Institutional Investor looks at Socially Responsible Investing: • Watch videos of II’s Executive Editor, Mike Peltz, and reporters, Imogen Rose-Smith and Katie Gilbert.
• Read Imogen Rose-Smith’s report on the Compass Conference, the RFK Center’s SRI forum.
• Read Katie Gilbert’s story about SRI 2.0 – today’s socially responsible investing model
•Click through our slideshow of images from the Compass Conference on SRI.
In spite of the change in investor attitude towards climate change, it still is possible to raise a new fund. All you have to do is create a new investment model, change investor expectations and lower the greed factor.
That’s how John Preston and Russell Read recently closed on the first $100 million of their Vanterra C Change Transformative Energy & Materials Fund. The fund, the first new partnership to raise greentech money in the last three years, will make “investments in companies that help transform the operations of industrial users and producers of energy and materials.”
Preston & Read’s approach is a radical departure from funds that have raised billions of dollars in green capital over the last few years, mostly from so-called socially responsible investors (SRIs), promising huge returns from game-changing ideas. But many of the ideas were based on massive global governmental expenditures and are already unraveling because governments are cutting back. Others, such as solar panel maker Solyndra have had to severely curtail their plans and programs despite more than $700 million in government and private capital. Already, venture capital and private equity funds are telling limited partners that the projected returns may not materialize – or may take longer to realize.
Preston & Read are changing the metrics. They are starting small, encouraging co-investing and funding or transforming businesses that already exist. No promises that can’t be kept.
“There is a great need for investing in green and a tremendous opportunity,” says Preston, a former head of technology transfer at MIT and an energy entrepreneur himself. But the strategy deployed by many venture mega funds – pour hundreds of millions into long-term projects that are anchored by government grants – is simply wrong. The opportunity is in helping transform old industrial businesses into modern, energy-efficient enterprises. “Big old industries are ripe for innovation,” says Preston, and the innovation has to take place along lines where they can reduce carbon dioxide emissions and evolve into the new marketplace to meet new price and competitive guidelines.
Preston is a big believer in “de-risking” Vanterra C Change’s green investments. But the de-risking takes place before the fund invests. “We are helping companies develop future business strategies and find new customers,” explains Preston. Only when a company has new business for its new direction will Vanterra C Change invest. ‘We want our investors to profit from every investment we make,” he says. A real departure from some of the megafunds that will only go for the increasingly illusory bases-clearing grand slam.
Preston and Read also decided to change the terms of engagement. Instead of charging a 2% annual management fee and a 20% share in the profits – a practice that has come under increased criticism from limited partners – their management fee is structured to approach costs of running the fund and the 20% share. More important, investors in the fund can invest alongside Vanterra C Change – up to three times the size of the fund’s investment, without the fees that many other funds usually charge.
For Preston & Read, the former chief investment officer for CALPERS, raising the $100 million for C Change was a stroke of luck. They were singled out by Vanterra, a New York based private equity fund that was “looking to invest in areas that investors were running away from.” Vanterra managing partners Shad Azimi and Alan Quasha, convinced that the existing models of investing in clean tech were flawed, screened 80 different partnerships before settling on C Change.
Once Azimi and Quasha identified C Change as the fund of choice, Vanterra brought in some of its own limited partners, including prominent Middle Eastern royal families, Reinet Investments, a publicly traded investment company and other high net worth individuals.
The business opportunities from “green” still are plentiful. And investors want to participate. But as the global economy continues to stagnate, the focus has shifted somewhat – from longer term game changing technologies to changes that pay off now. The ability of C Change to recognize that shift and respond should be a lesson learned for others as well.
