santa barbara county employees’

Santa Barbara County Employees’ Retirement System 2021 Private Real Return Strategic Plan

• Program Review 3

• Strategic Plan 9

• Appendix 15

Agenda

Program Review

SBCERS’ Private Real Return (“PRR”) Investment Policy has outlined the following:

Goal

To provide investment returns commensurate with the Program’s targets through participation in Private Real Return investment opportunities. To reach a target allocation of 9% of total plan assets.

Objectives

In addition, the Portfolio is focused on the following objectives:

• Preserve investment capital

• Provide diversification to SBCERS’ overall investment program

• Provide a hedge against inflation

• Provide cash yield as a component of the overall investment return

Benchmark:

• Achieve total returns that meet Portfolio’s benchmark, Consumer Price Index-All Urban Consumers (CPI-U) plus 4%

Investment Limitations as a % of Target Allocation:

• One manager – 25% maximum Multiple managers at 9%

• One co-investment – 10% maximum; total co-investments 40% maximum None to date

SBCERS’ PRR Portfolio Goals and Objectives

Hamilton Lane | Global Leader in the Private Markets Proprietary and Confidential | 4

SBCERS’ PRR Timeline

Hamilton Lane was hired in 2014 to select new investments, monitor, and provide advice for the private infrastructure and natural resources portfolio


2012 – PRR Portfolio inception • SBCERS establishes 5% target allocation

2013 – Commitments made to two initial investments • Actis Energy 3 and U.S. Farming Realty Trust II

2014 – HL hired; allocation of $120 million over three years • Targeted annual commitments of $30 - $50 million

2015 – HL completed first investment • KKR Global Infrastructure Investors II, L.P.

2016 – Full investment year • Closed on $45 million to four partnerships

2017 – Target allocation increased to 9% • Investment tranche extended

2018 – Increased annual commitments to $90 million • PRR allocation reached 3.5%

2019 – Annual commitments reached $100 million • PRR allocation increased to 4.8%

2020 – Annual commitments surpassed $100 million • PRR allocation increased to 5.5%

SBCERS’ PRR AllocationAs of September 30, 2020

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

2012 2013 2014 2015 2016 2017 2018 2019 2020

$ M

illio

n

Annual Commitment Allocation PRR Target Allocation Actual PRR Exposure

Strategically Building the Portfolio


9/30/2015 9/30/2020 Long-Term Target

Strategic Diversification by Exposure

Str

ate

gy

Ge

og

rap

hy

Ind

us

try

Natural Resources

53%

Infrastructure47%

North America

57%

Europe23%

Asia3%

Rest of World16%

Natural Resources

79%

Infrastructure21%

North America

83%

Europe6%

Asia2%

Rest of World

9%

Oil & Gas23%

Power & Renewables

14%

Energy8%

Agriculture55%

NaturalResources

55-65%

Infrastructure35-45%

NorthAmerica40-80%

Europe10-50%

Asia0-20%

Rest of World0-20%

Oil & Gas19%

Power & Renewables

18%

Energy14%

Communications21%

Agriculture9%

Transport10%

Mining & Minerals4%

Timber2%

Other2%

Water1%

Oil & Gas10-25%

Power & Renewables

10-25%

Energy10-20%

Communications10-25%

Agriculture5-20%

Transport0-15%

Mining & Minerals

0-15%

Timber0-10%

Water0-10%

Activity Review


• Expect contributions to outweigh distributions as build to target allocation

• Net cash outflow of $35.8M in 2020

• Record annual distribution activity in 2020

• Seven funds generated distributions greater than $1M during the year

Portfolio Cash Flow Activity

($60)

($50)

($40)

($30)

($20)

($10)

$0

$10

$20

$30

2013 2014 2015 2016 2017 2018 2019 2020

($ in

Mill

ion

s)

Contributions Distributions Net Cash Flow

Top Manager Exposure


• Top five manager exposures are all generating positive since inception returns

• In aggregate the managers are generating an IRR of 8.2%

Investment Guidelines limits exposure to one manager to a maximum of 25% of total Program

• Portfolio is well diversified by manager with top exposure at 8.2% of the total Program

Top 5 GP Relationships by Total Exposure*As of September 30, 2020

General Partner Investment StrategyNumber of

FundsTotal Exposure

($M)% of TotalPortfolio

SinceInception IRR

Stonepeak Associates, LLC Infrastructure 2 $32.7 8.2% 21.6%

Global Infrastructure Partners Infrastructure 2 30.2 7.6% 1.9%

Brookfield Asset Management Infrastructure 2 30.1 7.6% 9.3%

GSO Capital Partners LP Natural Resources 2 28.3 7.1% 3.7%

EQT Limited Infrastructure 3 27.6 6.9% 13.0%

Total 11 $148.9 37.4% 8.2%

*Total Exposure defined as Reported Market Value plus Unfunded Commitment

Strategic Plan

2020 Strategic Plan Update


Review of themes and objectives identified for 2020

Commitment Pacing• Met target commitment range with $108M in commitments; increased

allocation to 5.5%

Manager Concentration

• Committed to four existing manager relationships, while adding three new manager relationships (HitecVision, ISQ, Tiverton)

Short Term Performanceand Liquidity

• Seek potential j-curve mitigating strategies when available (e.g., cash yielding strategies)

Portfolio Diversification

• Prudent diversification by strategy and geography; 4 of 7 funds will target global investments

Board and Staff Education

• Co-Head of Real Assets provided Real Assets Market Overview at August Board Meeting

2020 Commitment Activity

• Total commitment activity of $108.4M in seven partnerships in-line with Strategic Plan objectives

• Four commitments to existing managers; three commitments to new managers

• Well diversified by strategy and geography

• Strong pipeline of opportunities for 2021


Commitment Activity

Closing Date Partnership Investment Strategy Geographic FocusCommitment

($M)

2020 Allocation

2/27/2020 HitecVision North Sea Opportunity Fund, L.P. Natural Resources Western Europe $15.0

5/11/2020 Stonepeak Infrastructure Fund IV, L.P. Infrastructure North America $15.0

10/29/2020 EQT Infrastructure V, SCSp Infrastructure Global $18.4

10/30/2020 ISQ Global Infrastructure Fund III, L.P. Infrastructure Global $15.0

11/17/2020 Digital Colony Partners II, L.P. Infrastructure Global $15.0

1/27/2021 Tiverton AgriFinance II, L.P.1 Natural Resources North America $15.0

2/12/2021 Hancock Timberland and Farmland Fund, L.P.1 Natural Resources Global $15.0

Total $108.4

Note: Change in commitment amounts due to FX fluctuations.1 Legal process began in 2020 for Tiverton and Hancock; as such, counted towards 2020 allocation

Where Are We Headed?


Identifying 2021 Portfolio Objectives

Commitment Pacing • Target annual commitments of $90M - $110M to reach long term target of 9%

Manager Concentration

• Commit to core manager relationships, while considering new managers

Short Term Performanceand Liquidity

• Seek potential j-curve mitigating strategies when available (e.g., cash yielding strategies)

Portfolio Diversification

• Consider target exposures (strategy and geography) in making investment decisions

Horizon Model


ScenarioAs of

9/30/202021 2022 2023 2024 2025

Scenario 1: $90M annual commitments 5.5% 7.5% 8.4% 9.1% 9.6% 9.8%

Scenario 2: $110M annual commitments 5.5% 7.5% 8.5% 9.5% 10.3% 10.8%

Projected Allocation - Assumes 7.0% Total Plan Growth Rate

2%

4%

6%

8%

10%

12%

9/30/2020 2021 2022 2023 2024 2025

% o

f P

lan

Va

lue

Scenario 1 - $90M annual commitments

Scenario 2 - $110M annual commitments

Target PRR Allocation

Forward Calendar


• Existing managers back to market include two Infrastructure managers, diversified by size and geographic focus

• Will add new manager relationships in-line with Portfolio objectives

2021 Commitment Outlook

Partnership Investment Strategy Geographic FocusPrior Commitment

($M)

Existing Manager Relationships - likely to come back to market

Asterion Industrial Infra Fund II, FCR Infrastructure Western Europe $15.0

KKR Global Infrastructure Investors IV, L.P. Infrastructure Global $15.0

Total $30.0

Appendix

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Disclosures


As of February 16, 2021

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