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Global Ag Investing Trends and Implications for Australia Philippe de Lapérouse Managing Director August 1, 2012 Melbourne, Australia
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• HighQuest Partners + Soyatech
• Size of global ag market
• Fundamental drivers
• Expected range of returns
• Implications for investment in Australia
• Summary
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HighQuest + Soyatech
Strategic advisor in global food, agribusiness and biofuels
Media and & conferences for global agriculture
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Representative clients
HighQuest works globally for strategic and financial investors operating across the sector
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Upcoming Events
Global AgInvesting Asia 2012
September 25-27 | Singapore
Global AgInvesting Europe 2012
December 3-5 | London
Global AgInvesting Middle East 2013
February 25-27 | Abu Dhabi
Global AgInvesting 2013
April 29-May 1 | New York City
www.globalaginvesting.com
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New York conference attendees
End Investors:
26.7%
Investment Managers:
42.0%
Industry and Other:
31.3%
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New York conference attendees
Assets Under
Management
Additional AUM
in Three Years
Ag-Focused Investment Managers $16.2 billion $17.3 billion
Diversified Investment Managers $3.6 billion $3.4 billion
End Investors $1.2 trillion $8.2 billion
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New investment- strategy
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New investment - geography
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Example of sub-allocation framework for an ag portfolio
Geography
Operational / Development
Type of Asset
• Australia
• S. America
• E. Europe
• Russia
• Africa
• Land Ownership (Free Title)
• Risk- Sharing Lease Structures
• Farm Management
• Land Development / Conversion
• Value Chain Investment
• Permanent Crops
• Dairy
• Animal Protein Production
Core
8-10%
• North America
• Row Crop Land
• Cash Lease
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Total global agriculture market value is estimated at more than $6.4 trillion (including the food & beverage sector), representing over 8.5% of the world’s economic activity in 2010.
Global agricultural has been experiencing steady growth of 4 - 5% in recent years
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Note: Illustrative
• 1980-1999 uses 2000 pricing
• 2011-2020 uses 2010 pricing (which is not a bad mean going forward
Agricultural commodities trade is forecast to exceed 520 million metric tons in next ten
years due to rising demand in China, India,Southeast Asia and Middle East.
Global agricultural trade volume to increase 2.7% (CAGR) over 10 years
Wheat
Corn
Soybeans
Soybean Meal
Sugar
Palm Oil
Rapeseed
Soybean Oil
Rapeseed Meal
Rapeseed Oil
0
100,000
200,000
300,000
400,000
500,000
600,000
(1000M
T)
Global Trade Volume by Crop, 1980-2020F
Wheat
Corn
Soybeans
Soybean Meal
Sugar
Soybean Oil
Rapeseed Oil
Rapeseed Meal
-
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
(000 U
SD
)
Total Export Value, 1980-2020F
Rapeseed
Palm Oil
Source: USDA statistics and baseline projection, CME
11
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Input
• Seed;
• Fertilizer;
• Pesticide;
• Herbicide
• Farm
equipment
• Energy
Production
• Growers; • Cooperatives
Storage Handling/
Trading
Storage Handling/
Trading • Grain
elevators;
• Brokers and
traders
Transportation& Logistics
• Ocean;
• Barge;
• Rail;
• Truck
Processing
• Primary
processing;
• Food and
feed
ingredients
End users
• Food
• Feed
• Biofuels
• Industrial
Agriculture value chain
A complex market structure which requires appreciation for how margins are shared amongst players at different points along the supply chain.
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Global agricultural market outlook
Seed
Ag chemicals & fertilizer
Ag machinery
Ag production
Food& beverage
Animal feed
Meat & aquaculture
Biofuels
2010 market value (est.) 2015 market value (est.) Estimated CAGR 2010-2015
Ag investment
Ag insurance
$37 billion
$134 billion
$56.1 billion
$ 1.3 trillion
$3.84 trillion
$263 billion
$672 billion
$56.4 billion
$20 billion
$23 billion
$47 billion
$196 billion
$80.5 billion
$1.46 trillion
$4.6 trillion
$313 billion
$815 billion
$80 billion
$40 billion
$66.6 billion
3.5%
6.5%
7.5%
2.4%
3.7%
3.5%
3.9%
7.2%
15%
20% 13
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Key issues driving farmland values
Population growth and increase in GDP • Increased demand in developing markets, particularly Asia, SE Asia and North
Africa • Shift in diets from grain to animal protein
Increasing urbanization • Pressure on available arable land for crop production • Increasing reliance on processed foods
Constraints on supply • Access to water • Climate change • Linkage to energy markets • Slowdown in yield increases
Human capital • Generational transfer in both developed and developing markets • Lack of capacity building in developing markets
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Historical global harvested acreage(ha) on a per capita basis (1964 – 2012 proj.)
0.12
0.15
0.18
0.21
0.24
Note: The crops include barley, corn, millet, oats, rye, sorghum, wheat, mixed grain, rice and oilseeds (copra , palm kernel, cottonseed, peanut, rapeseed, soybean, sunflower seed).
• Global harvested acreage has increased by 41% to estimated 916 million hectares in 2012 from 648 million hectares in 1964.
• Global harvested acreage on a per capita basis has dropped 35% to estimated 0.13 ha/person in 2012 from 0.2 ha/person in 1964.
Shrinking contribution to the global food supply
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Historical world per capita demand for corn, wheat and soybean (kg) (1964 – 2012 proj.)
0
30
60
90
120
150
Per capita corn demand Per capita soybean demand Per capita wheat demand
• Global consumption of corn, soybean and wheat has increased 305%, 772% and 187% respectively to 863 million MT 261 million MT and 673 million MT.
• Per capita soybean consumption has been growing significantly (by 311% to over 37 kg/ person since 1964) thanks to increasing demands from industrial sector and animal feed sector, while per capita corn and wheat consumption will reach 122.4 kg/ person (growth of 87%) and 95.5 kg/person (growth of 33%) respectively in 2012.
Per capita demand for major crops increasing
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Historical global per capita feed grain and oilseed ending stocks(MT) (1964 – 2012 proj.)
0.00
0.03
0.05
0.08
0.10
Per capita feed grains ending stock Per capita oilseeds ending stock
• Global feed grains ending stock has grown by 108% to estimated 354.7 million MT in 2012 from 170 million MT in 1964 while it has decreased by 4% to 0.05 MT/ person in 2012 on a per capita basis.
• Global oilseeds ending stock has grown over 42 times to estimated 73.9 million MT in 2012 while on a per capita basis, it has grown by less than 20 times to estimated 0.01 MT/ person in 2012.
Market volatility driven by uncertainty of available supply
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0
0.01
0.02
0.03
0.04
0.05 Soybeans
.
0%
1%
2%
3%
4%
5% Corn
0%
1%
2%
3%
4%
5% Rice
0%
1%
2%
3%
4%
5%
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
Wheat
Trailing 10-Year Yield Improvement
0.0
1.0
2.0
3.0
4.0
5.0
6.0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
Global Yields for 4 Major Crops Historical and Projected
(MT / ha) Corn
Rice
Wheat
Soy
Source: USDA; HighQuest Analysis
Declining productivity gains
18
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0
20
40
60
80
100
120
140
160
0
10
20
30
40
50
60
70
Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11
Cru
de P
etr
ole
um
So
yb
ean
Oil
Soybean Oil and Crude Petroleum November 2000- July 2012
Soybean Oil Crude Petroleum
Nov ‘00-Dec ‘06
R2 = 0.19
Jan ‘10-Jul ‘12
R2 = 0.62
Jan ‘07-Dec ‘09
R2 = 0.86
New pricing dynamic created by biofuels mandates
Source: The Jacobsen, US EIA
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-$1.00
-$0.50
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
8/8/05 8/8/06 8/8/07 8/8/08 8/8/09 8/8/10 8/8/11
Ethanol, Corn and Price Spread $/Gallon Ethanol
Spread Ethanol Corn Per Gallon Ethanol
R² = 0.8717
0
1
2
3
4
5
6
7
8
9
0 1 2 3 4
Co
rn $
/BU
Ethanol $/gal
Corn vs. Ethanol Sep '07-Jul '12
The Jacobsen, CBOT
Aug ’05-Aug ’07: R2 = 0.12
Sep ’07-Jul ’12: R2 = 0.87
Corn- Ethanol Pricing Relationship
Source: The Jacobsen, CBOT
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Relationship - ending stocks (inventories) and prices
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
0%
10%
20%
30%
40%
50%
60%
70%
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
US
$/B
u
US Corn Stocks-to-Use Ratio vs. Corn Price
Stocks-to-Use
Price
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Demand drivers
+ 9 billion people by 2050 Increasing urbanization Growth concentrated in developing markets
1. Population
Shift in diets from grains to animal protein Increased demand for oilseeds and feed grains Engel’s Law / Bennett’s law
2. Rising Incomes
Potentially limitless Key pricing driver
3. Biofuels and
Industrial Uses
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Demand for commodities driven by rapid GDP/capita growth in developing
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Demand drivers - rising incomes
Animal Protein Consumption(kg) Per Capita vs. GDP Per Capita(PPP basis) - 2010
R² = 0.6709
-
20
40
60
80
100
120
140
- 10,000 20,000 30,000 40,000 50,000 60,000
Co
nsu
mp
tio
n p
er
cap
ita
(kg)
GDP per capita(PPP)
Australia
USA
Japan
UAE
S. Korea Norway
New Zealand
China
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Demand drivers - rising incomes
R² = 0.96
0
5
10
15
20
25
30
35
40
0 2,000 4,000 6,000 8,000
Co
ns
um
pti
on
pe
r c
ap
ita
(k
g)
GDP per capita (PPP) Source: USDA; IMF; HighQuest Analysis
Chinese Vegetable Meal Consumption Per Capita vs. GDP Per Capita (1994-2009)
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R² = 0.93
0
20
40
60
80
100
120
0 10000 20000 30000 40000 50000
Oils
eed M
eal Consum
ption/C
apita
GDP/Capita (PPP-basis)
2009 Oilseed Protein Meal Consumption/Capita vs. GDP/Capita (PPP-basis)
US
Canada
EU
Argentina
Middle EastFSU-12SE Asia
N. AfricaSSA
IndiaS. Asia
Soybean meal consumption increases due to higher animal protein consumption
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China - meal demand
Over the past 15 years, meal consumption in China has had a 99% correlation with GDP per capita. Based on this correlation and OECD projections for future GDP growth in China, HighQuest projects that Chinese meal consumption will increase by 60% over the next decade (50 to 80 million MT).
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Projected global demand - 2020
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Sunflowerseed
Cotton
Peanut
Sorghum
Rapeseed
Barley
Soy
Rice
Wheat
Corn
Source: USDA; HighQuest Analysis
Global Production of 10 Major Crops (Historical1980-2010; Projected 2011-2020; 000 MTs)
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Farmland required to supply projected demand
Conservatively, 65-85 million net incremental hectares will be required.
0
10
20
30
40
50
60
70
80
90
Net Additional Farmland Required by Crop (2010-2020; million hectares)
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Other estimates for farmland to meet demand
68,000
48,000
27,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
HQP USDA FAPRI
Comparison of Projections of Additional Farmland for 10 Major Crops to Meet Demand / 2010 -
2020(000 ha)
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Brazil - a key player
22.5
12.8
11.8
8.1
9.4
64.6
South America
FSU-12 Sub Saharan
Africa
South Asia Row Total
New Cropland By Region – Last Decade (2000-2010 – Harvested Ha for 10 major crops)
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Supply - available global land reserves
WHILE LAND IS AVAILABLE FOR PLANTING, MUCH OF IT IS NOT ECONOMIC TO FARM
Sources: FAO; HighQuest Analysis
Net Reserves
547 18%
Forest804
26%
Protected
204 Urban
58
2%
Current Arable
141147%
Potential Rainfed Cropland (3,024 million hectares)
Africa256
47%
Latin America
152 28%
Asia87
16%
North America
30 5%
Oceana18
3%2
Net Reserves By Region(547 million hectares)
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Source: World Bank(2011)
Geographic options for increasing farmland production
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New long run price equilibrium
1960s
1980s
1990s
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Thesis for farmland investment
1. Fundamentals a) Supply < Demand
Increase in supply slower than increase in demand b) Demand Rationing
High & volatile prices Price signal for capacity expansion New demand creation – biofuels and industrial uses
c) Higher Land Values... ...and potentially attractive economics throughout the sector resulting from application of technology and efficient agronomic practices which will generate higher cash rents per unit of land which will be capitalized into the value of the land.
2. Inflation & currency protection 3. Uncorrelated returns
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5 Key risk factors
Step-change improvement in yields Launch of drought resistance varieties
1. Seed Technology
China SE Asia North Africa/Middle East
2. Slower Growth
On the distant horizon biofuels; protein meal; fat
3. Algae or Microorganisms
Double-edged sword Inverts the supply curve
Food security Export bans / trade embargoes GMO acceptance
4. Infrastructure/ Food Wastage
1. Seed Technology
5. Trade Policy
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US farmland returns vs. major origins outside the US
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Comparative production economics
Key origins offer significant differences in both price and cost structures.
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Historical returns - 100-year US farmland appreciation
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Returns on US farmland compared to other assets
US Cropland
(USDA) Timber (NCREIF)
US Cropland
(NCREIF)
Russell 2000
S&P 500
Comm'l RE (NCREIF)
LT Corp Bonds
10-yr Treasuries
Gold
GSCI
0.00
2.00
4.00
6.00
8.00
10.00
12.00
0.00 5.00 10.00 15.00 20.00 25.00 30.00
Mean
Real
Retu
rns
Standard Deviation of Returns
Mean Real Return vs. Standard Deviation (1991-2009)
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Historical correlation vs. inflation and other asset classes
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Australian agricultural land use
Source: World Bank
48%
50%
52%
54%
56%
58%
60%
62%
64%
66%
360
380
400
420
440
460
480
500
Millio
n h
ecta
res
Australia Land Use
Ag Land as a % of Total Agricultural Land
Arable Land
11.53%
Permanent Cropland
0.09%
Pasture and
Other 88.38%
Australia Agricultural Land Use
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Australian agricultural production and exports
27,891
8,145
2,382 2,068 1,141
350.7
18,639
4,625
1,453.5 553.5
127.2 30.9
66.8%
56.8%
61.0%
26.8%
11.1% 8.8%
0%
13%
26%
39%
52%
65%
78%
0
5,000
10,000
15,000
20,000
25,000
30,000
Wheat Barley Canola Sorghum Oats Corn
1,0
00 m
etr
ic t
on
s
Australian major crops' production and exports, 2010-11
Production Exports export/production(%)
Source: Australian Government/ Department of Agriculture, Fisheries and Forestry (ABARES)
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Australian wheat
Source: Australian Government/ Department of Agriculture, Fisheries and Forestry (ABARES), USDA/FAS
Wheat 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
AU /World exports 13% 14% 8% 6% 10% 11% 14% 17%
10,400
11,050
11,700
12,350
13,000
13,650
14,300
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
1,0
00 h
ecta
res
1,0
00 m
etr
ic t
on
s
Australian wheat production, export and acreage
Production (kt) Exports (kt) Area (000 ha)
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Australian barley
0
800
1,600
2,400
3,200
4,000
4,800
5,600
0
1,500
3,000
4,500
6,000
7,500
9,000
10,500
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
1,0
00 h
ecta
res
1,0
00 m
etr
ic t
on
s
Australian barley production, export and acreage
Production (kt) Exports (kt) Area (000 ha)
Wheat 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
AU /World exports 28.2% 28.8% 12.0% 21.9% 16.1% 22.8% 29.2% 23.2%
Source: Australian Government/ Department of Agriculture, Fisheries and Forestry (ABARES), USDA/FAS
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Australian canola
0
350
700
1,050
1,400
1,750
2,100
2,450
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
1,0
00 h
ecta
res
1,0
00 m
etr
ic t
on
s
Australian canola production, export and acreage
Production (kt) Exports (kt) Area (000 ha)
Wheat 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
AU /World exports 18.3% 11.8% 3.4% 5.8% 9.1% 11.3% 14.9% 18.6%
Source: Australian Government/ Department of Agriculture, Fisheries and Forestry (ABARES), USDA/FAS
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Australian Farmland Value
Source: Knight Frank; Citi Private Bank 2011 report
Location Description Averageprice/haEngland Averagealllandtypes $22,000Romania Pricedependentonsizeofholding $1,560-$3,250Poland Pricedependentonsizeofholding $4,550-$8,125
Ukraine 5-10yearsleaserights $150-$350
RussiaPricedependentonsizeofholdingandprogressoffreeholdapplication $300-$1,000
Zambia Longleasehold $1,000-$1,500
BrazilDrylanddouble-croppinginMatoGrosso $7,000
Brazil TopsugarcanelandinSaoPaulo $12,000Argentina Northernprovinces $1,200-$2,500
Argentina Centralprovinces $5,000-$10,000Canada Saskatchewanprovince $1,300Australia Drylandarablewithreliablerainfall $1,600-$1,700U.S. Qualitydrylandincornbeltstates $16,000
Price per HA Change
08’/09’
• Australian farmland prices dropped in 2009 and 2010 due to a severe drought. Prices
for farmland have since more than recovered due to demand for agricultural
commodities.
• Compared to 1984, the proportion of agricultural land, wholly or part-owned by overseas
entities almost doubled to 11 % by the end of 2010. South Australia saw the highest
jump in foreign ownership, increasing by almost 12%.
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Summary
1. Historical 8% -10% real returns likely better in the next decade
Higher in less mature markets(15 – 22%)
2. There will be a supply response but it will lag demand
3. New pricing paradigm higher + more volatile
Short run: reservation price of the marginal consumer(biofuels)
Long run: price signal required for additional capacity
4. Farmland is the limiting factor economic rents capitalize into the land value
49 Proprietary information – not for distribution. Copyright © 2012 by HighQuest Partners LLC. All rights reserved.
Example of sub-allocation framework for an ag portfolio
Geography
Operational / Development
Type of Asset
• Australia
• S. America
• E. Europe
• Russia
• Africa
• Land Ownership (Free Title)
• Risk- Sharing Lease Structures
• Farm Management
• Land Development / Conversion
• Value Chain Investment
• Permanent Crops
• Dairy
• Animal Protein Production
Core
8-10%
• North America
• Row Crop Land
• Cash Lease
1005 North Warson Road, Suite 226 – St. Louis, Missouri 63124 – USA
(314) 994-3282 | www.highquestpartners.com
Philippe de Lapérouse
Managing Director HighQuest Partners, LLC
314-994-3282 [email protected]
www.highquestpartners.com