Albourne Update Real Assets SDCERA Board of Retirement February 20 th 2014
Agenda 1) Program History 2) Current allocation vs. targets 3) Portfolio composition 4) Performance 5) Future Pacing 6) Market Update 2
Program History The San Diego County Employees Retirement Association ( SDCERA ) Real Asset Portfolio was first established under policy in March 2010. Previously to that date there was a 5% allocation to Infrastructure. Infrastructure was combined with Energy from the Private Equity Portfolio to establish the original positions in the Real Asset Portfolio, thus establishing a beginning vintage year of 2005. From 2010 forward a 10% allocation target was established. Allocations to Real Assets typically improve the overall risk return profile of institutional investors by improving diversification with uncorrelated assets, and provide inflation protection (participation). 3
Program History Strategic Objective The strategic objective of the SDCERA Real Assets Portfolio is to invest funds directly in assets that are tangible or physical in nature, or to invest funds in the security interests, obligations, options and other rights to the cash flow streams associated with those assets. Performance Objective The primary performance objective of the Portfolio is to generate annualized net returns which exceed the return of the Real Assets Performance Benchmark over time. 1/3 GSCI + 1/3 S&P MLP + 1/6 S&P Materials Index + 1/6 S&P/TSX Materials Composite Index. The Real Asset portfolio continues to expand and diversify and should still be considered early in its development life. Focus remains on tangible assets with a high potential for cash flow. 4
Current Allocation The plan is currently within its target range of exposure to Real Assets and recent commitments are expected to increase Market Value exposure over time. Target Market Value & Range Target Market Value: $960m As of Q3 2013 Based on Total SDCERA Portfolio NAV of $9.6bn 5
Portfolio Composition mitted pital Energy - Oil and Gas 21% Strategy Diversification The portfolio will continue to upgrade opportunities in the energy and infrastructure sectors as older vintages roll off and new opportunities present themselves. Agriculture will expand its platform as the manager continues to build out the portfolio. Additional non-core opportunities will be explored over the next 12 months. Committed Capital Timber 5% Agriculture 24% Paid-In Capital Energy - Oil and Gas 19% Paid-in Capital Timber 7% Agriculture 20% Metals And Mining 13% Infrastructure 37% Metals And Mining 12% Infrastructure 42% As of Q3 2013 6
Portfolio Composition Geographic Diversification SDCERA is well diversified geographically relative to the opportunity set that exist in global markets. Regional Diversification ional Diversification North America 71% Europe 11% South & Central America 8% Australia New Zealand Africa 4% 2% ROW 3% Asia 1% OECD Weights OECD Weights Non- OECD 10% OECD 90% As of Q3 2013 7
Performance Total Portfolio IRR: 8.3% Pooled Mean Benchmark: 5.6% Market Equivalent Benchmark: 7.4% As of Q3 2013 8
Portfolio Performance Funds Committed ($m) Paid In (% of Committed) By Strategy Unfunded ($m) Distributions ($m) NAV ($m) DPI TVPI IRR Agriculture 3 225 52% 109 1 112 0.0x 1.0x -2.3% Infrastructure 5 350 73% 131 84 246 0.3x 1.3x 11.0% Metals & Mining 2 125 56% 60 4 58 0.1x 0.9x -21.4% Oil & Gas 8 192 59% 80 58 81 0.5x 1.2x 9.5% Timber 1 50 82% 11 6 40 0.1x 1.1x 7.1% Total Portfolio 19 942 63% 391 152 537 0.3x 1.2x 8.3% By Vintage Vintage Funds Committed ($m) Paid In (% of Committed) Unfunded ($m) Distributions ($m) NAV ($m) DPI TVPI IRR PME 2005 1 10 100% 0 9 4 0.9x 1.2x 5.1% 5.3% 2006 2 17 88% 3 18 5 1.2x 1.6x 16.4% 8.0% 2007 2 25 96% 2 18 12 0.7x 1.3x 8.9% 5.8% 2008 2 150 110% 20 80 151 0.5x 1.4x 11.7% 9.5% 2009 1 15 80% 3 0 14 0.0x 1.2x 13.9% 6.5% 2010 4 275 62% 107 22 170 0.1x 1.1x 8.5% 4.7%* 2011 3 200 60% 84 4 105 0.0x 0.9x -6.3% 4.7% 2012 3 200 40% 123 1 75 0.0x 1.0x -1.3% 5.4% 2013 1 50 4% 48 0 1 0.0x 0.5x - - Total Portfolio 19 942 63% 391 152 537 0.3x 1.2x 8.3% 7.4% All figures as of Q3 2013. PME for the Real Assets portfolio is composite index comprise of 1/3 GSCI + 1/3 S&P MLP + 1/6 S&P Materials Index + 1/6 S&P/TSC Materials Composite Index as defined in the SDCERA IPS. * Vintage PME calculated using fund PMEs weighted by Paid-In. 9
Fund Performance Fund Year Agriculture Committed (m) Paid In (% of Committed) NAV(m) DPI TVPI IRR Brookfield Brazil AgriLand Fund 2011 75 68% 47 0.0x 0.9x -8% AMERRA Agri Fund II 2012 50 78% 40 0.0x 1.1x 7% Hancock Agricultural Investment Group 2012 100 30% 29 0.0x 1.0x -4% Fund Fund Infrastructure Timber As of Q3 2013 *This co-investment was made in Q4 2013 and does not appear in commitment or unfunded totals Year Year Committed ($m) Committed ($m) Paid In (% of Committed) Paid In (% of Committed) NAV($m) DPI TVPI IRR Global Infrastructure Partners 2008 75 87% 53 0.8x 1.4x 12% Macquarie Infrastructure Partners II 2008 75 92% 98 0.2x 1.4x 12% Brookfield Americas Infrastructure Fund 2010 75 91% 76 0.0x 1.2x 11% JP Morgan Global Maritime Investment Fund 2010 75 26% 18 0.0x 0.9x -8% Actis Energy Fund III 2013 50 4% 1 0.0x 0.5x 0% Actis Energy Fund III Co-Investment* 2014 13 0% 0 0.0x - 0% NAV($m) DPI TVPI IRR Molpus Woodlands Fund III 2010 50 78% 40 0.1x 1.1x 7% 10
Fund Performance Fund Year Mining Committed ($m) Paid In (% of Committed) NAV($m) DPI TVPI IRR RK Mine Finance Fund I 2011 50 59% 34 0.0x 1.2x 12% Taurus Resources Fund No. 2 2011 75 11% 24 0.1x 0.7x -29% Fund Year Oil & Gas Committed ($m) Paid In (% of Committed) NAV($m) DPI TVPI IRR EnerVest Energy Institutional Fund X-B 2005 10 100% 4 0.9x 1.2x 5% EnCap Energy Capital Fund VI 2006 9 99% 2 1.6x 1.8x 25% Merit Energy Partners - F II 2006 8 60% 3 0.4x 1.1x 2% EnCap Energy Capital Fund VII 2007 10 89% 3 1.1x 1.4x 19% EnerVest Energy Institutional Fund XI-B 2007 15 95% 9 0.5x 1.1x 4% Kayne Anderson Energy Fund V (QP), L.P. 2009 15 71% 14 0.3x 1.4x 20% Falcon E&P Opportunities Fund, L.P. 2010 75 56% 36 0.3x 1.2x 10% Denham Commodity Partners Fund VI 2012 50 23% 10 0.0x 0.9x -21% As of Q3 2013 11
Cumulative Cash Flows ($m) NAV as % of Total Plan Future Pacing Despite the fact the portfolio traces some of its investments back to 2005 it is still considered a young portfolio due to its revised objectives from 2010. Focusing on managers that have strong operating expertise, and are active across the capital structure has reduced the beta risk considerably. Pacing will continue at approximately $250 +/-(75) million per year in the foreseeable future to maintain the overall portfolio within the allocation parameters established by policy. $m SDCERA Real Assets Portfolio Cumulative Cash Flows (Q4 2005 - Q3 2018) 18% SDCERA Real Assets Portfolio NAV as % of Total Plan (Q4 2013 - Q3 2018) -$200m Historical Cumulative 16% 14% Max NAV Target (15%) High Case Projected NAV -$400m 12% Base Case Projected NAV -$600m -$800m High Case Projected Cash Flows Base Case Projected Cash Flows 10% 8% 6% NAV Target (10%) Low Case Projected NAV Min NAV Target (5%) -$1000m Low Case Projected Cash Flows -$1200m 2005 2007 2009 2011 2013 2015 2017 4% 2% 0% 2013 2014 2015 2016 2017 2018 12
2013 Real Asset Market Update Infrastructure Timber Infrastructure funds continue to raise additional capital as institutional appetite for the asset class does not appear to be slowing but rather shows increasing interests with respect to co-investments and direct investments in combination with co-mingled funds. Most managers performed very well despite the uncertainty of the interest rate environment. Although final valuations for the fourth quarter, and full year for 2013 will not be available until March, performance expectations are on target with yields in the 4% to 6% range and overall performance until Q3 coming in at range that is slightly negative to high teens for Brownfield strategies [Greenfield managers with higher risk have reported estimates in the mid-teens]. Timber witnessed a bit of resurgence with timber indices coming in at 9%. This can largely be attributed to the improvement of the US housing market and a drawdown of on stump inventories in the US Southeast. 13
2013 Real Asset Market Update Agriculture Energy Agriculture continued to perform well with indices reporting 20% returns. [It should be noted that the agriculture index consists of a small group of institutional quality managers and does not reflect the broader agriculture universe in the United States]. Agricultural performance was strong despite declines in corn and wheat. This can largely be attributable to stronger production levels on a per acre basis. It is anticipated that some agricultural assets could come under pressure 2014 as we move through a new lease cycle in a low grain price environment. Permanent crops continue to perform well despite adverse conditions in California. The energy sector continued to perform well although at a reduced pace as the majority of major plays began to mature and managers shift their focus from acquisition and drilling to more stable production-based strategies. We continue to see strong opportunities in the production and midstream space. 14
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