Venture Capital Investing In Puerto Rico OZs, With Monllor Capital

In this webinar, Jose Torres discusses the unique opportunities available to OZ investors in Puerto Rico.

Webinar Highlights

• Background on Jose, including his move to Puerto Rico a few years back;
• Unique investment opportunities that exist in Puerto Rico, including tax incentives from the local government;
• How PROZ is structured like a traditional private equity fund, combined with ESG strategy;
• Details on the fund portfolio’s focus on renewable energy, sustainable businesses, and infrastructure in Puerto Rico;
• Characteristics of Puerto Rico’s economy that make it an attractive locale in which to invest;
• How Act 60 in Puerto Rico results in favorable tax treatment for local companies;
• Review of companies in the fund portfolio, including energy storage and aquaponic farms;
• Terms of the fund offering;
• Live Q&A with webinar attendees.

Industry Spotlight: Puerto Rico OZ Fund

The Puerto Rico OZ Fund is an OZ fund which invests in infrastructure and operating businesses located on the island of Puerto Rico.

Learn More About Puerto Rico OZ Fund

Webinar Transcript

Jimmy: For now, we’ve got Jose Torres joining us. He’s going to present the Puerto Rico Opportunity Zone Fund. It’s a multi-asset fund investing in infrastructure and operating businesses on the island of Puerto Rico, which if you were here for the beginning of my presentation today, nearly the entire island of Puerto Rico has been designated as an opportunity zone, and there are numerous opportunities for being an OZ investor on the island of Puerto Rico. And on top of that, the local Puerto Rican government has numerous tax credits that they can apply to certain projects. So, Jose, I can see you and hear you and I see your screen. How are you doing today, Jose?

Jose: Well, thank you, Jimmy. I’m here today basically to talk about private equity, talk about opportunity zones, talk about ESG, I’m putting all of that together in Puerto Rico. So the disclaimer is this is not a solicitation for investments. If you’re interested, please email us or contact me and we can send you a private placement memorandum. A very brief background on myself. I basically came from the private equity and banking industry for the last 30 years. Three years ago, I decided to move to Puerto Rico and start my own firm. We founded Monllor Capital Partners here as an alternative asset management firm in Puerto Rico with our goal of really managing a tax-efficient private equity fund, utilizing both Puerto Rico tax incentives and the opportunity zone tax incentives. As a way of background, when I first looked at Puerto Rico, that’s when the legislation had just recently passed, and my focus was to try to make the opportunity zone work for operating businesses, particularly renewable energy. In terms of how I like for people to understand the Puerto Rico Opportunity Zone Fund is basically start with a private equity fund, traditional private equity structure with limited partners investing in multiple assets.

The second leg of the stool here is to put an ESG strategy. Basically, our goal is to make investments that will help the residents of Puerto Rico, the environment, and the economy of Puerto Rico. We’re only investing in Puerto Rico specifically so that Puerto Rican investors can take advantage of the OZ tax incentives. That’s basically one of the restrictions for Puerto Rican investors to get that OZ tax incentive. Again, we’re trying to do impact investing, and then we’re overlaying the opportunity zone tax incentives for those investors that have capital gains.

Our fund strategy is straightforward. Again, private equity, we’re going to do a diversified portfolio primarily in renewable energy, sustainable businesses, and infrastructure. We’re actively managing our assets, so we’re investing in companies that we think we can make better, that they can use my expertise and our team’s expertise in growing the company and ultimately exiting. So our goal is to only invest in a handful of companies where we can take an active role to help management. Again, we talk about renewable energy and sustainable businesses, but one of the ideas is in the event that we have an exit, that we will be reinvesting that capital. And the goal is not to be an income fund, but rather a capital appreciation fund, but we are looking to make a distribution about 2027 in order for those investors who want to use some of that fund liquidity to pay their deferred gains. We’re trying to…because we’re one of the first private equity funds in Puerto Rico, an investor in opportunity zones, we want to be an example. We’re partnering with best-in-class partners, DLA Piper from legal perspective, Grant Thornton from a tax and accounting perspective, and JTC Group as our fund administrator. Very briefly, our target is to get to 20 million. We’re targeting a return of about 3X after a 10-year whole period, and, right now, our minimum investment is $100,000.

So let’s talk about what the opportunity is. Basically, I’m not going to talk about the qualified opportunity zone and the benefits. Everybody has already heard a lot about that. But you haven’t heard necessarily that Puerto Rico is basically all an opportunity zone, so 95 plus of Puerto Rico is within an opportunity zone. So what does that bring? That brings actually an interesting playbook for a private equity fund as we can invest in multiple businesses, which will be fairly hard to do in the mainland. But why Puerto Rico? I mean, people ask me, why are you in Puerto Rico besides the fact that I decided to come back after 30 years of being on the mainland? One of the reasons is Puerto Rico has a large economy. There’s over three million people, it has about $100 billion in GDP, and also Puerto Rico is very well positioned from a strategic location between Europe, Latin America, and the U.S., and Puerto Rico is a U.S. jurisdiction. So that means less risk from a currency perspective and legal perspective if you were to go into Latin America or Mexico. Also, we have a very well-educated labor force, not only bilingual but a lot of engineers coming out of our major universities on the island. Puerto Rico has its own incentive tax codes, and I’ll talk about that in a few minutes. So when you look at the opportunity to put together the Puerto Rico tax incentives with the OZ incentives and then the need that we have in Puerto Rico for investing after the last year hurricanes about five years ago, it’s a great playbook here for me to look at opportunities to invest the capital.

So, very briefly, what a lot of people hear about Puerto Rico tax incentives, generally, what they tend to do is cap the income tax rate for the corporation or the company, or if it’s a pass through, that’s a tax rate that will flow through the parent company at a 4% income tax. Most of the companies that we’re going to invest, if not all, will have this tax benefit because they are in the renewable energy space, they’re in agriculture, they’re in manufacturing, or they’re on tourism. So all of those normally will be able to qualify and apply for a 4% income tax rate. There’s also tax exemptions on musical tax and property taxes, and more importantly, there’s zero withholding tax for any distributions that those companies make to their shareholders.

Let’s talk about what we have done thus far in our pipeline. So I’m extremely excited about our first investment. My first investment was a company that does business at SunBeat Energy. It’s a company that was founded by a local engineer. He’s been in the renewable energy business for over a decade. His original company was installing residential and commercial renewable energy deals. He was the first one to bring the Tesla battery into Puerto Rico. And after installing batteries from many other manufacturers over the last decade, he decided to design his own battery. It took him about 3 to 4 years to do that, and then he launched SunBeat Energy two years ago. The focus of SunBeat Energy is to develop. They manufacture for now in China, and then they sell and service those in Puerto Rico and throughout the Latin America and now in Florida and the U.S. And their whole idea is to make a better product for Puerto Rico and places that need energy storage.

And what I mean by need energy storage is places where energy storage is a fundamental part of what is needed to run renewable energy at home. In Puerto Rico, the lights go out all the time, so solar energy alone doesn’t really address the issue. Just a couple of points of what was attractive to me was the idea that he took the other products that are out there and look for a better product. One of the things that he did is taking the inverters and the batteries, making them under the same company, and using the same software, so there’s no issues of integration every time one of them gets a software update, which is something that happens frequently now with renewable energy products.

The other thing was installing this awesome all-in-one energy system. What does that do? That actually makes it cheaper to install, it makes it also more affordable, and ultimately, it will be the way that things will go forward because people are starting to always use as much as possible similar equipment made by the same manufacturer. And this also has all of the apps where you can manage your asset from your battery, from your phone, and you can also just keep monitoring it from your phone. Our second investment was actually something that I wasn’t really looking to do but after speaking on many conference alongside them, I decided to go and visit, basically, Fusion Farm is the first vertical indoor aquaponics farm in Puerto Rico. They basically grow organic produce inside their current facility. When I met them, I actually went there just because I was interested on the tour, did the tour, took some of their product home and I could not believe the quality of the product. I still think it’s some of the best products I’ve ever tasted, not only in Puerto Rico but anywhere outside of Puerto Rico.

Their ambition is to go from what is a research and development facility using 1,000 square foot of their existing facility to commercial scale, and that will require an additional investment. So that’s where we came in. We thought that we would be able to help them from a financing perspective and a management perspective go from the R&D stage to the commercial stage. A few points that are extremely interesting and attractive to me is that you use a fraction of the water that you would use in regular farming and also a fraction of the land. Now, this might not be for everywhere in the world at this stage, but it is starting to become part of the agriculture mix, not only in Puerto Rico but outside of Puerto Rico as well. Both on this facility and on this project and also on SunBeat Energy, our fund has right to increase our exposure at very attractive valuations.

Just going to finish here talking about our other two pipelines of projects. After being here in Puerto Rico for two years and talking about opportunity zones, everybody’s really interested in real estate. Our local partner is a real estate developer, so we have decided to partner up with them to add a small mix of what we call real estate infrastructure into our fund. Right now, we’re diligent three deals that they’re currently doing, and we have basically the option to go ahead and fund some of the equity on those deals. We have a single-family, we have a multifamily, and we have an eco-tourism hotel. So those are things that we’re looking at as we expand the fund and as we look at diversifying the fund.

And finally, from a pipeline perspective, our largest potential is renewable energy. Puerto Rico generates about 2.5%. The goal is to be 100%. We only need to get to 25% for this to be a huge market. We have a portfolio of seven projects that we’re currently diligence-ing with a local developer and a U.S. private tax equity partner. So this is probably also the way that will round up and close our investment. And then to close up, Jimmy, here, I just have the fund terms for anybody that is interested. Again, this is a traditional private equity fund structure. We charge a 2% management fee and a 20% carried interest. What we’re doing right now to try to scale our fund is offering any investor that is investing $500,000 or more a break on the fees and carried interest to 1.5% management fee and 15% carried interest. We’re doing that in order to scale the fund and try to get to the next level. So that’s what we have. Jimmy, my contact information, here is my cell number, and you can email at [email protected], and we also have our website at monllorcapital.com.

Jimmy: Fantastic. Well, thank you, Jose. Great presentation. And we’ve got time for one or two questions here before we move on to our next presenter. Johnny asks a question I think I can answer. Johnny asks, “Do PROZ funds, that’s your group, need capital gains contributed from Puerto Rico-related assets?” And I believe the answer is no. The assets do not need to be Puerto Rico gains. They could be gains from the mainland or anywhere that are subject to U.S. capital gains tax liability. And then last question before we move on is how many investments do you anticipate that PROZ fund will make and what’s going to be the average or typical investment amount?

Jose: Yeah. So, on that, let me finish on the first one because I think it’s important for people to understand that the only real restriction on opportunity zone funds in Puerto Rico is the fact that a Puerto Rican investor has to pay capital gains in Puerto Rico. And the Puerto Rican government said, if you want to get the local opportunity zone tax incentives, your capital has to be on a fund that only invests in Puerto Rico. But it could be a U.S.-based fund, it just has to invest all their capital into Puerto Rico. It could be a U.S. fund that doesn’t have Puerto Rican investors and they can just invest part of their capital in Puerto Rico. Sorry, I wanted to get that because I know that’s a question that is always asked, Jimmy, and it’s important for anybody that’s interested in doing business in Puerto Rico.

Jimmy: No, that was great.

Jose: The second question, in terms of the number of projects, I have this slide that…well, I won’t show it, that talks about this structure. Our goal is to have a minimum of four projects or four investments. And when we talk about renewable energy, there will be a portfolio of investments. At this stage, we’ve made two. We’re trying to close on our third investment, so I think that having four investments is very realistic. And the idea right now is to try to not do less than $1 to $2 million per investment with no more than 50% concentration at the beginning in any one investment and 25% right concentration, roughly, if we do our four investments.

Jimmy: Fantastic. Well, Jose, we’ve run out of time. Thank you so much. I don’t think we got to all of your questions. So if you do have any questions for Jose, you can reach out. I just posted his contact information in the Zoom chat. Jose, really appreciate your time today. Thanks for being here with us today. Appreciate it.

Jose: Thank you.