The Alternative Investment Podcast is now on YouTube!
In this webinar, Jose Torres discusses opportunities to invest in the future of Puerto Rico and the ongoing recovery from the 2017 natural disasters and subsequent bankruptcy.
- How Opportunity Zones represent an attractive way to implement impact investing in Puerto Rico.
- How PROZ follows ESG guidelines to invest in a better Puerto Rico, including projects that improve the environment and economy.
- How PROZ diversifies away from real estate and invests instead in operating businesses on the island.
- How natural disasters and bankruptcies have disrupted the Puerto Rico economy, and the economic advantages the Puerto Rico has currently.
- An overview of the numerous tax advantages beyond Opportunity Zones that are available to investors.
- An overview of the PROZ structure, including the first two companies that the fund has added to its portfolio.
- An overview of Monllor Capital and its accomplishments since being founded in 2018.
- An overview of the Opportunity Zone tax incentive.
The PROZ Fund seeks to acquire and develop a diversified portfolio of impactful and game-changing projects focusing on sustainable energy, businesses, seaweed technology processing and the development of communities after the devastation left behind from back to back hurricanes. The investments made will only be in Puerto Rico.
Learn More About PROZ
Jimmy: So, Jose has an opportunity zone fund, and I’ll try to talk about opportunity zones a little bit more throughout the course of the day today. I know a lot of you are joining me because you know about opportunity zones and you’ve been following the work that my company has done with opportunity zones over the past few years and how it fits into the larger alternatives investment universe. It’s a very tax-advantaged method of investing in impactful projects in typically, economically distressed communities. So, Jose with that, I’ll let you take it away. You’ve got 10 minutes for your presentation. Thank you.
Jose: Thank you. I’ll share my screen. Well, first of all, Jimmy and Andy, thank you for the opportunity to be speaking about impact investing in Puerto Rico. You did a great job in the disclaimer. If anybody wants additional information, we have a confidential information memorandum that we can make available to accredited investors. But why am I here today? I’m here to really talk about investing into a cleaner and better Puerto Rico. We’re trying to help Puerto Rico recover from the national disasters that occurred back in 2017. Puerto Rico lost about $100 billion dollars of physical damage. And that’s a significant amount. That’s about one time, the GDP of Puerto Rico. So, our goal here has always been to find a way to facilitate and bring incremental private capital to Puerto Rico. We believe that opportunity zones provide a very attractive way to do impact investing in Puerto Rico.
Puerto Rico is a large economy. We have about 3.2 million people. And again, the economy has about 100 billion of GDP. In terms of what we’re trying to do, we have already the first qualified opportunity fund that is focused on ESG investing in Puerto Rico. I’m gonna talk a little bit about that today. So why Puerto Rico? Let’s talk about that in a minute, but why Puerto Rico Opportunity Zone Fund? We’re here to do impact investing. We’re gonna do that as a private equity fund. We’re gonna be following ESG guidelines, and we do that investing into Puerto Rico Opportunity Zone Funds and opportunity zone areas. Our goal really is to achieve impact investing in Puerto Rico with the goal of making a better Puerto Rico. All of our investments are targeting things that will improve the environment, the economy, and ultimately the Puerto Rican people.
PROZ is basically an opportunity zone fund that is also providing diversification to investors. Our goal is to diversify away from real-estate asset class and provide investment in renewable energy and sustainable businesses and infrastructure. We have a lot of local relationships. I relocated back to the island a couple of years ago. We’re minority-owned but we bring global experience to Puerto Rico. And ultimately with this structure, the opportunity zone, we’re also trying to provide tax advantage investing to potential investors with capital gains.
So why Puerto Rico? Puerto Rico is a very attractive location to invest. A lot of people have heard the negative news of both the natural disasters and also the bankruptcy process of the Puerto Rican government and at some of its entities like the public utility of Puerto Rico. However, there is a very well-educated labor force. We’re also in a strategic location especially for shipping and being a bridge between the United States, Europe, and Latin America. And we’re a U.S. jurisdiction, although we do have a separate taxation system, we do have the U.S. currency and U.S. law. So that’s a key input for anybody making a decision on investing in Puerto Rico. Also, Puerto Rico has a lot of incentives, tax incentives, for all sorts of industries. Almost every industry and every company that we’re investing is gonna benefit from one of those tax incentives.
And finally, the opportunity zone legislation allowed for almost all of Puerto Rico to be a qualified opportunity zone. What that means is that we can invest in a variety of businesses in Puerto Rico that might be more difficult to invest in the U.S. mainland. A little bit about this investment strategy of the fund, we’re looking at a diversified portfolio, like I mentioned, renewable energy, sustainable businesses, and infrastructure. But we’re gonna actively manage the portfolio.
One of the interesting parts about opportunity zones and the tax benefit is the capital gains treatment at the end of 10 years. So, our goal is to reinvest distributions and any sales proceeds during that period into new investment opportunities to maximize capital gains treatment for our investors. In addition, we’re also gonna be looking at making a substantial distribution around 2027 to help pay for some of the deferred tax liabilities that the investors will have come due at that 2026 taxable year.
Because we’re one of the first opportunity zone funds in Puerto Rico and because we’re actually the first one looking at diversified portfolio of businesses, we have decided to also partner up with best in class. We wanna set that as an example to other fund managers to make sure that this is a thriving industry here in Puerto Rico. So, we have partnered with Grant Thornton as our tax advisor, JTC group as our fund administrator, and also DLA Piper as a legal counsel. Our target fund size for this first fund is $20 million. Target returns that are in the high teens and the minimum investment for an accredited investor is $100,000.
Just like I mentioned before, we’re structured as a traditional private equity fund, we will have limited partners. We have set up the fund in Delaware and the management company and the general partner is here in Puerto Rico. We are gonna invest in a diversified portfolio. I will talk about the first two companies that we have already invested in. We basically took our first investor in March of this year and made our first investment in SunBeat Energy on October of this year. I think the only thing that I would point out here is that because of the Puerto Rico tax jurisdiction issues, and also because of the opportunities on regulations and some of the tax treatment, we have decided to file corporate taxes at the fund level as a way to mitigate any taxation by Puerto Rico to our limited partners.
Let me talk to you a little bit about Monllor Capital, which is the company that I founded. We founded Monllor Capital back at the end of 2018 as I learned more about opportunity zones on Puerto Rico. I was already investing in Puerto with my previous job at Ares Management. But the thing that was really attractive to me was that as things get harder in a community like in Puerto Rico after the hurricane, a lot of the investors actually pull back. Why? Because there’s better opportunities to allocate capital. I thought that it was extremely important to actually be committed to investing only in Puerto Rico in order to actually look for not only the best deals that we can, but also to have that commitment. We are focused on investing in Puerto Rico.
Again, we try to bring the global experience and the local presence and the local expertise, and the local relationships. As a way of background, I have over 27 years of investment banking and private equity experience. And over the last 13 years, I was working for Ares Management in San Francisco and I used to run the San Francisco office. And I was a partner and also a member of the investment committee. And you can see some of the other institutions that I worked for before.
We have put a team of leaders that are gonna be integral in the management of the fund. We have Maricarmen Toro, a local Puerto Rico professional that will be a part of the advisory committee. And we have Marcelo Salas who is very bullish on Puerto Rico. And I met him actually two and a half years ago here in Puerto Rico when he used to work for JTC Group and he was actually trying to get people to look at Puerto Rico. So, I’m very happy that we have him now as part of our team.
Very briefly, I don’t wanna talk about all the details and opportunity zones, but there’s basically three big benefits that investors can look for. One is the deferral of your capital gains tax through tax years 2026, which means that you’ll pay that tax liability in 2027. If you invest before year and into a qualified opportunity fund, you actually will be able to benefit from a 10% step-up in basis after the five-year mark. What that does is it’ll basically decrease your tax liability by about 10% at that time. But the most important benefit and what I think is the holy grail of opportunity zone is being able to actually get tax-free capital appreciation if you hold your investment for at least 10 years. So that means all of your capital gains after 10 years are tax-free. The only other point that I will make about opportunity zones and funds that is very important for investors is that you only have 180 days to actually invest your capital gains into a fund. Now, you can invest in a fund without capital gains. You just will not be able to get this incremental opportunity selling tax benefits.
I wanna talk very briefly about our first investment. Our first investment is basically SunBeat Energy. We’re very excited. This is a company that was funded by an industry veteran that has been in Puerto Rico, installing energy solar systems and energy storage system for over a decade. He decided to come up with a better energy storage product. He was the first one to bring Tesla on the island and install Tesla. He’s installed many different battery systems, and he decided that he needed to come up with a more customized product for Puerto Rico and other particular places where there’s a lot of hurricane possibilities, but also warmer weather. So, a lot of those things are taken into account. I would say the two takeaways when we make this investment is that he’s always looking at improving the product. He’s basically an engineer from background, and that’s what he’s trying to do. The product, when you look at it, what it does is it integrates a bunch of the separate components, all of it, with the same brand and the same communication. So that allows for much easier installation of the system, but also ongoing updates of the software. So those are key metrics that we looked at when we made that investment.
The second investment that we made was Fusion Farms and some people know about this because they have been actively raising capital here in Puerto Rico. But we do have a number of investors that wanted to invest through an opportunity zone fund to take those benefits. And we made this investment actually just a couple of weeks ago. We’re very excited about this investment too. I see that there’s other people talking about agriculture here after me, but what they’re doing here is really addressing an issue for Puerto Rico, which has to do with the hurricane and with the lack of land and water. With this company, basically, their big benefit is using less water, it’s hurricane resistant, and it’s what they call more than organic. Basically, there’s no fertilizers. The fertilizer comes from the fish and the ammonia that’s developed by the fish.
They’re gonna be using rainwater even for that 10% of the water that they will use. And basically 9 to 10 times higher yield than regular farming. They have a letter of intent with one of their existing clients to buy all of the output of that facility. Our capital went to finish the first big farm that they have under construction. And I’ll finish here with just mentioning that we also have other deals under LOI and our structure is basically a traditional private equity fund. Here are the terms of the fund. And I think you went through most of that, except that we have a traditional 2 and 20 management fee and carried interest. With that, I will turn it back to you, Jimmy, and anybody can contact us through our fund or through our websites.
Jimmy: Fantastic. And I’ve posted a link to your website in the chat. It’s proz.fund. So please do head there to learn more. And Jose has his email address on screen if you’d like to learn more about the fund and request subscription docs. Real quick. One question here from Matt, he asks, “When was the fund started and how are existing investments priced for new LPs?”
Jose: Very good question. The way that…the first investment and our investor basically was March 1st of this year. So that’s basically the starting point of the fund. And what we are doing is we actually have been talking because of the issue of opportunity zones, where investors only have 180 days. And we also only have 180 days to deploy that capital. For this first period and during the fundraising period, we’re waiving all of our management fees and basically, any investor that comes in will be investing at par. Every investor will have their limited partnership pro-rata across all of our investments.
Jimmy: Fantastic. All right, well, Jose, appreciate you attending and presenting today on the inaugural Alts Expo. Excellent presentation. I’m gonna cut you loose there. We’ll bring on our next presenter. Thank you, Jose.
Jose: Thank you.