SAN DIEGO COUNTY EMPLOYEES RETIREMENT ASSOCIATION June 15, 2012 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 AMERRA Agri Fund II, LP I. Executive Summary Proposed Investment Commitment Staff requests Board approval of a $50 million allocation to the AMERRA Agri Fund II, LP. Fund Strategy AMERRA Agri Fund II, LP provides customized commodity finance solutions for private companies operating in the agricultural sector mainly across the Americas, including participants in the production, transportation, storage, refinement, distribution and marketing of commodities. Fund Terms Target Fund Size: Term: Investment Period: Currency: Management Fee: $500 million 5 years following the initial closing date, 1-year extension Capital recycling permitted through year 4 following the initial closing date (May 1, 2012) US Dollars 1.50% (SDCERA is receiving a fee discount from the standard fee of 1.75% given the size of the proposed investment)
Incentive Fee: 17.5% (SDCERA negotiated a discount in the incentive fee from 20%) Preferred Return: 6% Catch Up: 80% to GP, 20% to LP GP Commitment: 2% Distributions: All cash income paid quarterly, after the final close Legal Counsel: Sidley Austin, LLP Fund Auditors: McGladrey & Pullen, LLC Administrator: Admiral Administration, LLC SDCERA Portfolio Considerations Previous SDCERA Commitments to Investment Manager: none Recommendation s Portion of Total SDCERA Portfolio: 0.6% Recommendation s Portion of Exposure Target for Real Assets: 3.9% II. Overview Staff requests Board approval of a $50 million commitment to the Amerra Agri Fund II, LP. SDCERA s Portfolio Strategist, Salient Partners, concurs with Staff s recommendation. Key attributes of the Fund include: Low volatility and non-correlated strategy Quarterly cash distributions, reducing the j-curve effect Experienced investment team within agricultural financing with strong networks Inflation and interest rate protection III. AMERRA Capital Management Having worked together for over 18 years, Craig Tashjian and Nancy Obler formed AMERRA Capital Management in 2009 to pursue investment opportunities in the agribusiness sector of the Americas. Leveraging their combined 45 plus years of experience in capital markets and commercial banking, they formed a unique investment vehicle that would allow investors to participate in the commodities market by investing in the corporate debt of companies in the agricultural sector. Prior to founding AMERRA, Mr. Tashjian and Ms. Obler worked together at Societe General (Soc Gen), where Mr. Tashjian was head of the Energy & Natural Resources Group in the Americas. Prior to Soc Gen, Mr. Tashjian was Global Head of Commodity Finance at Standard Chartered Bank, where he hired Nancy Obler. Discussion/Action on the AMERRA Agri Fund II, LP 2
AMERRA is sponsored by MD Sass-Macquarie Financial Strategies, LP (Finstrat) and Macquarie Bank Ltd. which own a 50% stake of AMERRA Capital Management. FinStrat is a joint venture between MD Sass and the Macquarie Group founded in 2006 that seeds and incubates asset managers as part of their private equity funds. MD Sass is a New York based investment manager founded in 1972 with $6 billion in assets under management. As part of this relationship, MD Sass provides AMERRA with marketing, legal, compliance, accounting and IT support. AMERRA Capital Management, MD Sass and Macquarie Capital Investors Management are registered SEC investment advisors. As a reminder, FinStrat also has a 50% ownership interest in Taurus Resources, a Metals & Mining manager. SDCERA made a $75 commitment to the Taurus Resources Fund II in September 2011. IV. Investment Opportunity AMERRA Agri Fund II provides customized commodity finance solutions for private companies involved in the agricultural sector, including participants in the production, transportation, storage, refinement, distribution and marketing of commodities. AMERRA will originate and structure corporate debt, loans and other financial instruments related to private companies in the agricultural sector located mainly in the Americas (North, Central and South America). Due to their private status, most target portfolio companies do not have access to traditional capital markets, and rely upon banks and other financial institutions for raising capital for working capital and acquisitions. The Fund will focus primarily on secured loans and debt instruments with conservative asset coverage ratios. V. Due Diligence Over the past 18 months, Staff has met with over fifteen investment managers focused on agriculture. This includes managers focused on acquiring farmland across the US, South America, Australia and New Zealand, managers pursuing a private equity approach (purchasing private companies in the agricultural sector), and niche investment strategies. AMERRA is a unique offering within the financing commodity sector with limited competition. Although certain banks do provide a similar customized financing solution to agricultural companies, they are providing capital from their own balance sheets and are not currently offering a fund structure available to outside investors. Discussion/Action on the AMERRA Agri Fund II, LP 3
The AMERRA investment is expected to provide attractive risk-adjusted returns with low volatility. This investment will add to the diversification of SDCERA s agriculture portfolio given its investment characteristics including a shorter investment horizon and quarterly cash distributions. Staff conducted meetings with senior members of the investment team in SDCERA s offices and the firm s office in New York. During the onsite meeting, Staff met with the firm s investment professionals including the founding principals, the Chief Operating and Risk Officer, credit analysts and operational professionals. During the onsite, Staff reviewed the firm s organization, operations, and current investments. Staff had the opportunity to review samples of Investment Proposals which included detailed reviews of each transaction, credit analyses, and security and covenant monitoring packages. Staff believes that AMERRA has the competence and experience to successfully manage the portfolio and to mitigate the risks associated with the strategy given their experience in the market and long-standing networks. AMERRA Agri Fund II has a target fund raise of $500 million and has so far closed on $200 million. Current investors in Fund II include several investors that had invested with AMERRA through Fund I or through a similarly managed separate account. 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 AMERRA Capital and the AMERRA Agri Fund II, LP, and concurs with Staff s recommendation. VI. Placement Agent Policy AMERRA has complied with the disclosure requirements of SDCERA s Placement Agency Policy. AMERRA did not use an external Placement Agent in its relationship with SDCERA. However, under Assembly Bill 1743 s expanded definition of Placement Agent, AMERRA does have an internal marketing professional, through their relationship with MD Sass, who is considered to be a Placement Agent under the Bill. MD Sass did not have any gifts or contributions to disclose. Discussion/Action on the AMERRA Agri Fund II, LP 4
VII. Potential Conflicts of Interest / Relationships Salient Partners made a commitment to invest in the AMERRA Agri Fund II for the firm s Yield Fund in February 2012. Salient will not receive any financial benefit related to the SDCERA commitment. While Salient concurs in SDCERA s investment, the sourcing and due diligence of SDCERA s investment was conducted by SDCERA Staff. Albourne has conducted due diligence on AMERRA and AMERRA Agri Fund II, LP., 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 and 3% to Infrastructure and Other Real Assets. Within Natural Resources, SDCERA is currently invested within Energy, Agriculture, Timber, and Metals & Mining. As of March 31, 2012, total exposure to private market Real Assets was $742 million (includes the current NAV and unfunded exposure). IX. Concluding Comments Staff believes that an investment in the AMERRA Agri Fund II, LP will be a strong addition to the Real Assets portfolio. Given the key attributes and diversification benefits of the Fund, Staff recommends a $50 million commitment. Discussion/Action on the AMERRA Agri Fund II, LP 5
Appendix A Real Assets Portfolio Plan (5)=(4)-(3) Pro-Forma (1) (2) (3)=1+2 (4) Room for Current Proposed Pro-Forma Exposure Future Exposure Additions Exposure Target Additions Natural 4.8% 0.6% 5.4% 10.5% 5.1% Resources AMERRA Infrastructure 3.8% 0.0% 3.8% 4.5% 0.7% & ORA Total 8.6% 0.6% 9.2% 15% 5.8% Discussion/Action on the AMERRA Agri Fund II, LP 6