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Fund profile: Inside Mirova’s $300m LDN vehicle

The UN-backed Land Degradation Neutrality Fund was officially launched this week at the COP13 in China. As the vehicle progresses toward a first close, we speak to its manager to find out more about return expectations, fee structure and prospective LPs.

Two years ago, the UN issued a tender to select a manager for the Land Degradation Neutrality Fund, an investment vehicle designed to combat desertification. In December 2015, the institution selected Mirova, the sustainable investment unit of France’s Natixis, and the vehicle was launched this week, at the COP13 conference in China.

But Gautier Quéru, the fund’s investment director and project manager, already has his eyes set on how LDN could be emulated. “The objective of this fund is to prove the concept, so that other similar initiatives can be launched in the natural capital sector. Its approach and structure are meant to be replicated,” he told Agri Investor. Mirova, which expects to close the vehicle on $300 million next year, says “successive funds” will be launched after the end of LDN’s investment period.

So what makes the firm think the vehicle can be a success? Answer: the premise that the innovative projects it targets – combined with a fairly conventional structure – will attract not only public institutions and development financiers but private investors as well, according to Quéru.

Mirova is aiming to reach a $100 million first close on LDN before the end of the year, and has already received the backing of Luxembourg’s government. A number of other potential LPs are carrying out advanced due diligence, Quéru said – including the European Investment Bank, the French Development Agency and the Inter-American Development Bank. The EIB is considering a €60 million investment.

“Most importantly,” Quéru added, “first-close investors will also include private institutions – and not only foundations and endowments, but also insurers and pension funds.”

The way LDN is designed is meant to reassure them. The fund’s 15-year tenure is the result of a compromise: Quéru said 20 years would have been ideal – in tune with the biological cycle of underlying assets – but that it could have proved a stumbling block for fundraising.

LDN’s fee structure approaches that of typical renewable energy and infrastructure vehicles, Quéru explained: it includes a management fee and performance-linked compensation. Mirova is also an investor in the fund. Quéru did not elaborate on fee levels but Pantheon Ventures’ 13-year Global Infrastructure Fund III, launched earlier this year with a 73 basis points annual management fee and a 10 percent carried interest charge, gives an order of magnitude.

Returns targeted by the vehicle are nearly on par with renewable funds’ usual benchmarks, Quéru said. “The objective is to provide financing at a price adjusted for risk.” In the realm of conservation funding, this has so far proved largely elusive, as most of the finance is either provided by governments and multilaterals (at a very low interest) or local banks that do not know how to price such risks (and thus charge a very high interest).

He declined to disclose further details, but a report by Mirova published in June 2016 says global conservation investments tend to generate net IRRs of between 5 percent and 9.9 percent.

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The vehicle will blend senior debt, junior debt and equity, the latter being capped at 30 percent of the fund. LDN will have a global remit; a maximum of 20 percent will go towards developed markets, with the balance allocated to developing countries.

Investment ticket sizes will vary depending on deals. But Quéru pointed out that meeting the UN’s ambitious development goals won’t be done by doing pilot projects. “The idea is to scale up the opportunity,” he explained. “We’ll do tickets of around $10 million, but it could be less, or it could be more.”

The fund already has four deals ready to go, including a coffee plantation reforestation project in Peru. The initial pipeline will be used to convince later investors, and Quéru says that LDN could end up raising more than $300 million, should demand be strong enough. “$300 million is a reasonable size for the opportunity we’ve identified. But we’re leaving the door open.”