Energy Efficiency Investments In A Pension Fund Asset Allocation

Michael Friedlander, COO/CFOAPG Investments Asia, Ltd

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Introduction to APG

• Established on 1 March 2008: All Pensions Group• Builds on a long tradition of pension fund management• One of the largest pension administrators in the Netherlands and one

of the largest managers of pension assets in the world• Promotes the pension interests of 2.7 million Dutch individuals and

4000 employers• Advocate of collective pension schemes• APG has a long-term contract with clients

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About APG (1)

• Aims to make high real long-term returns, which help the pension fund tp provide attractive pensions at reasonable premiums

• Proven track record for returns• Extremely low costs compared to commercial asset

managers

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About APG Investments (2)

• Focus on the long term with an investment strategy that is based on internal ALM expertise

• Team of 550 investment professionals worldwide• International network and subsidiaries in New York and Hong Kong• Assets largely (80%) managed internally• External mandates only if internal management does not add value

or if external route is more inexpensive• Large number of broadly spread internal portfolios which makes it

possible to customise risk and returns

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About APG Investments (3)

• Broad internal knowledge and skills present for largely actively managed portfolios

• Strong player in the illiquid segment• Innovative approach to investment

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Objectives of APG and APG Investments

• APG’s ambition:– Use customised asset management to contribute to the objectives of the

pension fund client: a good pension at a reasonable price

• Long-term objective for returns– real, inflation, salary growth

• Realising the client’s ambition requires investment in real assets– Manage real investment risks– By spreading over investment categories, strategies and countries

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APG’s Investment Beliefs Investment risk is rewarded

Financial markets are not entirely efficient

There is a premium on illiquidity

Investing for the long term pays off

People and culture are critical factors for success

ESG factors are an increasingly important factor in investment decision making

Diversification is a “free lunch”

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All Very Interesting, But What Is “It”?

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P2E2 Initiative – US Commerce Department

Developed To Solve 2 Major Problems

1. Lenders Worried About Loaning Into Exotic Zip Codes

2. Minimizing/Reducing Equity Requirements From Hosts

But Left 2 Major Problems Unresolved

3. Scale

4. Look & Feel Of “Project Finance”

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Proposed Solution – “Stealing A Page From Our Real Estate Investing Handbook”

Fund, LLP

LP Equity Capital ProvidersGP Fund Manager

Fund Service Providers

SPV 1 SPV 2 SPV 3 SPV 4

Debt Capital Providers

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Fund Approach

• Professionally Managed• Captures Economies Of Scale

– Standardized ESA Contracts & Structure– Increased Deal Flow For ESCO’s– “Certain” Financing For Projects

• Increased Lender Confidence• Attractive Investment Characteristics For Subordinated

Lenders• Significantly Mitigates & Manages Risks

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But How Deep Is The Market?...• Annual Expenditures 2011-2015 Total GHG Reductions

– North America - € 69 Billion– China - € 57 Billion– Europe € 74 Billion– Everywhere Else € 102 Billion

• Annual Expenditures 2026 – 2030 Total GHG Reductions– North America - € 140 Billion– China - € 211 Billion– Europe € 137 Billion– Everywhere Else € 323 Billion

• 40% Of Expenditures Associated With Energy Efficiency

Source: Pathways to a Low Carbon Economy, V2, McKinsey & Company, 2/24/2009

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But How Does This Coincide With The Mandate & Fiduciary Obligations Of A

Dutch Pension Fund?

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Fundamental Belief 1Investment risk is rewarded…

Counterparty CreditCurrent 7 Year

Credit Yields7 Year Treasuries 3.3744%

AAA 4.1940%

AA 4.8847%

A 5.0697%

BBB 6.2777%

EE Investments 13%-15%

Source: Bloomberg, 6/16/2009

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Fundamental Belief 2Financial markets are not entirely efficient…

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

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, USA15 July 2003

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Fundamental Beliefs 3 & 4There is a premium on illiquidity…Investing for the long term pays off…

“Typical” Fund Terms– 10 Year Horizon w/options to extend

• 13%-15% Target IRR Represents A Simple Payback Of 3-3.5 Years– Fund Structure Enables Economy’s of Scale + Scalability, Aligns Interests

of Fund Manager, and Keeps “Hot Money” Out

Cash Flows Are Structured As Long Term Operating Leases– Stable, Predictable Cash Flows w/Floor Payments– “Indexed” To Inflation Through Energy Prices

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Fundamental Beliefs 5 & 6People and culture are critical factors for success…ESG factors are an increasingly important factor in investment decision making…

• Exceptional Investment Returns (on a Risk Adjusted Basis) To Clients

• Makes A Major Contribution To Solving One Of The Key Contributors to Climate Change

• Significantly Advances Global Economic Benefit– Employment– Reduced Reliance On Public Sector Funds/More Efficient

Allocation of Global Capital

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In Spite Of A Compelling Business Case, There Are Issues…

• External– Fragmented & Uncoordinated Stakeholders– Supply Of Funds & Qualified Fund Managers (Scale)

• Sector• Geography• Fund Management Infrastructure (PM, Risk Management, etc.)

• Internal– Which Portfolio Do You Put It In?

• Infrastructure? Commodities? Credits/FI? PE? ILB? Real Estate? Absolute Return? Exotic Beta?

– What Is The Benchmark?– Tracking Error

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Summary• EE Investing

– Consistent With Fiduciary Obligations To Act In Beneficiaries Best Interests

– Major Contributor To Portfolio Alpha– “Nicely Matched” Term For Asset/Liability Hedging– Growing “Supply” of Investment Managers & Investment Vehicles– Natural Inflation Hedge– Significant & Growing Regulatory Agenda

• Enables Institutional Investors To Make A Significant & Meaningful ESG Impact

• Scalable• Somewhat Of A “Chicken & Egg” Issue Remains

– Does Supply Cause Demand or Does Demand Cause Supply?

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