SAN DIEGO COUNTY EMPLOYEES RETIREMENT ASSOCIATION January 11, 2013 To: Board of Retirement Mr. Brian White, CEO Mr. Lee Partridge, Salient Partners, Portfolio Strategist From: Loren de Mey, Investment Officer RE: Discussion / Action on Actis Energy III I. Executive Summary Proposed Investment Commitment Staff requests Board approval of a $50 million commitment to Actis Energy III. Fund Strategy Actis is raising a $750 million fund, Actis Energy III, to invest in power assets, including power generation (renewable and thermal) and power distribution across Latin America, Africa and Asia. The Fund s strategy is to aggregate energy assets into scalable regional platforms (buy and build power plants) as well as improve energy distribution infrastructure. Fund Terms Target Fund Size: $750 million Term: Ten Years with potential for three additional one-year extensions Investment Period: Five Years Currency: US Dollars Management Fee: 1.85% (SDCERA will receive a 10% discount to the standard fee for being a first close investor, which translates to a fee of 1.665%) Incentive Fee: 20% Preferred Return: 8%
Catch Up: 66% to GP/ 34% to LP GP Commitment: 2% Legal Counsel: Simpson Thacher & Bartlett LLP Fund Auditors: KPMG LLP Administrator: Internal by Actis SDCERA Portfolio Considerations Previous SDCERA Commitments to Investment Manager: none Recommendation s Portion of Total SDCERA Portfolio: 0.55% Recommendation s Portion of 10% Target for Real Assets: 5.5% II. Overview Staff requests Board approval of a $50 million commitment to Actis Energy III. SDCERA s Portfolio Strategist, Salient Partners, concurs with Staff s recommendation. Key attributes of the Fund include: Experienced Energy Team in developing, acquiring and operating power assets throughout their target markets Local presence and strong networks within emerging markets Strong track record within emerging market power III. Actis Actis was established in 2004 when is spun out from CDC Group (Commonwealth Development Corporation). CDC was founded in 1948 to provide development finance to businesses located in former British colonies across Africa, Asia and the Caribbean. Overtime, CDC was granted authority to invest in countries beyond the Commonwealth where there was a need for capital. In 1998 a more formalized investment approach was adopted which became the core of its investment focus. This culminated in 2004, when CDC split into two businesses, a fund manager (Actis) and an investment company. Actis continued to pursue a direct investment strategy with the management team acquiring majority ownership of the Firm and control of its investment processes and operations. At this time, Actis raised capital from third party investors. The investment company, which retained the CDC name, refocused its activities on providing capital to fund managers active in its markets, including but no longer exclusive to Actis. Since its spin out in 2004, Actis has grown to become one of the leading independent fund managers focused exclusively on emerging markets, raising $6.3 billion in new Discussion/Action on Actis Energy III 2
commitments since the firm s inception to June 2012. In May 2012, Actis acquired the remaining 40% stake from the UK government and is now wholly owned by its partners and employee benefit trust. As of September 31, 2012, Actis had $5.2 billion in assets under management across funds within private equity, energy and real estate. IV. Investment Opportunity Increased demand for electricity in emerging markets is closely correlated to economic growth and domestic consumption. The energy sector in emerging markets has suffered from underinvestment over many decades. According to the International Energy Agency, power generation, transmission and distribution require investment of at least $10 trillion to 2035 in order to meet current needs. The high growth rates of GDP and particularly domestic consumption in the emerging markets are making the energy shortfall progressively more acute. Governments in many emerging markets now realize that their growth trends are only sustainable if their countries have access to an affordable and reliable power supply. According to estimates from the World Bank and the International Energy Agency between 1.3 and 2 billion people have no access to electricity. The infrastructure build out is therefore a core theme for the Fund. Actis believes that an improved regulatory and policy environment has made the infrastructure opportunity increasingly attractive for private sector investors. Many governments in emerging markets are faced with a potential large shortfall in energy supply, as the demand for electricity grows faster than GDP. Many governments are not able to finance the necessary expenditures from their own resources and are seeking alternative sources of funding from the private sector. This need to attract external private capital continues to provide the impetus for sustained structural reform and deregulation of the energy sector across emerging markets. Investment Strategy Actis is an operationally focused energy manager focused predominantly on control transactions diversified across its target regions of Latin America, Asia, and Africa. Actis intends to follow the strategy implemented in their predecessor funds which involved aggregating energy assets into scalable regional platforms and targeting attractive risk-adjusted returns characterized by both downside protection, including cash generation and upside potential. The Fund will invest in power generation assets including thermal (mainly natural gas and oil, and potentially coal in India) and renewable energy (wind, solar, hydro). The Fund will also invest in power distribution assets. Discussion/Action on Actis Energy III 3
V. Due Diligence Over the past 18 months, Staff has reviewed over 15 investment managers focused on infrastructure, including several managers with a specialized focus on the power sector. At this time, there is very limited competition within the emerging markets power sector, with few specialist investors and little competing capital. Staff conducted meetings with senior members of the investment team in SDCERA s offices and the firm s office in San Jose, Costa Rica. During the onsite, Staff reviewed the firm s organization, operations, and current and past investments. Staff had the opportunity to tour a recently constructed wind-energy project, Cerro de Hula, located in Honduras. This project is held in Actis Energy 2 through the portfolio company, Globaleq Mesoamerica Energy. Investment counsel, Waller Lansden, has conducted a review of the Fund documents. There are no material legal concerns with respect to the Fund or its structure. Counsel is in the process of negotiating a side letter with the manager which will be finalized prior to making an investment. Staff utilized a third party provider to conduct background checks on the firm and senior investment professionals and no material issues were noted. Additionally, Albourne Partners conducted a review of Actis Energy III and concurs with Staff s recommendation. VI. Placement Agent Policy Actis has used a placement agent in its relationship with SDCERA, First Avenue. Actis and First Avenue have complied with the disclosure requirements of SDCERA s Placement Agency Policy. First Avenue did not have any gifts or contributions to disclose. VII. Potential Conflicts of Interest / Relationships No conflicts of interests have been identified with SDCERA s consultants including Salient Partners, EnnisKnupp, Albourne Partners and Townsend. Albourne has conducted due diligence on Actis but they will not receive any direct or indirect financial benefits. VIII. SDCERA s Real Assets Portfolio The SDCERA Fund has a 10% target allocation to Real Assets, with strategic targets of 7% to Natural Resources (Energy, Agriculture, Timber, and Metals & Mining) and 3% to Infrastructure and Other Real Assets. The current NAV of the private market Real Discussion/Action on Actis Energy III 4
Assets portfolio is $410 million, or 4.5% of the total fund. Unfunded exposure (committed, but not yet called by the investment managers) is $543 million. IX. Concluding Comments Staff believes that an investment in the Actis Energy III will be a strong addition to the Real Assets portfolio. As the demand for power continues to outpace supply, the Fund should be in an attractive position to address the emerging markets energy gap. Given the key attributes and diversification benefits of the Fund, Staff recommends a $50 million commitment. Discussion/Action on Actis Energy III 5