap & trade • Social enterprise & VC model dominate • “NO” • Significant innovation • Labeled with underperformance 2 3rd Wave Impact Drives Returns 2nd • More than Mission 4 Billion MORE People Eating Meat and Driving Cars • Global macro trends: Developing world population & middle class Natural resource consumption Pollution and climate change costs Income disparity and inequality • Massive market shifts = new risks, opportunities, and value • It’s “just” smart macro-trends investing 3 Confidential Drivers from Macrotrends • • • Duration: Sustainability, resource constraints of fundamental importance in long-lived assets (real assets) Integration: risk allocation, risk appropriate returns, and risk management are about sustainability factors. ESG, Benefit Companies Opportunity: Community and environmental problems are opportunities for financial innovation at scale • Performance: Sustainability is a performance driver…in the long term • Institutional Quality: Institutions are entering. 4 Resources CALPERS ESG research database: http://www.calpers.ca.gov/index.jsp?bc=/about/pr ess/pr-2013/june/finance-symposium.xml CALPERS Protocol (September 2013): http://www.calpers.ca.gov/eipdocs/about/press/news/invest-corp/boardoffsite.pdf Equilibrium Forum – Alan Emkin (Pension Consulting Alliance): http://vimeo.com/69999326 WEF Report: http://www.weforum.org/reports/marginsmainstream-assessment-impact-investment-sectorand-opportunities-engage-mainstream-i Emergent Themes • Long duration vs short term • Long term capital vs patient capital • Strategies executed in public policy, public interest, and regulation • Monetization of trust and authenticity • With… Additionality Intentionality Permanence Institutional Impact investing is a new discipline and model: The lessons of impact applied to deliver Sustainable Alpha at institutional scale. “The mission investors know the right words, but often are unclear how they apply. The financial investor knows the right words, know what they mean, but don’t know how they are applied”. 5 Thesis: Sustainability-driven Real Assets Strategies Higher resource productivity • Convert waste into value • Create higher value outputs • Stewardship management Dynamic operating execution • Think long term • Consider the whole system • Externalities matter 6 Confidential Asset Thrives • Higher Current Yield • Long Term Value Equilibrium Capital Building the Leaders in Sustainability Driven Real Assets • Founded in 2007 2013: $500M+ 2014: $1.2 - 1.4B • Real Assets: Agriculture/Food, Water, Energy, Real Estate Current income, long-term IRR, and inflation hedge Uncorrelated to traditional asset classes Flight towards long lived real assets Fragmented, significant size, and often few managers • Sustainability Driven “alpha” strategies • Institutional investor focus • Impact at scale 7 Confidential Come for the returns, Stay for the impact Real Assets Sectors and Alpha Generation Equilibrium Sustainable Methodologies Renewable Energy Distributed, decentralized, energy generation and efficiency Sustainable Agriculture Reducing chemical inputs, leveraging mechanization, enhancing the soil Green Real Estate Mixed use, efficient designs, integrated with the community Water Management Reclaimed, recycled and efficient use of wastewater streams Land Stewardship Optimizing land resource utilization Directly Correlating Sustainable Methodologies and Returns 8 Confidential Source of Returns • • • • • Multiple revenue streams Reduced input costs Waste/inefficiency into value Higher value outputs Long term enhanced asset productivity Equilibrium Platform Research Drives Our Investment Process Proprietary Research Development Strategy Fund Team Formation Product Development Fund Launch and Investing 36 to 48 months Process Cost: $2M- $4M • Proprietary Strategies •Superior returns •Real assets •Long term assets •Scale •Innovative structures • Building Teams • Addressing Investors’ Needs Measurement and Reporting 10 Confidential Current Product Highlights ACM Permanent Crop, LLC Australian Pastoral Fund Investments in permanent cropland and synergistic midstream assets to create a vertically integrated, sustainable farming enterprise that grows, packs and markets high-value produce. Focused on management and operational improvements using Agriculture Capital Management’s proven expertise. Investments in the land and operations of grass-fed cattle and sheep in Australia. Targets 500,000 cattle and 1 million sheep for domestic and export markets. This is the fund manager’s third pastoral fund dedicated to sound environmental, animal welfare and human resources management practices. • 10-year fund, $150-250mm targeted size • 10+years fund, - $500mm Wastewater Opportunity Fund, LLC Gerding Edlen Green Cities II, LP Project-level capital for the development and operations of waste to revenue bio-processing facilities. Initial proprietary projects include U.S. bio-processing developers in livestock/agriculture and food processing. Value-added, sustainable real estate development and investment funds. Focused on urban, in-fill, office, apartment and mixed-use properties in the U.S. from one of the world’s leading developers of LEED-certified properties with over 50 certified or registered LEED projects., of 60 green projects • ` 7-year fund, $150-250mm targeted size • 7year fund, $250-300mm targeted size Multi-Strategy Real Assets Vehicle A multi-manager vehicle, with no management fees or carried interest, from Equilibrium's platform of sustainability-driven real asset investment products. • 11 Confidential 12+ years vehicle, 2014 pooling period, $250 million maximum pool size Equilibrium Capital Group Building the Global Leader in Sustainability Driven Real Assets 12 Confidential ACM Permanent Crops, LLC Superior value-creation from vertically integrated, sustainable farming Fund Summary Agriculture Capital Management is managed by AgriCare and Equilibrium Capital. AgriCare is one of the largest managers of permanent cropland in the U.S. And operates 11,000 acres of farmland, as well as midstream assets (processing, packaging and storage facilities), for institutional investors and other farmland owners, totaling $165 million in asset value. AgriCare also manages a marketing/distribution operation with its own brand (HomeGrown Organic Farms). Fund Features Investment Highlights • Crops mix: Citrus, berries, table grapes, and nuts • Geography: western U.S. (California, Oregon, other) • Targeted assets portfolio: Existing cropland 70%, development land 30% Carried interest: 15% with catch-up Preferred return: 8% and farm production, quality control, process control enhancement • Drivers of returns: organic products offer premium pricing, midstream assets captures margins, sustainable farming practices accumulates value of the croplands 13 Confidential Management fee: 1.5% Bonus in years where current income exceeds preferred return; capped at 0.5% addition to management fee. • Midstream assets: captures greater share of economics between retail market(s) • Sustainable farming practices: water management, topsoil protection / Fund size: $150-$250 million, minimum investment $1.5 million Targeted Fund returns: current income from crop operations (8%-10%) plus capital return from sustainable land use practices, totaling 12%-14% IRR (net) Term: 10 years (+2 one-year extensions) Australian Pastoral Fund Diversified portfolio in the land and operations of Australian grass-fed cattle and beef Fund Summary A portfolio of Australian grassland properties and livestock for domestic and export markets, diversified by region and climate zone. Targets 500,000 grass-fed cattle and one million sheep using sustainability, mobility and technology as integral to operations. This is the Fund manager’s third pastoral fund dedicated to sound environmental, animal welfare and human resources management practices. Fund Features Fund size: A$250-A$500 Management fee: 0.75% Market Opportunity • Global beef consumption is expected to climb 24% by 2020, from 64.5 million metric tons in 2011. • Australia is the world’s 2nd largest beef exporter after Brazil. • Rising incomes and growing populations in emerging markets are fueling demand for farm products including proteins, helping push global food costs 1.9% higher in January (the most in 11 months), according to the United Nations. 14 Confidential Property acquisition management fee: onetime 1% of acquired assets Current Yield: Targeted 8%-10% current yield Total IRR: 16% - 20% Performance Incentive Bonus: 15% of net gains on disposal after 5% compounded annual hurdle Term: Exit or monetization strategy to be determined by unitholders after 10 years from close Green Cities Fund II Value-added, sustainable real estate development and investment funds. Fund Summary Gerding Edlen, based in Portland, Oregon, is recognized worldwide as the leading sustainable real estate developer, having completed more than 50 completed projects throughout the United States. Similar to their first fund, Green Cities Fund II is a value-added fund to invest in development capital of selected real estate projects. Projects are in the United States, generally in growing urban centers, and are mixed-use (residential / office / retail) and LEEDS platinum. Value is generated from buildings where people want to live and work, which communities are proud to have as neighbors, and which operate more energy, water and waste more efficiently. Fund Features Fund II size: $250 - $300 million Management fee: 1.50% Market Opportunity • Rising demand for sustainable workspace and habitat • Demographic shift – Gen-Y – towards renting, with home purchases deferred • Demonstrable superior returns from LEED products – value-add capital and core capital • Retrofit opportunities at least as great as new-builds 15 Confidential Carried interest: tiered depending on performance (to LPs) to align performance incentives Returns: targeted at 16% to 18% IRR on invested capital Term: 7 years from close with two one-year extensions Wastewater Opportunity Fund Maximizing value from wastewater Fund Summary The Wastewater Opportunity Fund will provide project-level capital to leading developers that design, build and operate projects in the agricultural waste, food waste and municipal wastewater sectors. Farms, food processing facilities and municipalities are burdened by high waste removal costs, fines related to strict wastewater discharge constraints, volatile energy costs, and increasing air pollution restrictions. The Fund solves capital constraints faced by these projects that require less than $25 million and that generate valuable revenue streams from the energy and nutrients that are embedded in wastewater. Market Opportunity Fund Features Carried interest: 20%, with catch-up Preferred return: 8% • Wastewater efficiency solutions benefit from favorable existing legislation and are experiencing strong, growing demand as farms, food processors, communities and municipalities attempt to address waste management problems, including high disposal costs, greenhouse gas emissions, odor, pollution, contamination and capacity limitations. • The projects generate revenue from renewable electricity or gas, nutrients, environmental credits and byproducts, often through long-term revenue agreements with credit-worthy counterparties. The Fund’s portfolio will establish these well-defined performance contracts and enable a variety of potential Fund exit strategies that 1) are enhanced by the ability to aggregate projects and 2) can be realized in the absence of a robust public market or mergers and acquisitions activity typically required by clean technology or water rights funds. 16 Confidential Management fee: 2% per annum, attenuating 10% per year after year five • The Fund’s targeted sectors and addressable wastewater market include over 4,250 potential projects representing $30.4 billion of total project capital requirements in the next five years. Fund size: $150–$250 million (minimum investment of $2.5 million) Returns: Targeted 16%-18% net IRRs and 8% current income Term: 7 years with up to 3 one-year extensions (with LP consent) Multi-Strategy Real Assets Vehicle A multi-manager vehicle, with no management fees or carried interest, providing access to Equilibrium's platform of sustainability-driven real assets investment products Fund Summary No fee, no carry: Only actual costs to administer the Fund. Equilibrium participates through its ownership interest in underlying managers. Not a blind pool: A significant portion of the portfolio has already been identified. At each pool closing, capital will be invested in funds actively accepting investors capital. Targeted current income: Current returns reflect long-term productive economics of underlying real asset strategies Additional access to funds: Equilibrium to facilitate direct access to Managers Proposed Fund Investments Investments in 4-8 underlying funds on the Equilibrium platform, across multiple regions and five primary sectors. Targeted Sectors Agriculture Energy Real Estate Fund Features Management fee: None (admin. expenses only) Carried interest: None Returns: Targeted at 6% to 7% blended current returns, and 15% net total IRR Term: Based on underlying funds; est. 12+ years Allocation method: Equally distributed as available, no more than 25% in any fund/product, no more than 50% of any first-close. Water Land Equal allocation into funds actively in market and accepting investors’ capital at each vehicle pool closing, during open period Fund 1: ACM Permanent Crops Fund I Vertically integrated, sustainable permanent crops Fund 4: Australian Pastoral Fund Diversified portfolio of grass-fed livestock and land Fund 2: Green Cities Fund II Value-added and opportunistic green real estate Future Strategies Fund 3: Wastewater Opportunity Fund 2-4 additional strategies under development New opportunities in wastewater efficiency 17 Confidential Disclaimer and Forward-Looking Statements The information contained herein and any other forms of communication related thereto are for information purposes only, and should not be regarded as an offer to sell or a solicitation of an offer to invest in any security. Past performance is not indicative or a guarantee of future performance. Equilibrium Capital is not a registered investment advisor and does not provide tax, accounting, or legal advice. Investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. This information and all the material shared in conjunction with it whether verbal or oral are confidential.