Energy Efficiency Investments at Holland's Largest Pension Plan

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Presentation by APG's Michael Friendlander on Investments in Energy Efficiency and the role they can play in a pension fund's asset allocation.

Holland's largest pension plan believes that ESG Investments should play an integral role in an institutional investor's asset allocation.

The presentation does also elaborate on the role of APG as so-called Fiduciary Asset Manager. Developments in the Netherlands have blurred the distinctions between commercial asset managers on the one hand and large pension plans on the other.

LMG agrees that efficient pension plan management is better done in larger organizations. However, when opting for active asset management approaches it remains to be seen if manager selection within or by a Fiduciary organization is 'top-of-the-bill'. An 80 percent internal management of mandates seems rather high when analyzing our databases: no single, large asset manager was outperforming in more than 30 percent of asset categories according to LMG.

APG is nonetheless one of the most professional pension plans in the world and we agree wholeheartedly with the ideas put forward here that pension plans could and should play a more active role in the global allocation of capital in the future. Especially at a time when governments in developed nations are struggling with large debts.

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  • Energy Efficiency Investments at Holland's Largest Pension Plan

    1. 1. Energy Efficiency Investments In A Pension Fund Asset Allocation Michael Friedlander, COO/CFO APG Investments Asia, Ltd
    2. 2. Introduction to APG <ul><li>Established on 1 March 2008: All Pensions Group </li></ul><ul><li>Builds on a long tradition of pension fund management </li></ul><ul><li>One of the largest pension administrators in the Netherlands and one of the largest managers of pension assets in the world </li></ul><ul><li>Promotes the pension interests of 2.7 million Dutch individuals and 4000 employers </li></ul><ul><li>Advocate of collective pension schemes </li></ul><ul><li>APG has a long-term contract with clients </li></ul>
    3. 3. About APG (1) <ul><li>Aims to make high real long-term returns, which help the pension fund tp provide attractive pensions at reasonable premiums </li></ul><ul><li>Proven track record for returns </li></ul><ul><li>Extremely low costs compared to commercial asset managers </li></ul>
    4. 4. About APG Investments (2) <ul><li>Focus on the long term with an investment strategy that is based on internal ALM expertise </li></ul><ul><li>Team of 550 investment professionals worldwide </li></ul><ul><li>International network and subsidiaries in New York and Hong Kong </li></ul><ul><li>Assets largely (80%) managed internally </li></ul><ul><li>External mandates only if internal management does not add value or if external route is more inexpensive </li></ul><ul><li>Large number of broadly spread internal portfolios which makes it possible to customise risk and returns </li></ul>
    5. 5. About APG Investments (3) <ul><li>Broad internal knowledge and skills present for largely actively managed portfolios </li></ul><ul><li>Strong player in the illiquid segment </li></ul><ul><li>Innovative approach to investment </li></ul>
    6. 6. Objectives of APG and APG Invest ments <ul><li>APG’s ambition: </li></ul><ul><ul><li>Use customised asset management to contribute to the objectives of the pension fund client: a good pension at a reasonable price </li></ul></ul><ul><li>Long-term objective for returns </li></ul><ul><ul><li>real , inflation, salary growth </li></ul></ul><ul><li>Realising the client’s ambition requires investment in real assets </li></ul><ul><ul><li>Manage real investment risks </li></ul></ul><ul><ul><li>By spreading over investment categories, strategies and countries </li></ul></ul>
    7. 7. APG’s Investment Beliefs <ul><li>Investment risk is rewarded </li></ul><ul><li>Financial markets are not entirely efficient </li></ul><ul><li>There is a premium on illiquidity </li></ul><ul><li>Investing for the long term pays off </li></ul><ul><li>People and culture are critical factors for success </li></ul><ul><li>ESG factors are an increasingly important factor in investment decision making </li></ul><ul><li>Diversification is a “free lunch” </li></ul>
    8. 8. All Very Interesting, But What Is “It”?
    9. 9. P2E2 Initiative – US Commerce Department <ul><li>Developed To Solve 2 Major Problems </li></ul><ul><li>Lenders Worried About Loaning Into Exotic Zip Codes </li></ul><ul><li>Minimizing/Reducing Equity Requirements From Hosts </li></ul><ul><li>But Left 2 Major Problems Unresolved </li></ul><ul><li>Scale </li></ul><ul><li>Look & Feel Of “Project Finance” </li></ul>
    10. 10. Proposed Solution – “Stealing A Page From Our Real Estate Investing Handbook” Fund, LLP LP Equity Capital Providers GP Fund Manager Fund Service Providers SPV 1 SPV 2 SPV 3 SPV 4 Debt Capital Providers
    11. 11. Fund Approach <ul><li>Professionally Managed </li></ul><ul><li>Captures Economies Of Scale </li></ul><ul><ul><li>Standardized ESA Contracts & Structure </li></ul></ul><ul><ul><li>Increased Deal Flow For ESCO’s </li></ul></ul><ul><ul><li>“ Certain” Financing For Projects </li></ul></ul><ul><li>Increased Lender Confidence </li></ul><ul><li>Attractive Investment Characteristics For Subordinated Lenders </li></ul><ul><li>Significantly Mitigates & Manages Risks </li></ul>
    12. 12. But How Deep Is The Market?... <ul><li>Annual Expenditures 2011-2015 Total GHG Reductions </li></ul><ul><ul><li>North America - € 69 Billion </li></ul></ul><ul><ul><li>China - € 57 Billion </li></ul></ul><ul><ul><li>Europe € 74 Billion </li></ul></ul><ul><ul><li>Everywhere Else € 102 Billion </li></ul></ul><ul><li>Annual Expenditures 2026 – 2030 Total GHG Reductions </li></ul><ul><ul><li>North America - € 140 Billion </li></ul></ul><ul><ul><li>China - € 211 Billion </li></ul></ul><ul><ul><li>Europe € 137 Billion </li></ul></ul><ul><ul><li>Everywhere Else € 323 Billion </li></ul></ul><ul><li>40% Of Expenditures Associated With Energy Efficiency </li></ul>Source: Pathways to a Low Carbon Economy, V2, McKinsey & Company, 2/24/2009
    13. 13. <ul><li>But How Does This Coincide With The Mandate & Fiduciary Obligations Of A Dutch Pension Fund? </li></ul>
    14. 14. Fundamental Belief 1 Investment risk is rewarded… Source: Bloomberg, 6/16/2009 Counterparty Credit Current 7 Year Credit Yields 7 Year Treasuries 3.3744% AAA 4.1940% AA 4.8847% A 5.0697% BBB 6.2777% EE Investments 13%-15%
    15. 15. Fundamental Belief 2 Financial markets are not entirely efficient… Source: Information programs for technology adoption: the case of energy-efficiency audits, Soren T. Anderson Richard G. Newell, Resources for the Future, 1616 P St. NW, Washington, DC 20036, USA 15 July 2003 Project Type Number of Projects Mean Simple Payback Adoption Rate Buildings & Grounds (e.g., lighting, ventilation, building envelope) 14,208 1.47 (62%) 0.51 Motor Systems (e.g., motors, air compressors, other equipment) 13,783 1.22 (77%) 0.60 Thermal Systems (e.g., steam, heat recovery and containment, cooling) 6,790 1.23 (77%) 0.44 Combustion Systems (e.g., ovens, furnaces, boilers, fuel switching) 2,358 0.99 (98%) 0.56 Operations (e.g., use reduction, maintenance, scheduling, automation) 1,471 0.93 (105%) 0.50 Electrical power (e.g., demand management, generation, transmission) 155 1.82 (47%) 0.30 Industrial Design (e.g., modify thermal, mechanical systems) 145 1.44 (64%) 0.38 Ancillary Costs (e.g., administrative, shipping, distribution) 10 1.76 (49%) 0.50 All Projects 38,920 1.29 (72%) 0.53
    16. 16. Fundamental Beliefs 3 & 4 There is a premium on illiquidity… Investing for the long term pays off… <ul><li>“ Typical” Fund Terms </li></ul><ul><ul><li>10 Year Horizon w/options to extend </li></ul></ul><ul><ul><ul><li>13%-15% Target IRR Represents A Simple Payback Of 3-3.5 Years </li></ul></ul></ul><ul><ul><li>Fund Structure Enables Economy’s of Scale + Scalability, Aligns Interests of Fund Manager, and Keeps “Hot Money” Out </li></ul></ul><ul><li>Cash Flows Are Structured As Long Term Operating Leases </li></ul><ul><ul><li>Stable, Predictable Cash Flows w/Floor Payments </li></ul></ul><ul><ul><li>“ Indexed” To Inflation Through Energy Prices </li></ul></ul>
    17. 17. Fundamental Beliefs 5 & 6 People and culture are critical factors for success… ESG factors are an increasingly important factor in investment decision making… <ul><li>Exceptional Investment Returns (on a Risk Adjusted Basis) To Clients </li></ul><ul><li>Makes A Major Contribution To Solving One Of The Key Contributors to Climate Change </li></ul><ul><li>Significantly Advances Global Economic Benefit </li></ul><ul><ul><li>Employment </li></ul></ul><ul><ul><li>Reduced Reliance On Public Sector Funds/More Efficient Allocation of Global Capital </li></ul></ul>
    18. 18. In Spite Of A Compelling Business Case, There Are Issues… <ul><li>External </li></ul><ul><ul><li>Fragmented & Uncoordinated Stakeholders </li></ul></ul><ul><ul><li>Supply Of Funds & Qualified Fund Managers (Scale) </li></ul></ul><ul><ul><ul><li>Sector </li></ul></ul></ul><ul><ul><ul><li>Geography </li></ul></ul></ul><ul><ul><ul><li>Fund Management Infrastructure (PM, Risk Management, etc.) </li></ul></ul></ul><ul><li>Internal </li></ul><ul><ul><li>Which Portfolio Do You Put It In? </li></ul></ul><ul><ul><ul><li>Infrastructure? Commodities? Credits/FI? PE? ILB? Real Estate? Absolute Return? Exotic Beta? </li></ul></ul></ul><ul><ul><li>What Is The Benchmark? </li></ul></ul><ul><ul><li>Tracking Error </li></ul></ul>
    19. 19. Summary <ul><li>EE Investing </li></ul><ul><ul><li>Consistent With Fiduciary Obligations To Act In Beneficiaries Best Interests </li></ul></ul><ul><ul><li>Major Contributor To Portfolio Alpha </li></ul></ul><ul><ul><li>“ Nicely Matched” Term For Asset/Liability Hedging </li></ul></ul><ul><ul><li>Growing “Supply” of Investment Managers & Investment Vehicles </li></ul></ul><ul><ul><li>Natural Inflation Hedge </li></ul></ul><ul><ul><li>Significant & Growing Regulatory Agenda </li></ul></ul><ul><li>Enables Institutional Investors To Make A Significant & Meaningful ESG Impact </li></ul><ul><li>Scalable </li></ul><ul><li>Somewhat Of A “Chicken & Egg” Issue Remains </li></ul><ul><ul><li>Does Supply Cause Demand or Does Demand Cause Supply? </li></ul></ul>
    20. 20. Disclaimer <ul><li>This presentation contains information and views as of the date indicated and such information and views are subject to change without notice.  APG has no duty or obligation to update the information contained herein.  Further, APG makes no representation, and it should not be assumed, that past investment performance is an indication of future results.  Moreover, wherever there is the potential for profit there is also the possibility of loss. </li></ul><ul><li>This presentation and the information contained herein are for educational and informational purposes only and do not constitute and should not be construed as an invitation, inducement or offer to sell or solicitation of an offer to buy any securities or related financial instruments in any jurisdiction in which such offer or solicitation, purchase or sale would be unlawful under the securities, insurance or other laws of such jurisdiction.    </li></ul><ul><li>  </li></ul><ul><li>Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.  APG believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. </li></ul><ul><li>This presentation represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.  The commentaries were not prepared for any particular investment objectives, financial situation or requirements of any specific investor and do not constitute a representation that any investment strategy is suitable or appropriate to an investor’s individual circumstances or otherwise constitute a personal recommendation.   </li></ul><ul><li>The contents of this presentation have not been reviewed by any regulatory authority.  You are advised to exercise caution and if you are in any doubt about any of the contents of this presentation, you should obtain independent professional advice. </li></ul>

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