mayors water summit
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MAYORS WATER SUMMIT
Pension Funds as a Possible Source of
Capital for Public Infrastructure
December 8, 2010
Guest Speakers: Craig Beevers & Thad Wilson
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DISCLAIMER
The services outlined in this presentation are provided by M3 Capital Partners LLC in the United States, M3 Capital Partners Limited in the United Kingdom and M3 Capital Partners (HK) Limited in Hong Kong.
This presentation is made on a confidential basis to selected sophisticated institutional investors. It must not be copied or disclosed to anyone except to personnel and professional advisers of the recipient on a confidential need to know basis. It is for information purposes only and is not an offer or invitation to subscribe for or purchase securities or to enter into any agreement for investment services nor a solicitation of an offer to subscribe for or purchase securities or enter into any such agreement. No advice or recommendation is contained in it and it does not take into account the investment objectives, financial situation and particular needs of any potential investor or issuer.
All investments are subject to significant risks of loss of income and capital. Past performance of particular investments should not be seen as an indication of future performance, and there is no certainty or guarantee that results comparable to those achieved in the past can be achieved in the future.
In the United Kingdom this presentation is intended only for investment professionals and high net worth companies, partnerships, associations or trusts falling within Articles 19 and 49 of the FSMA (Financial Promotion) Order 2005. Firms authorised under the Financial Services and Markets Act (“FSMA”) may also provide this presentation to persons they have classified as Professional Clients under the Financial Services Authority rules. Transmission to any person in the UK other than the categories stated above is unauthorised and may contravene FSMA. No person falling outside those categories should treat this presentation as constituting a promotion to him or rely or act on it for any purposes whatever.
This presentation is in Hong Kong only intended for professional investors. The term "professional investor" is as defined in the Securities and Futures Ordinance and its subsidiary legislation.
M3 Capital Partners LLC is a member of FINRA and SIPC.
M3 Capital Partners Limited is authorized and regulated by the Financial Services Authority.
M3 Capital Partners (HK) Limited is licensed with the Securities and Futures Commission.
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M3 CAPITAL PARTNERS
An Integrated, Global Real Asset Private Equity Investment and Advisory Firm
1 Services provided in the United States by M3 Capital Partners LLC, in the United Kingdom by M3 Capital Partners Limited, and in Hong Kong by M3 Capital Partners (HK) Limited.
Focus on Real AssetPrivate Equity
Global Presence and Expertise
Management-Owned with Long-Term Stability
Global platform with regional offices in Chicago, New York, London and Hong Kong1
The majority of M3 transactions involve cross-border flows of capital
M3 Principals have average real asset experience of 23 years and average M3 tenure of 15 years
Stability of senior management and a focus on long-term strategic relationships
Since inception in 1991, M3 has focused on real asset private equity investment and financial advisory services, executing 200+ transactions with a total capitalization over $80 billion
M3 currently manages two private equity funds aggregating $2.9 billion of equity through Evergreen Investment Advisors, a wholly owned subsidiary
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INFRASTRUCTURE OVERVIEW
Why is Private Capital Attracted to Infrastructure Assets?
Due to recent market turmoil and the perceived threat of inflation, private capital is attracted to tangible infrastructure assets offering:
Low volatility
Predictable cash-flow
Attractive real returns
Low correlation with other asset classes
Attractive features of drinking water and wastewater infrastructure investments:
Capital intensive
Varied sizes ($10 $100+ million)
Very long investment horizon
Stable, secure cash-flows
Monopolistic characteristics
Massive need for investment
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PRIVATE CAPITAL’S APPEAL
Why Should Municipalities be Attracted to Private Capital?
Ownership / Control If correctly structured, public entity retains control over pricing and regulation Municipalities can continue to oversee operating and safety standards Failure to comply to standards results in termination of agreement
Payment Municipalities can receive direct upfront payment or avoid capital drain Potential to reinvest proceeds in infrastructure or other public works
Risk Transfer Construction, operation and maintenance, financial and regulatory risks transferred to private sector
Social Benefits Limits need for public entity leverage Allows for redeployment of stretched municipal human resources Brings forward time at which projects can be undertaken Large driver of employment locally and nationally1
Additional Benefits Private expertise and operational efficiencies may result in long-term user savings
Allows for potential transfers of new technologies and global best practices Diversifies funding sources
1 Studies cited by Jack Wells, US DOT Chief Economist, have found that each $1 billion in infrastructure investment could generate 34,800 jobs.
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PRIVATE INVESTMENT VEHICLES
Variety of Direct & Indirect Sources of Private Capital
Infrastructure Assets
Public Pension Funds
Corporate Pension Funds
Sovereign Wealth Funds
Insurance Companies
Private Equity Funds Unlisted Funds Listed Funds Fund of Funds
Listed Corporates
Direct Investment Secondary Investment
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THE DIRECT APPROACH
Direct Investment by Public Pension Funds
Capital Characteristics Pension plans are characterized by very long-term liabilities (i.e. retiree benefits) and thus are natural owners of long life-cycle assets
Pension funds desire better alignment of interests among stakeholders
Capital Availability Pension plans have increasing in-flows resulting in more flexibility to reinvest capital and fund future capital expenditures
Investment Horizon Very long-term investor – strong alignment of interests with focus on whole-life project costs
Motivated to achieve more cost-effective design and construction Allows for setting clear performance standards aligned with financial incentives Permits long-term budgeting
Use of Leverage Not motivated to leverage asset to meet promote hurdles or “alpha” targets
Return Expectations Typically more focused on current yield rather than capital appreciation Lower total fees
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SPECTRUM OF POTENTIAL STRUCTURES
Not a “One Size Fits All” Approach
Private Ownership
DBOF / Concession
Joint VentureDBOPublic
Ownership
Potential Pension FundInvestment Structures
Strengths Control over design,
build and operations process
Very long-term cash-flow stream
Challenges Structuring of
financial and operational risks
Political acceptance
Rate setting mechanism
Example Publicly traded
utilities
Strengths Coordination of
design, build and operations process
Long-term, stable cash-flow stream
Challenges Structuring of
financial and operational risks
Getting the contract terms “right” up front
Example PERC Water’s Santa
Paula, CA Water Recycling Facility
Strengths Long-term ownership Alignment of interest Ability to optimize
leverage
Challenges Minority ownership
for investor
Untested structure
Rate setting mechanism
Example Potentially structure
similar to Indianapolis transfer agreement
Investor Perspectives:
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CONTACT INFORMATION
M3 Capital Partners www.m3cp.com150 S. Wacker Drive, 31st FloorChicago, IL 60606
Craig Beevers Direct: 312.499.8500E-mail: cbeevers@m3cp.com
Thad Wilson Direct: 312.499.8530E-mail: twilson@m3cp.com
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