Strengthening Our Commitment

Castlelake’s significant asset experience is central to our value proposition for stakeholders, including both counterparties and investors. Leveraging this throughout 2021, we continued the evolution of a gas-to-liquids and specialty chemicals producer in our portfolio. We allocated funding to expand the producer’s operations and its facilities’ ability to process major pollution sources such as flare gas, methane and industrial carbon dioxide into sustainable specialty chemicals. Enhancements completed in 2021 encompassed both additional environmental controls on existing assets as well as design and engineering for large-scale future assets with carbon capture; this opens the door to the potential future creation of carbon negative products. We are proud to help further the producer’s vision of introducing products that enable a broad range of customers to reach their sustainability goals.

In the theme of optimizing assets, we also point to an investment in a California-based wind farm. This repowering project involved decommissioning and removing a small-scale wind turbine farm near San Francisco and replacing it with more powerful and energy-efficient large-scale turbines. In addition to creating a source of clean renewable energy for California, the project sought to provide greater protection for the area’s Golden Eagle population through the removal of the older turbines and strategic site design. Our team also worked with a local Native American tribe to address concerns around traditional cultural property and hired several local tribesmen to serve as cultural monitors to the project. We were pleased to exit this investment in 2021 to a local utility company. In the years ahead, we look forward to continuing to play a role in providing strategic capital to finance the energy transition through new investments across geographies.

We recognize that investment managers can play a critical role in directing capital to opportunities that can have a positive ESG impact on our society. At Castlelake, we believe we can marry this role with investment and return objectives by preferring opportunities that generate compelling risk-adjusted rates of return and have a positive ESG impact rather than opportunities without a positive ESG impact. Our investment activity in the hospitality sector in 2021 stands as an example of this. The COVID-19 pandemic has had an outsized impact on the hospitality sector due to ongoing travel restrictions and limited appetite for travel and socialization given health and safety concerns. With little to no revenue coming in from travelers and traditional sources of capital adopting risk-off appetites, hotel operators have become increasingly capital constrained. Our experience investing in real estate assets across the U.S. and Europe, and our experience underwriting global travel via our aviation investment strategy enabled us to act as a liquidity provider in this sector.

With an ESG lens in place, we directed some of our capital to two opportunities that offer distinct environmental and social advantages. The first was an investment in a real estate investment company specializing in high-quality hotels in Spain and Portugal. The company’s strategy is to acquire and reposition hotel assets, breathing new life into existing assets and optimizing operations to maximize their value. Additionally, the company actively targets LEED v4 Gold certification for all assets and supports the revitalization of the affected urban areas by attracting tourism to these areas and enhancing the value of other adjacent properties. The company also has a stated goal of information transparency, clear governance and compliance with legal and contractual obligations. When evaluating the myriad of opportunities to potentially achieve compelling returns in this dislocated sector, we viewed this particular company as also having a higher potential to drive positive ESG impact in the regions where its assets are located and in Europe more broadly.

Similarly, Castlelake identified an opportunity to direct capital to a hotel operator in the U.S. with a strong focus on the wellbeing of guests and positive social and environmental impacts. Through a joint venture agreement with the operator, Castlelake is acquiring and reimagining assets in the west and northwest regions of the U.S. into attractive destinations for the socially and environmentally conscious traveler. Features of the hotels include the use of environmentally-friendly design and construction materials; the use of earth-friendly cleaning products; locally sourced food, supplies, and services; solar arrays, low-energy and low-flow fixtures, and water-efficient native landscaping; and limited use of plastics. Additionally, the operator seeks to give back to the community through partnerships with regional organizations. With each reservation made at any of the operator’s hotels, the operator provides a donation to further the missions of these organizations, which range from seaside restoration to adolescent mental health training. These examples demonstrate the intersection of our investment mandate and ability to drive positive ESG impact. We are excited to explore similar opportunities in other markets in the years ahead.

Similar to Castlelake’s significant asset experience, a commitment to seeking control within our investment criteria often enables us to influence the strategic direction of our investments. Castlelake was pleased to support two green bond projects through its majority shareholder positions in a large Spanish homebuilder and a Greek real estate investment company in 2021. We believe these projects enabled us to help influence the strategic direction of these sizable companies toward efforts to improve environmental impact.

According to S&P Global Ratings, the Spanish homebuilder’s green financing framework aligns with the four components of both the Green Bond Principles and the Green Loan Principles. These include a commitment by the borrower to allocate the full amount of the net proceeds of loans and bonds to eligible green projects; to use clear green criteria to select projects for funding; to manage and track proceeds; and to report regularly on the environmental impact and use of proceeds. Ultimately, we believe Castlelake’s influence on the direction of the company and support for ESG principles, coupled with the company’s position as one of the largest homebuilders in Spain, will help contribute to the transition of housing developers and real estate companies to a low-carbon economy through measures that reduce natural resource consumption and shrink environmental footprints.

In the past year, Castlelake also expanded its partnership with a real estate company with the largest Class A commercial office property portfolios in Greece and a longstanding commitment to positively impacting the environment and community through its work. Since 2016, the real estate company has undertaken a campaign to improve infrastructure and upgrade important socially-oriented properties within its portfolio. In 2021, it issued a green bond to finance or refinance a portfolio of projects focused on enhancing energy efficiency within the Greek real estate market. Castlelake’s role as a majority shareholder in the company enabled us to provide support for the issuance of the green bond and the company’s plans for executing on these ESG-oriented projects.

Castlelake widened our talent sourcing efforts and reviewed our recruitment partners to ensure we are finding top-tier talent in non-traditional areas of the industry as well as individuals with diverse backgrounds and experiences. We forged a partnership with 10,000 Black Interns—a UK-based initiative committed to placing Black students and recent graduates into internships at investment management firms—providing high-caliber young professionals with opportunities to complete summer internships in Castlelake’s London office.

We also conducted training among our hiring managers to enhance the objectivity of our interview evaluations. In addition, the HR team continues to review compensation data across the firm to ensure pay parity by gender and ethnicity.

This year, Castlelake launched a mentoring program that lets junior talent learn from senior professionals and vice versa, by pairing individuals at different seniority levels for regular conversations and meetings. We also hold employees accountable for creating an inclusive environment during our Annual Performance Review process, asking each individual to memorialize the ways in which they contributed to inclusion across the firm.

Beyond policies, we’re thinking about partnerships in new ways. Across the firm, employees are encouraged to contribute to organizations aimed at improving diverse representation within the private equity industry. We provide opportunities to support and engage with organizations such as Level 20, Gender Ideal, Women’s Association of Venture & Equity (WAVE) and Private Equity Women Investor Network (PEWIN), 10,000 Black Interns and OUT Investors.

In addition, in 2021 we partnered with an external consultant on a substantial culture research project that included an in-depth, third-party study of Castlelake employees’ unfiltered thoughts on the firm’s culture. Nearly 80% of our team participated in the survey, ensuring a broad perspective. Our leadership team, and subsequently all employees, reviewed and analyzed the results, which informed adjustments we are now making to help us sustain our culture and all that it might offer from a DEI perspective, with greater intentionality.

Castlelake is also implementing DEI principles into our investment strategy, believing that adding people with diverse backgrounds and ways of thinking to management teams leads to better investment outcomes. To establish baselines and track progress on this front, we’ve developed a standardized diversity measurement dataset and embedded it within the accounting and reporting systems that Castlelake’s operating partners use to provide certain data to our firm. Leveraging the Brook Graham scoring system, an industry-recognized framework for measuring statistical information about employees, we are asking our operating partners about the number of employees including the gender identity of employees, the ethnic makeup of the employee base and the stratification of management. Although one standard approach is likely not sufficient to address the myriad of investments within our broader portfolio, we expect this reporting process to provide us with more clarity around the challenges and opportunities we face as an investment manager.

Castlelake has signed the private equity trade association Institutional Limited Partners Association’s (ILPA’s) Diversity in Action initiative, which brings together limited partners and general partners focused on improving DEI across the industry. In signing, we’re committed to collaborating on and using a framework to advance DEI principles at our firm and throughout the private equity space. More specifically, this initiative commits Castlelake to undertake actions drawn from ILPA’s diversity and inclusion roadmap that are designed to cover such spheres as talent and investment management and industry engagement. We expect these best practices to help us enhance our own DEI efforts and programs and look forward to adhering to consistent reporting frameworks to disclose them.

Castlelake remains committed to finding and developing new and effective ways to become a more diverse and inclusive firm that actively seeks out and welcomes talented individuals with different backgrounds, experiences and perspectives. We know our work on this front will be ongoing and we strive each year to improve on these efforts.

Castlelake gives members of our global team the opportunity to drive change by participating in various committees, including our ESG Committee, DEI Committee and Employee Engagement and Community Committee (EECC). In 2021, these committees partnered to design programming that allowed our broader team to enact positive change in entertaining and enjoyable ways. Through formal and informal collaboration, we developed a robust agenda of activities and events that encouraged employee participation across office locations, experiences, and backgrounds. Our agenda included book clubs, focus groups, communications campaigns, social events, philanthropic drives and new partnerships with third-party organizations.

One event, a panel of female team members held in honor of International Women’s Day, focused on women’s experiences at Castlelake and as working professionals more broadly. More than 110 individuals attended the panel, which included an engaging conversation on the issues, obstacles, and opportunities women face. Building on this experience, we are conducting focus groups to dive deeper into the challenges the discussion revealed and how we can address them in an inclusive manner.

Other activities included a book club featuring Black authors in recognition of Black History Month and a webinar led by the group OUT Investors.

In addition to robust benefits, Castlelake has looked for new ways to enhance the employee experience in light of the ongoing COVID-19 pandemic and as we deepen our understanding of employers’ roles in the lives of our team members. As an example, we have identified opportunities to strengthen our support for families by increasing paid parental leave. We also believe that enabling our team members to spend time away from the office is essential to ensuring their work at Castlelake is conducive to cultivating healthy, balanced whole selves. For this reason, we encouraged employees to take additional paid days off during the year and use volunteer time off allotments to give back to the community.