Investing in private markets - Global · Scheme, AustralianSuper and property developer Argent. Real estate Hermes Real Estate has run mandates for pension schemes for more than 30

Excellence. Responsibility. Innovation.

Investing in private markets

For professional investors only www.hermes-investment.com


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Our alignment with investors’ objectives, combined with our scale and ability to source and execute attractive deals in private markets, underpins the proposition we offer: the ability to enhance returns and lower the cost of access.

We have invested in private markets since our origin in 1983 as the internal asset manager for the £43.1bn BT Pension Scheme (BTPS), one of Europe’s largest corporate pension funds. Throughout decades of working in partnership with BTPS, and more recently with other sophisticated global asset owners, we have developed an astute understanding of institutional investors’ objectives in private markets. This alignment directs our approach.

Our real estate, private equity, infrastructure and specialist credit teams aim to provide institutional investors with access to hard-to-reach assets capable of generating the risk-adjusted outperformance they seek over market cycles – whether low-correlated, stable returns through real assets or alpha from private-equity investments. We manage these exposures in prudent, long-term solutions for a broad range of investors, irrespective of their size.

Invested in established and emerging sectorsMore than £15bn of our £26bn in total assets under management is allocated across private markets. Our most established strategies are co-investment and pooled vehicles in the commercial real estate, infrastructure and private equity sectors. Key investments include our role in the regeneration of King’s Cross in central London, one of the largest urban renewal projects in Europe, and a substantial stake in Eurostar.

Figure 1. Hermes’ assets under management and commitments in private markets

47%

26%

24%

3%Real estate Infrastructure Private equity Private debt

£15.6bn€18bn

$20.2bn

Source: Hermes as at 30 September 2016.

In 2015, we launched one of the first institutional vehicles for investing in UK residential real estate, which focuses on the growing private rented sector and whose investments include two major build-to-rent projects in Manchester and Liverpool. Responding to the withdrawal of bank lending to corporations in Europe after the financial crisis, we have also launched strategies to invest in real estate debt and to lend directly to mid-market businesses in the UK and Europe.

Modes of access: from partnerships to pooled vehiclesWe enable investors of varying sizes and levels of internal resources to gain exposure to private markets. In major transactions, we have worked in club, consortium and joint-venture arrangements with large

asset owners such as BTPS, the C$278.9bn Canada Pension Plan Investment Board and the A$104bn AustralianSuper. Through segregated mandates, we provide exposure to select assets with the objective of meeting investors’ bespoke return targets. Our pooled vehicles enable investors with limited scale to benefit from a diverse range of deals we have participated in, including major transactions.

King’s Cross: a landmark urban regeneration project driven by Hermes, the BT Pension Scheme, AustralianSuper and property developer Argent.

Real estate Hermes Real Estate has run mandates for pension schemes for more than 30 years, investing throughout the UK and, since 2007, in the global real estate market. With exposure to about 150 assets, the team offers investors access to a broad set of opportunities. It invests in both commercial and residential real estate through joint ventures, segregated mandates and pooled vehicles. These include core industrial, retail and office properties, the 324-unit Cargo Building residential development by the Liverpool harbour and the regeneration projects of King’s Cross in central London and NOMA in the heart of Manchester.

With scale, experience and an embedded alignment with institutional investors, we have struck partnerships targeting specific opportunities, such as our joint ventures with the C$278.9bn Canada Pension Plan Investment Board for investing in central London commercial property and a major office development in Birmingham. Understanding that sustainable property development enhances the long-term value of assets and attracts high-quality tenants, we have created and implemented responsible property investment (RPI) principles. They are evident in the King’s Cross project, which supports energy efficiency, public spaces, historical preservation, social housing and measures to attract businesses and support local jobs growth. Such efforts have earned Hermes Real Estate recognition for the sustainability of the properties it develops and manages, such as a five-star rating from GRESB in September 2016.

Hermes Investment Management

An overview of the ways we enable investors to access private markets is as follows:

Club and consortium transactions: participating in a collective of like-minded investors seeking to acquire a major stake in an asset

Eurostar We worked with the C$254.9bn Caisse de dépôt et placement du Québec (CDPQ) to acquire the UK Government’s 40% stake in the channel tunnel train operator in March 2015. CDPQ gained a 30% holding and we secured a 10% exposure

Joint ventures: strategic partnerships formed to acquire substantial stakes in major assets and manage them as part of a select group

King’s Cross Transforming the 67-acre site in central London with AustralianSuper, BTPS and property developer Argent. As N1C, the city’s first new postcode in a decade, King’s Cross hosts businesses such as Google and The Guardian Media Group, a university campus and 2,000 new homes

Segregated mandates: aiming to meet bespoke risk and return targets for investors

Santander Pension Fund Segregated mandate seeking a specific outcome through an infrastructure portfolio with exposure to our stakes in Eurostar and Associated British Ports

Pooled vehicles: enabling a broad range of investors to gain exposure to portfolios of private-market assets, including major transactions

UK balanced property portfolio £1.3bn in direct investments across the UK commercial property spectrum for 117 investors, all of which are pension funds or charities

Hermes Infrastructure Allocates alongside a direct investment programme managed for BTPS, enabling investors to benefit from superior deal flow, scale and execution ability

Opening up attractive, hard-to-reach deals to a broad range of institutional investors is instrumental in our private-markets offering. Our participation in larger, more complex deals provides access points for large, well-resourced asset owners and investors with less scale and smaller internal teams.

OriginationStrong deal origination is vital to outperforming in private markets. Our scale, expertise and reputation help us to source and attract investment opportunities capable of generating the long-term outperformance that institutional investors require.

Investing in real estate since 1983, we have established a strong reputation for decisive execution and an ability to anticipate changes in the market cycle. The £6bn1 of transactions we executed in the last five years demonstrates our strong deal flow and ability to attract consortium, co-investment and joint-venture partners in commercial property deals. For our UK residential real estate strategy, we have partnered with Countrywide plc, the nation’s largest estate agency and property services group. The combination of our market contacts and Countrywide’s research into areas of high rental demand and relationships with developers and landowners enables us to source high-quality build-to-rent properties.

Our scale, expertise and long track records in infrastructure and private equity result in a strong market presence and relationships that enable us to consistently source attractive deals. In illiquid credit markets, the origination ability of our real estate senior debt team saw it assess £11.8bn in deal leads during its 15 months of deployment. The origination strategy for our direct-lending vehicle features a co-lending partnership with the Royal Bank of Scotland, the nation’s third-largest lender to mid-market businesses. This formal agreement, in which we have full access to RBS’ origination platform for senior-secured loans to UK mid-market businesses, complements the ability of our team to source high-quality loans in the UK and Europe.

Associated British Ports: acquired in 2015 by a joint venture between Hermes Infrastructure and the Canada Pension Plan Investment Board.

InfrastructureOur infrastructure platform provides clients with access to direct investment opportunities in highly attractive assets primarily located in the UK and Europe. We source these opportunities either directly or as part of a consortium, as was the case with our investments in Eurostar and Associated British Ports. Our highly experienced infrastructure team has a strong track record of partnering with global infrastructure investors who we believe consider us an investment partner of choice in the UK, such as the C$254.9bn Caisse de dépôt et placement du Québec.

We manage a substantial segregated account for BTPS, which provides us with a degree of scale and visibility that we believe enhances our access to investment opportunities for the benefit of all our clients. We analyse assets with a 20-year view, seeking sustainable, inflation-linked cash-yielding returns and scope for capital gain. We focus on establishing fit-for-purpose governance frameworks and promoting merit-based boards to oversee the assets we own.

1 For the five years ending 30 June 2016.

www.hermes-investment.com | 3


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London

Braes of Doune, near Stirling § 72MW capacity wind farm;

36 turbines

Fallago Rig, Scottish Borders § Fifth-largest UK wind farm; 144MW capacity;

48 turbines

ASG I & II, Midlands and North England

§ About 9000 residential solar photovoltaic systems

Thames Water Group, Thames Valley

§ Largest UK water utility; 14m customers

Anglian Water Group, East England

§ Fourth-largest UK water utility; 6m customers

Southern Water, South England

§ Seventh-largest UK water utility; 3m customers

Associated British Ports § UK’s leading port group with

nation-wide operations

NOMA, Manchester § 20-acre mixed-use project in

Central Manchester

MEPC Silverstone Park, Northamptonshire

§ 293-acre site being developed as a high-performance technology and logistics park

The Centre:MK, Milton Keynes § Regionally dominant shopping centre with

about 1.2m square feet of retail space

Milton Park, Oxford § Centre of excellence for science

and technology organisations

Paradise, Birmingham § Vibrant new office core in the city centre

covering 1.8m square feet

Wellington Place, Leeds § Regeneration of 22 acres of land in

central Leeds for mixed uses

Factory outlets at Castleford, Braintree and Street

§ Strong, stable income returns

The Cargo Building, Liverpool § 324-unit residential development in

Central Liverpool

Manchester Waters § 164-unit residential development in

Central Manchester

Energy Assets § UK’s largest independent industrial

and commercial gas meter provider

Eurostar § Sole operator of UK-to-Europe

passenger train

Hermes Greater London Partnership

§ Providing office space within the M25 as residential conversion and business growth create demand

King’s Cross, London § The UK’s exemplar regeneration project: the

completed scheme will provide 50 new buildings and 1900 new homes on 67 acres

Hermes Central London Partnership § Joint-venture investing in core-plus offices

generating total returns in excess of 22% p.a. since inception

Wind farm

Port

Solar power

Office property

High-speed rail

Urban regeneration

Water utility

Residential property Retail property

Innovation park

Our presence in private marketsKey real estate and infrastructure investments

KEY

Energy metering services



PEC II co-investments by sector

Source: Hermes and Hermes GPE as at 30 July 2016.

Private equity co-investments

Consumer discretionaryConsumer staplesIndustrialsITEnergyFinancialsTelecomsHealthcare

40%

18%

18%

15%

13%

5%

4%3% 2%

Americas 38%

Europe, Middle East and Africa41%

Asia and Australasia21%

PEC II, our 2014 vintage private equity co-investment fund, has invested in 41 companies on a globally unconstrained basis, pursuing growth-oriented opportunities across a range of sectors.

PEC II co-investments by region of operations


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Private equityWe are an active, long-term, global private equity investor with a 25-year history. We specialise in creating bespoke portfolios as well as raising and managing pooled co-investment vehicles for a select number of like-minded institutional investors. We were one of the earliest adopters of co-investments as an integral pillar of private equity programmes and have now invested in more than 150 of these deals, in addition to over 220 fund investments.

We invest on a globally unconstrained basis, focusing on the regions, sectors and companies that we believe present the most attractive opportunities. Using macroeconomic and targeted private markets research to inform our alpha-seeking investment decisions across both developed and emerging markets, we assess the growth trends that we believe will shape global economic activity in the medium to long term – such as demographics, natural resources and, most importantly, innovation.

Our highly selective investment process relies on strong deal flow from a wide range of private equity managers with whom we have developed close relationships. Investing across jurisdictions and in time-sensitive and challenging situations, our ability to execute is key to consistently attracting high-quality deals.

ResponsibilityWe believe that investing responsibly supports the long-term perspective needed to outperform throughout market cycles. By integrating environmental, social and governance (ESG) considerations into our investment decisions in private markets, we can identify risks or positive changes that are unlikely to surface in traditional financial analysis.

Our principles for responsible property investment (RPI) reflect our understanding that environmentally efficient buildings provide socio-economic benefits to communities that increase occupier demand. In addition to improving our properties in this regard, we advocate greater sustainability in the real estate industry through forums including the British Property Federation, the Institutional Investors Group on Climate Change, the Global Real Estate Sustainability Benchmark and the UNEP Finance Initiative.

ESG risks inform our private-equity investment strategy, are considered in our due diligence on transactions and are reflected in our portfolio construction. Upon investment, we establish an engagement programme as part of our ongoing monitoring of the companies we invest in.

Best-practice governance is evident in the structure and operation of our infrastructure vehicles. Investors into our pooled fund are provided with an independent valuation, and those committing more than £75m are represented by an advisory committee. We are a member of the UNPRI Infrastructure Steering Committee and the OFWAT investor group on establishing a voluntary code of governance for the operation of water utilities. Our wind farm assets, Fallago Rig and Braes of Doune, offset a combined 260,000tn of carbon dioxide each year.

Eurostar: Hermes and the Caisse de dépôt et placement du Québec worked in a consortium to acquire respective 10% and 30% stakes in 2015.

Specialist creditBoth of our illiquid credit strategies – direct lending and real estate debt – aim to exploit the vacuum caused by banks’ retreat from European business and property lending after the financial crisis. With capital-adequacy requirements restricting the types of credit exposure that banks can seek, opportunities for alternative lenders continue to grow.

Our direct lending strategy offers a unique origination capability in a market where the ability to source attractive loans is critical. Our ability to source deals across Europe through contacts among private equity firms, debt advisors, legal and accountancy firms and corporate treasurers is strengthened by a formal co-lending agreement with the Royal Bank of Scotland for UK mid-market loans. The strategy aims to generate stable, long-term returns through senior-secured loans to UK mid-market businesses, but investors with greater risk appetite can increase their exposure to unitranche transactions in bespoke arrangements. We have through-the-cycle experience in this market, with proven expertise in loan origination, structuring, execution, monitoring, restructuring and work-out situations in good and challenging markets.

For our real estate debt strategy, we invest in UK commercial mortgages that are fully secured by each underlying property. We favour bilateral loans, and are extremely selective in our approach: of the 208 deals seen in the 21 months to October 2016, we funded 10. In our analysis of mortgages, we draw on our real estate asset management team, which assesses the fundamentals of underlying properties. These insights inform our credit decisions, enabling us to better assess the quality of underlying assets.

Accessing the opportunityWe have a track record of working with respected investors in club, consortium, joint-venture and co-investment programmes to generate return streams from private markets that help investors achieve their objectives. Our alignment with investors’ interests, combined with our scale and ability to source and execute attractive deals across real estate, private equity, infrastructure and illiquid credit markets, is crucial in this. By offering a range of access points, we aim to accommodate investors of varying scale and resources. Understanding the long time horizons that frame institutional investors’ objectives, we manage investments prudently and with a focus on returns, environmental sustainability, social impact and strong governance. Our heritage, scale, expertise and networks enable us to deliver a strong proposition in private markets: an ability to enhance returns while lowering the cost of access.



This document is for Professional Investors only. This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to the investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability.

Any opinions expressed may change. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Investing in Property is an illiquid investment and may result in deferment of redemption of units. The value of the property is a matter of a valuer’s opinion rather than fact. Past performance is not a reliable indicator of future results and targets are not guaranteed. All figures, unless otherwise indicated, are sourced from Hermes. For more information please read any relevant Offering Documents or contact Hermes.

The main entities operating under the name Hermes are: Hermes Investment Management Limited (“HIML”); Hermes Alternative Investment Management Limited (“HAIML”); Hermes European Equities Limited (“HEEL”); Hermes Real Estate Investment Management Limited (“HREIML”); Hermes Equity Ownership Limited (“HEOS”); Hermes GPE LLP (“Hermes GPE”); Hermes GPE (USA) Inc (“Hermes GPE USA”) and Hermes GPE (Singapore) Pte. Limited (“HGPE Singapore”). All are separately authorised and regulated by the Financial Conduct Authority except for HREIML, HEOS, Hermes GPE USA and HGPE Singapore. HIML currently carries on all regulated activities associated with HREIML. HIML, HEEL and Hermes GPE USA are all registered investment advisers with the United States Securities and Exchange Commission (“SEC”). HGPE Singapore is regulated by the Monetary Authority of Singapore.

IN SPAIN: Hermes Investment Management Limited is duly passported into Spain to provide investment services in such jurisdiction on a cross-border basis and is registered for such purposes with the Spanish Securities Market Commission – Comisión Nacional del Mercado de Valores (“CNMV”) under number 3674.

Issued and approved by Hermes Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Registered address: Lloyds Chambers, 1 Portsoken Street, London E1 8HZ. Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation will not be available under the United Kingdom Financial Services Compensation Scheme. CM155543 09/16 T4764

Excellence. Responsibility. Innovation.

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Hermes Investment ManagementHermes Investment Management is focused on delivering superior, sustainable, risk-adjusted returns – responsibly.

Hermes aims to deliver long-term outperformance through active management. Our investment professionals manage equity, fixed income, real estate and alternative portfolios on behalf of a global clientele of institutions and wholesale investors. We are also one of the market leaders in responsible investment advisory services.

Our investment solutions include:

Private markets

International real estate, UK commercial real estate, UK private rental sector real estate, infrastructure and private equity

High active share equities

Asia, global emerging markets, Europe, US, global, and small and mid cap

Credit

Absolute return, global high yield, multi strategy, real estate debt and direct lending

Multi asset

Multi asset inflation

Responsible Investment Services

Corporate engagement, intelligent voting and public policy engagement

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