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© 2014 AQAL Capital. Strictly Confidential.

FINDING ETHICAL ALPHA USING INTEGRAL INVESTING METHODS

May 12-13, 2014, St. Augustine, Florida

Mariana Bozesan, Ph.D., M.S.Head of AQAL Investing Family OfficeFounder & General Manager, AQAL CapitalClub of Rome intl. full memberwww.AQALcapital.com

© 2014 AQAL Capital. Strictly Confidential.

THE FUTURE OF RAISING CAPITAL: WHY GP’S AND ASSET MANAGERS MUST NOW EMBRACE HUMANITARIAN AND ENVIRONMENTAL RISK RETURN METRICS

Mariana Bozesan, Ph.D., M.S.Head of AQAL Investing Family OfficeFounder & General Manager, AQAL CapitalClub of Rome intl. full memberAQALcapital.com

© 2014 AQAL Capital. All rights reserved. Strictly Confidential. 3

OUTCOMES TODAY

Demystifying the landscape of rather confused investors, businesses, and societyUnderstanding the hidden determinants, context, and trendsUnleashing the power of the integral model for de-risking early-stage investments


TREND #1: INVESTORS’ CONVERGENCE


TRADITIONAL INVESTING IS CHALLENGED

• Financial crisis lead to fear and uncertainty- Falling revenue and margins- Massive capital migration

• Frustrated wealth owners losing trust in their asset managers• Alternative and customized investing are on the rise• Traditional investing often focused on short-term profit

maximization at the expense of long-term health of global community, culture, environment, ethics, and overall human happiness

• Traditional investment metrics often missed sustainable, time-based businesses and responsible investment opportunities

• Many traditional asset managers failed to develop a core competency in alternative investing opportunities including impact investing (SRI/RI/ESG)

5

Profit

TRADITIONAL INVESTING

Profit Metrics

e.g.

WALL STREETBERKSHIRE-HATHAWAY

KKRSEQUOIA CAPITAL

Source: Mulcahy, D. & Weeks, B. & Bradley, H. S., (2012, May). We have met the enemy …. And he is us: Lessons learned from twenty years of the Kauffman Foundation’s investments in venture capital funds and the triumph of hope over experience. Kauffman Foundation Research


IMPACT INVESTING IS FRAGMENTED IN TERMS OF MOTIVES AND APPROACH

Two types of Investors:1. Financial (Profit) First Investors

- Pursue the optimization of financial returns before having an impact floor

- Investors “are not willing to accept lower than market returns as a cost to optimizing social or environmental goods, although they still make a positive impact”

2. Impact (People/Planet) First Investors - Seek to optimize social and environmental impact

with a financial floor- For greater impact, investors are willing to accept

lower than market financial returns

IMPACT INVESTING

Sustainability Metrics: ESG

Triple Bottom Line

Profit

People

Planet

e.g.GRAMEEN BANKTRIODOS BANK

GLS BANKBANK SARASIN

*Definition after (Eurosif, 2010, p. 7)



The integration between Traditional Investing

and Sustainable Impact Investing is needed in order to fulfill the needs

of leading edge investors today


AN INTEGRATED APPROACH TO INVESTING

Integral Investing is based on Ken Wilber’s Integral theory that is widely applied in 50 disciplines including science, politics, economics, education, medicine, and business; Ken Wilber is endorsed by Nobel Prize laureate Al Gore, former US President Bill Clinton, former Secretary of State Hillary Rodham Clinton, and is also used i.e. at McKinsey and Company. Source: Wilber, K. (2000). A theory of everything: An integral vision for business, politics, science, and spirituality. Boston: Shambhala.

Integral Metrics

Planet

People

Profit

Ethics, Ego, Emotions &

ConsciousnessBehavior

ExteriorInterior

Indi

vidu

alCo

llecti

ve Culture & Morals

INTEGRAL INVESTINGAQAL Investing, Natural Investing

Profit


Profit Metrics

IMPACT INVESTING

Profit

People

Planet

Sustainability Metrics ESG, IRIS, SAM

Triple Bottom Line

e.g.GRAMEEN BANK

LGT VENTURE PHILANTHROPY

e.g.

TRADITIONAL WALL STREET

BANKSAND

VENTURE CAPITAL FIRMS



AWAKENED INVESTORS HAVE APPEARED, OCCUPYING A SPECIFIC POSITIONING AND SHOWING PARTICULAR DRIVERS

11

FIN

ANCI

AL R

ETU

RNS

SOCIAL, ENVIRONMENTAL, ETHICAL, CULTURAL, & HAPPINESS IMPACT

PROFIT FLOOR

“FINANCIAL FIRST”IMPACT INVESTORSOptimize financial returns while maintaining an impact floor

PhilanthropyLOW

HIGH

LOW HIGH

Pure Philanthropy

Pure Financial “IMPACT FIRST” IMPACT INVESTORS Optimize social/

environmental impact while maintaining a financial floor

INTEGRALINVESTORS

Optimized, risk adjusted financial returns and

premium impact returns

IMPACT FLO

OR


TREND #2: CONVERGENCE OF BUSINESS MODELS


SOCIAL

ENVIRONMENTAL

PROFIT

ETHICS EGO

EMOTIONSCONSCIOUSNESS

BEHAVIOR

ExteriorInterior

Indi

vidu

alCo

llecti

ve CULTURE& MORALS

PROFIT

TRADITIONAL BUSINESSES

SOCIAL BUSINESSES

INTEGRALLY ACTING BUSINESSES (ESG/PRI DRIVEN )

e.g. DM, Puma, Whole Foods, Patagonia, REI

SOCIAL

ENVIRONMENTAL

e.g.ENRON

BPMONSANTO

PHILLIP MORRIS

e.g.GRAMEEN BANK

OWNERSLGT VENTURE

PHILANTHROPY PORTFOLIO COMPANIES

BUSINESS INTEGRALIZATION


PREMIUM RETURNS FOR INTEGRALLY ACTING BUSINESSES

*Source: Sisodia, R., Sheth, J., Wolfe, D.B. (2007). Firms of endearment: How world-class companies profit from passion and purpose. New Jersey: Wharton School, p. 16; **Source: Mackey, J., & Sisodia, R., (2013). Conscious Capitalism: Liberating the heroic spirit of business. Boston: Harvard Business Press Review.

15 Year 10 Year 5 Year 3 Year Cumulative Annualized Cumulative Annualized Cumulative Annualized Cumulative Annualized

FOE Return 1646.1% 21.0% 254.4% 13.5% 56.4% 9.4% 77.4% 21.1%

GTG Return 177.5% 7.0% 14.0% 1.3% -35.6% -8.4% -23.2% -8.4%

S&P 500 Return 157.0% 6.5% 30.7% 2.7% 15.6% 2.9% 10.3% 3.3%

Note: Company returns are total returns with dividends reinvested and compounded**

Sample: Whole Foods: +40%

Higher ROI than FoEsover 10 years

(1800% shareholder value 1995–2006)

Sample: 8.0xhigher ROI than market average

(S&P 500) over 10 years; and 3.1xhigher than GGCs

Sample: 3.0x higher ROI than market

average (S&P 500) over

15 years

GOOD TO GREAT COMPANIES (GGCs) 2002

Nucor; Kimberly-ClarkKroger; Walgreens

Wells Fargo; Gillette

INTEGRALLYACTING BUSINESSES

DM, REI, The Container Store Entelios AG, Riversimple

Stoneyfield Farms, Whole FoodsTrader Joe’s; Patagonia

FIRMS OF ENDEARMENT (FoEs) 2007*

Patagonia AmazonSouthwest AirlinesIKEA; BMW; eBay,

AVEDA


TREND #3: THE EMERGENCE OF SECOND TIER HUMAN CONSCIOUSNESS


RATIONALINTELLIGENCE

THE TRUE

- SCIENCE -

ENLIGHTENMENT ERADEMOCRACY

NATION STATESMODERN MEDICINE

SPACE SHUTTLE

CIVIL RIGHTS & GREEN MOVEMENTFEMINISM

SOCIAL BUSINESSCULTURAL CREATIVES:

25-30%

EMOTIONALART, VALUES, MORALS,

ETHICS

THE BEAUTIFUL

- ART -

INTEGRALLY ACTING HUMANSINTEGRATING HUMANITY’S VALUE SPHERES

“DeMedici Effect” in the 21st century

THEBEAUTIFUL

- ART -

THE GOOD

- MORALS -

THE TRUE

- SCIENCE -

EVOLUTION OF HUMAN CONSCIOUSNESS TO LATER STAGES OF DEVELOPMENT


OUTCOMES TODAY



THE FINANCIAL CONTEXT

The disaster of 2007/2008 nearly ruined the global economic system– By Oct. 2008, about $25 trillion were obliterated from the value of stock markets

What started with an initial liquidity crisis lead to – The disruption of capital flows– The collapse of the “too big to fail” financial organizations incl. Lehman Bros., Fannie Mae, and

Freddy Mac– Severe downturns in the global casino/stock markets world wide– Currency crunches, failure of major businesses , global recession including the European sovereign-

debt crisis (Ireland, Portugal, Greece, Spain, Cyprus, etc.) – LIBOR, Madoff scandals– No end in sight!

Q: How sustainable are our financial and economic systems?


THE SOCIAL CONTEXT

Real estate bubble bursts, foreclosures, evictions (USA, Spain, Ireland, etc.)

Prolonged unemployment in most Western countries– 7.6% USA, 12% in Europe on average

Increased inequality in the West– USA with the “most millionaire households” in the world followed by Japan, China, UK, and

Germany

Growing health problems physically, mentally, emotionally– Cancer, overweight, obesity, depression, asthma

Social unrests: – Occupy movement, Spanish Indignados, Greek protest, Arab spring, Ucraine protests

The worst social consequences since the Great Depression


THE ENVIRONMENTAL CONTEXT

We continue to emit twice as much CO2 in the atmosphere than can be absorbed by our forests and oceans with disastrous consequences for the earth’s ecological balance:– Global warming at accelerated speed can lead up to 2-4 degrees Celsius in this century– Ongoing droughts

Water is becoming more important than petrol

– Ongoing hurricanes, floods, rapid melting of polar ice caps lead to the raise of ocean levels

– Irrecoverable loss of bio diversity


What is going on?


The quiet killer and the driving force behind destruction

but also the GOOD is

Exponential Growth


Most decision makers do not get it

until it is muchto late to respond


What is Exponential Growth?


The sage and the Indian king


THE SAGE AND THE INDIAN KING

8 > 1+2+4=7

32 > 1+2+4+8+16=31

On each new field, there are more grains of rice than in all previous fields together

Exponential growth means that each duplication contains a larger quantity of things than all previous quantities taken together

The last square would contain 9.223.372.036.854.780.000 grains of rice that would cover the surface of today’s India with more than 1 meter of rice


EXPONENTIAL POPULATION GROWTH220.000 PEOPLE ARE BORN PER DAY (NET)


EXPONENTIAL ECONOMIC GROWTH

It took Europeans 1000 years, the UK 100 yrs., Germany 70 yrs., Japan 50 yrs., and it took China only 6 years to double its economic output

China’s resource hunger is not only a media eventIts GDP has doubled 6 times since 1978By 2017, it will need more resources and will produce more goods than in its entire history all together!


OUR TRUE PROBLEM: LACK OF AWARENESS REGARDING THE IMPORTANCE OF EXPONENTIAL GROWTH

With every duplication, the quantity added is LARGER than the entire compounded previous quantityThe megatrends in the 21st century are:– Exponential population growth– Exponential economic growth– Exponential consumer growth: During the last 40 years, we added

3 additional Billion consumers

We have reached our physical Limits to Growth on our planet


“Humanity is stupid enough not to do what is perfectly doable”

to prevent disaster, Prof. Randers


Is that really true?


Maybe!


But, something good is also going on!


EVOLUTION OF CONSCIOUSNESSRESEARCH ON PRIVATE EQUITY INVESTORS

138 investors: 50% men – 50% womenGlobal investors from USA, Canada, Germany, China, India, France, Thailand, Bali, Singapore, Turkey, Dubai, Ireland, SwitzerlandHigh-tech, clean-tech, music, beverage, health care, Wall street financiers, lawyers, music industryActive philanthropists and social entrepreneursStanford, MIT, Harvard, Sorbonne, etc. graduates– 45 doctorate degrees, 60 MBAs, other Master’s degrees

Aggregated investment capital: $1.39B


THE HERO’S JOURNEY: AWAKENING

35Copyright 2010 |

Physical degradation, back pain, overweight, regular colds, heart problems, food allergies, injuries, multiple sclerosis


THE HERO’S JOURNEY: EMOTIONAL PAIN

36Copyright 2010 |

“horrible divorce,” death of “mother” or “wife,” “high-degree anxiety,” “worry and fear,” “heartbreak,” tension between “fear and desire,” “grief,” the “need” to be accepted by the outside world, “frustration,” “lack of trust,” “lack of joy,” “deep sadness,” “lack of alignment,” “lack of fulfillment,” “completely unhappy”


THE HERO’S JOURNEY: THE TIPPING POINT

37Copyright 2010 |

TERRIBLE EMOTIONAL PAIN LEAD TO THE COURAGE TO FACE OWN SHADOW USING TEACHERS

– “Got fed up with fear”– Decision to experience the “dark night of the soul” – Asking essential life questions: “Who am I? Why am I here?”


NOTICED LACK OF MEANING AND FULFILLMENT

“I wasn't manifesting why I was here” “I was following a script that wasn’t authored by me”“While there were fun things like building new markets and I really enjoy business, there was this sort of almost mind numbingly impossible monotony around the trajectory that I was on”“I had enough intellectual understanding that the gold rings were running out”“There’s fewer jobs left” in the world“There was a growing, gnawing, unfulfillment of maximizing shareholder value”


UNITY CONSCIOUSNESS EXPERIENCES

“Lightning bolt [that] moved through my body” “Out-of-body experience … that really showed me very clearly that I am not my body”“We proceeded to have a conversation where he read my mind and responded so I never opened my mouth”“Feeling [that] would be so powerfully strong that it was almost to the point where you couldn’t walk” “Mystical experience,” “divine light,” “divine intelligence,” the “heart was exploding with love,”“My body turned into an intense beam of light”“My heart opened and I could feel every bird and insect as part of me”

They had no framework to understand what was going on and a “quantum leap in consciousness” was the result

39


THE HERO’S JOURNEY: RETURN TO SOCIETY

“This [journey within] was like drinking out of a fire hose. In this area, MIT and Stanford Business School were like drinking out of a fire hose for academic and business issues. This was like drinking out of a fire hose for emotional, spiritual and consciousness issues. We need both.”

40Copyright 2010 |


INVESTORS’ VALUES SHIFT


How can we leverage this development in early stage

investing?


OUTCOMES TODAY



THE AQAL MODEL & DUE DILIGENCE PROCESS INTEGRATED INVESTING IS HONORING THE TRUTH IN ALL THERE IS

Integral Investing is based on Ken Wilber’s Integral theory that is widely applied in 50 disciplines including science, politics, economics, education, medicine, and business; Ken Wilber is endorsed by Nobel Prize laureate Al Gore, former US President Bill Clinton, former Secretary of State Hillary Rodham Clinton, and is also used i.e. at McKinsey and Company. Source: Wilber, K. (2000). A theory of everything: An integral vision for business, politics, science, and spirituality. Boston: Shambhala.

Integral Metrics

Environmental DD

Social, Stakeholder & Governance DD

Traditional $$$ DD

Individual Consciousness (incl. morals &

values) Due Diligence

Individual & Collective Gap

Analysis & Report

ExteriorInterior

Indi

vidu

alCo

llecti

ve Organizational, Cultural & Ethical

Due Diligence (DD)

INTEGRAL INVESTINGAQAL Investing Screening Process

Profit


Profit Metrics

IMPACT INVESTING

Profit

People

Planet

Sustainability Metrics ESG, IRIS, SAM

Triple Bottom Line

e.g.GRAMEEN BANK

LGT VENTURE PHILANTHROPY

e.g.

TRADITIONAL WALL STREET

BANKSAND

VENTURE CAPITAL FIRMS


KEN WILBER’S INTEGRAL MODEL

Ken Wilber’s Integral Model is endorsed by Bill & Hilary Clinton and Applied in 50+ disciplines and organizations including McKinsey and Company

Four quadrant correlates for humans, along lines of increasing complexity

Source: Wilber, K. (2000). A theory of everything: An integral vision for business, politics, science, and spirituality. Boston: Shambhala.

Self & Consciousness[Subjective Experience]

I

INTERIOR INDIVIDUAL

INTERIOR COLLECTIVE

Culture & Worldview[INTER-Subjective]

ArchaicAnimistic-Magical

Early MythicLate Mythic

Scientific-RationalPluralistic

HolisticIntegral

12

34

56

78

Postmodern

Modern

Traditional 1

23

45

67

8

Social System & Environment[INTER-Objective]

Brain & Organism[Objective Behaviors]

IT

EXTERIOR INDIVIDUAL

EXTERIOR COLLECTIVE

WE ITS

Brain functions,

organic states, n

eutral

structu

res, etc.

12

34

56

78

12

34

56

7

Instinctual SelfMagical Self

Egocentric SelfMythic Self

Achiever SelfSensitive Self

Holistic Self

Survival ClansEthnic Tribes

Feudal EmpiresEarly Nations

Corporate StatesValue Communities

Holistic CommunitiesIntegral Meshworks

Foraging Agrarian Informational

Horticultural Industrial

8Integral Self

Neocortex (Triune Brain)Complex Neocortex

SF1SF2

SF3



SUMMARY

Demystifying the landscape of rather confused investors, businesses, and society

Investors’ convergence

Convergence of business models

Emergence of second tier human consciousness

Understanding the hidden determinants, context, and trendsExponential growth is the driving force

Unleashing the power of the integral model for de-risking early-stage investments

“The Future of Raising Capital: Why GP’s and asset managers must now embrace humanitarian and environmental risk return metrics” We can say they MUST In my view, they will do it only when they reach the level of consciousness that mandates it

to them from within – it is a function of evolution and everybody starts at ground zero!


WE WILL CATCH THE BOAT