Thursday, September 9, 2010

Al Gore's Generation Investment Management's Portfolio Ain't So Green: It's Deliberate

Every time GIM files their 13F quarterly report with the SEC I trot out some boilerplate:
Two comments I've made in the past but have to repeat:
1) These are only the publicly traded U.S. stocks in their portfolio. Private deals, foreign stocks, cash etc. don't show up.
GIM is reputed to be running $5 Billion, these securities only total $2.36 Bil.
2) This is not a very "green" portfolio.
The intro to the Nov. 2009 filing was a bit more flippant:
Al's got wood!
And implements!
As we've commented before this is not a particularly green portfolio.
These are only the publicly traded U.S. names. Other investments (GIM is a large holder of carbon trader Camco, CAO.L, for instance) they aren't required to report, so they don't.
Here's the inside scoop, from NewNet:

NewNet Investor Profile: Colin le Duc, Generation Investment Management
While asset managers are seeing an increased interest in clean energy-related investing, there is a danger that the sector is not yet equipped to sufficiently handle the influx of capital, according to Colin le Duc, of asset management firm Generation Investment Management.
Despite these potential difficulties the secular trends for this sector offer an engaging prospect, says le Duc, senior portfolio manager for the firm’s Climate Solutions Fund, a $683m public and private equity fund. The firm was co-founded in 2004 by former US Vice President Al Gore and former CEO of Goldman Sachs Asset Management, David Blood.

Since the firm’s inception in 2004, a focus on long-term investing – across both public and private markets – has meant that the firm places a high value on the sustainability of its investments. Within this area, energy and environment looms large as an investment theme, which is to be expected from an organisation co-founded by climate change advocate Gore. Le Duc says, ‘From the start we focused on long-term shareholder value, from companies that are part of the solution to the world’s greatest challenges, coupled with very strong investment and valuation discipline.’

The firm has two funds. The $5.5bn, long-only Global Equity Fund, targets businesses across broad sustainability areas, including clean energy and related environmental sectors issues. The firm’s Climate Solutions Fund, takes more of a smaller cap and private equity approach. Le Duc explains, ‘We are focused on growth equity investments in business that are in expansion mode with some commercial traction and are looking at scaling up.’

The dangers of thematic investing
According to le Duc, the focus on long-term shareholder value as opposed to developing fresh technology marks the difference between the firm and a typical private equity investor. With a broad focus on renewable energy, energy efficiency, biomass and carbon, the firm has a broad remit to explore a number of investment areas. For le Duc, the primary challenge for investors looking to specialise in this way is not compromising the promise of returns for the sake of the investment theme. He says, ‘It is more about the need for diversification when you are running a lot of money. What we are trying to present with our global equity fund is a well-diversified, large-scale public equity fund. It is more reflective of the market cap available within clean technology, and the difficulties and the traps around thematic investing.
‘If you are purely investing in cleantech and public markets, and the whole of the cleantech sector is overvalued, you do not want to have to be restricted in terms of having to deploy capital into those sectors. You want to avoid that trap of thematic investing,’ he adds.

Freedom to diversify
The advantage, le Duc explains, is in having an investment mandate that allows you to be diversified across any sector, with an overriding focus on sustainable and responsible, long-term investing. He says, ‘Given the materiality of climate change and given our knowledge of networks in the climate change space, it is natural for us to be allocating a lot of capital to that theme because we are investing where we have a lot of edge and understanding.’

Climate change-related investing covers a necessarily broad scope, from sector and region, to investment size and stage. An area that is particularly interesting to le Duc is energy efficiency. He says, ‘In some ways that is a function of the valuations in energy efficiency, relative to other areas of cleantech. The green building environment, including anything to do with insulation, building controls, electrical components, building monitoring systems, is also very interesting to us, as we typically invest in very capital-light business models.’ This means project development and the financing of renewable energy projects is out, purely for the capital-intensive nation and risk associated with such a project. Le Duc says, ‘We do not invest in project development, we invest in the picks and shovels, support services and the people who are benefiting from these new developments, but which are less capital-intensive. That would also point us towards the carbon space, owning companies like the exchanges, or businesses that focused on analytics. We like intellectually heavy, capital-light, IT-based models.

‘Another area that we particularly like is the downstream solar space. We deploy quite a bit of capital into that area, including concentrated solar power and downstream installers,’ he adds.
In terms of geography, Generation again prefers to take a conventional approach, preferring to target regions where the company has specific experience and an understanding of the investment environment. He says, ‘We take a traditional approach and prefer to invest where we actually understand both the companies and the region. We focus on parts of the world where we feel we have a lot of edge, which currently is the US and Europe. Particularly with private equity transactions, despite there being a huge amount of potential in India and China, executing private equity deals in those countries is very difficult.’

Despite the company having the majority of its assets deployed to Europe and into the US market, le Duc also recognises the appeal of certain geography-specific thematic areas, such as Indian solar.

What characterises Generation’s investment approach, he continues, is a preference for minority investors, highlighting the importance of partnering with other, like-minded investors. He says, ‘The key factor in our investment approach is that we are typically minority investors, so we like to work with like-minded partners. In particular, we have a very strong partnership with US venture investor Kleiner Perkins Caufield Byers. Seeking local, knowledgeable partnerships is particularly relevant when looking to become involved in less familiar geographies.

‘In private equity, you really need to be collaborating with your competitors a lot more than you would in public equity. We have spent a lot of time building relationships with like-minded investors – either those who we can work with directly, or who we can buy companies off, or indeed we can sell to at a later date,’ he adds....MORE
Here's GIM's last 13F.