Foresight Environmental Fund LP

Proposal for Royal Borough of Kensington & Chelsea Foresight Environmental Fund LP

Proposal for Royal Borough of Kensington & Chelsea Pension Fund

Summary

The Foresight Environmental Fund is a fund focussed on London’s growing recycling industry and targeting compound annual growth of 20-30%. Launched in March 2011 with a cornerstone commitment of £35 million by the European Investment Bank (from the London Green Fund), the Fund’s institutional supporters also include the London Pension Fund Authority and East Riding Pension Fund. The Fund has been reviewed by Hymans Robertson.

This memorandum sets out the basis for a potential £10 million commitment by the Royal Borough of Kensington & Chelsea Pension Fund. The proposal is summarised on pages 1-3, with separate sections giving more detail on the investment pipeline, fundraising status and management team experience.

Investment Strategy

The Fund will provide development capital to support companies that operate waste-to-energy and recycling facilities in the Greater London area. The Fund’s portfolio will be diversified across a variety of waste feedstocks, process technologies and output markets, in order to target high returns without the risk inherent in relying on any single waste source, process or market. The Fund will invest at the construction stage and will not normally take planning risk.

The Fund will position its portfolio for acquisition by large waste management groups and secondary funds, with the aim of returning capital and profits to investors between the 4th and 8th years of the Fund’s life.

Fund Management

The Fund is managed by Foresight Group LLP, an English limited liability partnership owned by its investment staff and authorised by the FSA. Foresight is a long-established private equity investor with a 26-year track record and over £300 million of .

Foresight’s first institutional fund returned £4 for every £1 of investor commitments, executing 28 investments and managing the portfolio to exit over an average holding period of around five years. Foresight’s first trust achieved a higher total return than any other . Since its establishment, the firm has delivered an average cash multiple of 2.8x cost across more than 50 exited investments.

Foresight identified the waste sector opportunity in 2006 and made its first investment in the sector in 2007. Since then it has invested £60 million in 10 companies involved in various sub-sectors of the recycling industry. The Fund investment team of 8 professionals combines operational management expertise from a range of process industries and board level experience in waste management and recycling businesses.

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Market Opportunity

The waste management sector in the UK is Catching up with Europe undergoing a transformation, designed to end 100% reliance on landfill in favour of alternative means of disposal including recycling and 80% energy generation. The shift is mandated by EU directives, which require the UK to boost 60% recycling and energy recovery from waste closer to the levels achieved by countries such 40% as Germany. The Confederation of British

Industry has estimated that 300 landfills will 20% close over the next decade, meaning that approximately 2,000 new waste management 0%

in waste 2009ofmunicipal % facilities will be required by 2020. UK Germany

Landfill Energy Recycling

London recycles less of its municipal waste than any other English region. The cancellation of £1.5 billion of PFI (Private Finance Initiative) credits for waste infrastructure projects in London has delayed progress against targets. These conditions provide the Fund with an opportunity to take a significant market share in the region, positioning the Fund’s portfolio as a strategic acquisition target for large waste management companies.

The supply of capital for investment in recycling is currently weak, due to the banking crisis and the lack of private equity investors with the necessary expertise. As a result, Foresight believes that it can secure attractive terms for investment by the Fund.

Legislative Drivers

Powerful UK and European Union legislative drivers Landfill Tax per Tonne are driving growth in the recycling industry. Foremost £80 among these measures is the landfill tax. Landfill tax rates have climbed from £16 to £56 per tonne in 5 years, and are set to increase by a further £8 per £60 tonne each April, reaching £80 in 2014.

The effect of the increase in landfill tax rates is that £40 recycling facilities offering an alternative means of waste disposal are now in high demand. £20 The Environmental Services Association is anticipating a capital expenditure of between £10-20 billion to finance new infrastructure for recovering £0 materials and energy over the next 10 years. 2005 2008 2011 2014

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Financial Profile

The Fund aims to deliver a return on investment of 2-3x the amount subscribed by investors. This equates to an IRR of 20-30% based on the expected cashflow profile. (IRR means the effective annual interest rate delivered by the cashflows of the fund. It is stated after all fund costs.)

Foresight expects to draw down investors’ commitments over a 3-4 year period and to distribute capital and profits over the following 3-6 years. The investment period ends formally on 31st December 2015 (4.5 years). The fund life is 10 years with up to 2 1-year extensions subject to investor approval. The investor Years cashflows shown in the chart are illustrative and are not a forecast.

Foresight has modelled the Fund performance under various scenarios, designed to reflect the key areas of risk. The analysis shows a range of outcomes, with IRRs of 16%-29% and cash-on-cash multiples of 1.8-2.5. These figures are stated net to investors. Within this range, the base case produces a 23% IRR and a cash-on-cash multiple of 2.2.

Terms

Foresight is entitled to an annual of 2% of the Fund, reduced by 80% of any fees received by Foresight in relation to Fund investments. The performance incentive is a 20% share of net profits, payable after investors have achieved a distributed compound annual return of 8% on their drawndown capital. Establishment costs charged to the Fund are capped at £400,000 (0.4% of the maximum fund size).

Governance

The Fund is an English . All decisions of the Fund Manager in relation to the Fund will be made by the investment committee. The investment committee comprises Bernard Fairman (chairman), Matt Taylor, Andrew Page, Nigel Aitchison and David Hughes. Foresight has appointed Ernie Richardson as an additional non-executive member to the investment committee. The investment committee reaches its decisions by majority vote on the basis of written submissions prepared by members of Foresight’s investment team. The Fund’s Advisory Committee comprises up to five representatives of Limited Partners. The Advisory Committee will be consulted by Foresight on general policies, any proposed evolution of the investment strategy, any key-man changes and any conflicts of interest. Decisions of the Advisory Committee will be taken by vote of a majority or by written consent.

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Section 2: Investment Pipeline

Foresight’s active pipeline has increased over the last 6 months from £200 million (total project funding required) to £290 million. In particular, the formal launch of the Fund in April combined with origination activity by the Foresight team stimulated engagement with TEG, Thames Water and SITA.

Foresight expects to make commitments to investments totalling £24 million in the Fund’s first year of operation (ending March 2012). The list of priority projects is shown below, followed by a brief description of each opportunity.

Project Commitment Equity funding (£m): date Total Fund Closed Loop plastic recycling Dec-11 12 7 TEG anaerobic digestion Sep-11 11 7 Thames Water anaerobic digestion Mar-12 5 5 Careys biomass combined heat and power Dec-11 10 5 Total year 1 investments 38 24

Co-investment: The difference between total equity funding and likely commitment from the Fund in the table above represents co-investment from other sources. Foresight manages £150 million in a range of listed investment vehicles (Venture Capital Trusts), some of which can invest alongside the Fund. A co-investment agreement is in place, giving the Fund a priority allocation in relevant investments. Foresight is also working with independent private equity firms that have an appetite for the sector. These include Novus Modus (venture arm of the Irish utility ESB), Ludgate and Albion Ventures, each of which has already made 1-2 comparable investments. The government-supported Business Growth Fund launched in April 2011 represents a further potential source of co-investment, and a number of project sponsors also have resources for co-investment.

Closed Loop Recycling is the UK market leader in recycling waste plastic bottles for re-use in food- contact packaging. The investment supports expansion of the company’s existing plant in Dagenham, and the construction of a specialised plastics sorting facility. The company has contracts with, among others, Veolia, Biffa, Marks & Spencer and Britvic, and recently attracted a senior industry figure as chairman. Project location is Dagenham.

TEG: the project comprises construction and operation of an in-vessel composting and anaerobic digestion facility fuelled by food waste. TEG is a successful project developer using proven technology to replicate its existing plant in Perth, Scotland. Planning has been submitted and 40% of the 50,000 tonnes of feedstock required already secured, from various sources including North London Waste Authority. Project location is Dagenham.

Thames Water owns and operates a number of anaerobic digesters (AD) for the treatment of sewage sludge. Equipment will be installed at some of these sites to prepare incoming food waste, which will then be used to generate renewable energy using spare capacity in the existing AD plants. The potential is several times the figures shown in the table, which are for one site. Project location is Lee Valley, Edmonton.

Careys is a family-owned waste management business which has secured planning consent for a major waste recycling development, including a 30,000 tonne biomass-fuelled combined heat and power plant. Project location is Wembley.

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Section 3: Fundraising

The target size of the Fund is £70 million, with a cap at £100 million.

At first close the European Investment Bank committed £35 million to the Fund, using resources from the London Green Fund, which it manages on behalf of the Greater London Authority and the London Waste and Recycling Board.

Further investors have signed deeds of adherence or are completing their legal review of the Fund, with a view to a second closing in Q3 2011 at £60-80 million.

The following table summarises the investors that are most advanced through the commitment process. Foresight is also in discussion with investors such as Invesco, Macquarie, Morgan Stanley and Unigestion as well as a number of local authority pension funds.

Investor Amount Status £m

EIB (LGF) 35 Signed and being invested. London Pension Fund Authority 10 Approved. Expected to sign in July.

East Riding Pension Fund 4 Signed.

Emirates National Bank of 3 Target commitment, of which £1.5 million has already Dubai been signed by underlying clients.

Foresight Investments PCC Ltd 10 Dedicated feeder fund, enabling high-net-worth private investors to participate in the Fund. EIB (own balance sheet) 10 Formally approved, but subject to update on fundraising and portfolio developments. Sub-total 73

Royal Borough of Kensington & Chelsea Pension Fund – up to: 10 Proposed.

Total 83

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Section 4: Management Team Experience Matt Taylor (age 47) joined David Hughes (age 58) Foresight in May 2000 and joined Foresight in July 2004 was appointed as a partner in as a partner. David has 29 April 2001. Matt has 18 years’ experience in years’ experience in private investment management, equity investment initially with and management, gained at 3i Group plc and subsequently establishing fund management Foresight. Matt has also worked at IKB operations for Framlington Investment Deutsche Industriebank AG in Düsseldorf and Management Ltd, Baltic plc and Bank Austria Morgan Stanley International in London. AG, London. In 2001 he joined the business unit of Advent Venture Partners which Andrew Page (age 41) joined Foresight acquired in 2004. Foresight in July 2004 and was appointed as a partner in Giles Whitman (age 31) September 2005. Andrew has joined Foresight in 2007. He 10 years’ experience of has 3 years’ experience in private equity investment management, gained private equity and 5 years at 3i Group plc, Advent Venture Partners and experience in financial analysis Foresight. His previous career in the chemicals and due diligence reporting. industry included engineering and operations Prior to joining Foresight, he was a member of management within business units of Unilever Ernst & Young’s Transaction Advisory and Dow. Services team and worked as an equity research analyst for HSBC Investment Bank. Nigel Aitchison (age 42) joined Foresight in 2008 as Tom Thorp (age 33) joined a partner. Nigel has over 18 Foresight in 2008. Tom has 2 years’ experience in the years experience in private waste management equity and over 5 years industry. Prior to joining experience in financial analysis Foresight, Nigel was a board director of both and due diligence reporting with Shanks Waste Management Ltd, with annual KPMG’s Transaction Services and turnover in excess of £130 million and Restructuring teams both in London and employing over 800 people, and Shanks PFI Munich. He has performed due diligence as Investments Limited, for which he completed well as advising on company refinancings and two major waste PFI project financings and working capital exercises for demergers and secured over £150 million in bank financing. AIM listings. Bernard Fairman (age 60) is James Samworth (age 33) the chairman of Foresight. joined Foresight in 2009 after a Prior to founding Foresight in 10 year career at steel-maker 1984, Bernard was involved in Corus in operations investing in early stage high- management and leading key growth companies for 3i commercial accounts. He has Ventures, and spent 6 years within investment investment experience within banking and banking specialising in the oil industry and 5 private equity in the environmental, natural years performing advisory, financial resources and industrial sectors, gained at management and strategic planning roles. Deutsche Bank, Lyceum Capital Partners and Next Wave Ventures.

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