The 6 angels & 6 devils of environmental investing

Carter Bales, the co-founder and Chairman of private equity firm NewWorld Capital Group, is driven by dire pessimism and over-whelming optimism that converge through his livelihood: environmental investing. While he’s pessimistic about the direction of the planet when it comes to climate change, a pending resource crisis and decaying infrastructure, he remains confident that private equity can help the crisis by showing it’s possible to invest in businesses geared toward helping the environment and make a good return.

NewWorld Capital Group previously raised $ 170 million and has made two investments in diesel emissions limiter Cleaire Advanced Emissions Controls, and energy efficiency AC producer, Coolerado. This year NewWorld Capital Group plans to raise at least $ 300 million more with a goal to do 8-12 deals, at $ 30-50 million each. I caught up with Bales late on a Friday afternoon to discuss his investment principles, which include the 6 angels and 6 devils of environmental investing, and a 4-plank strategy to fix our global problems. Also don’t ever call him a cleantech investor (at least not to his face).

(This interview has been edited for length and clarity).

Q). When we first met, we talked about the six angels and the six devils of environmental-oriented investing. What are the angels?

A). The six angels characterize the attractiveness of the environmental opportunities sector. We invest in energy efficiency, clean energy, water resources and reclamation, waste-to-value, and environmental services. The six angels are the six things that make these sectors attractive:

1). It’s already big. It’s over 300 billion in the U.S. alone, middle market.

2). It’s growing at 2-4 times GDP, among the fastest growing sectors in the U.S. economy. Rapid growth is a beautiful thing.

3). A substantial amount of innovation is going on in the market, some of it driven by all the money that went into venture capital in the last decade, some driven by simply technology or regulatory push.  Innovation is a beautiful thing because it creates more diversity in the market and less competitive intensity.

4). Diversity. The cyclicality of the sector will be far less because the end industries that are driving the segments we invest in are very diverse. You’re not going to see the problem that many investors fear, which is investing in a sector fund and the whole sector goes into decline or cyclic downturn.

5). A lot of complexity. It strongly favors the prepared mind or the expert, and tends to keep the journalists at the door. You’re going to get less copycat behavior.

6). It’s undercapitalized. When you track all the firms that play in this big sandbox, the venture firms kind of grew up small with the exception of Kleiner and a few others, but basically they grew up supporting computer software innovation, which are first cross businesses and you can revolutionize the whole market. In our industry, these companies are kind of capital hungry so they require growth capital to get to scale.

Q). And what are the six devils that you’re trying to avoid in all your investments?

1). Technology risk. We’re not a venture firm and we’re not a cleantech firm. We will not take physics risk or science risk. It isn’t just whether the product works or the technology works, it’s whether you can scale the manufacturing without getting a lot of risk. That’s a golden rule around here.

2). We will not take on hydrocarbon pricing risk. We don’t invest in renewables because we don’t take hydrocarbon pricing risk. Renewables rely on high hydrocarbon prices, and hydrocarbon prices are highly subsidized. They’re asking us to compete against it with virtually no subsidies, and the subsidies being so temporary that you don’t have any policy stability. It’s better to just avoid all that stuff.

3). We don’t want to take capital scale risk. We don’t want to write big checks. We’d rather write more small checks. We’d rather do follow-on investing, milestone-based investing, rather than take a big first cost by writing a big first check.

4). We do not take on foreign competitor risk. If China really wants something bad, they’ll throw large amounts of commoditizing capital at it to drive down value and ultimately win on volume.

5). Business scaling risk. We accept it but we want to mitigate it as much as possible. We’re prepared to actually do that and be deeply involved in helping these companies grow, but we want to be paid damn well for doing that because it is a real risk. One of my complaints about the venture world is that by betting on technologies, they run the risk of hanging one man twice. They have to have a technology risk work out to their benefit. And then after that they have to take the business scaling risk. We’re prepared to take one of those risks.

6). Regulatory and subsidy risk. We’re perfectly happy to take advantage of a subsidy. But we will not base our investment case on the subsidy.

Q). Do you think technology risk is a job for the venture capital industry or should that function shift primarily to government programs, like ARPA-E?

A). It depends totally on the nature of the business. If the business requires enormous scale to function and it’s competing against an established hydrocarbon based business that’s fat with subsidy, then you do need government participation. These are very often second mover businesses. The first mover breaks the sword.

Let’s take CCS [carbon capture and storage] for example. CCS patent protection is not going to help very much. You’ve got so much social resistance to running a CO2 pipeline near somebody’s backyard. You’ve got a long, long process of educating the regulators and getting the permits. The first mover very often get’s screwed. The second mover comes in and buys the assets cheaper, discounts the first mover, and earns a respectful return.  Patent protection isn’t a very good protection, and you want to make sure that there’s some return for the risk taken by the first mover. If it’s true capital scale business, then government has a role to play.

If it doesn’t require a big investment like carbon capture and storage, then it probably doesn’t require ARPA-E or whatever. Venture investment ought to be adequate.  But venture firms, as you know, can’t write really large checks.

The government isn’t particularly good at picking winners. But there are energy innovations that are needed where there is significant technology risk for which the venture industry is not fully fitted. You go to places like GE and so forth — rich corporations. Most of them don’t want to take that kind of chance around technology risk. They’d rather buy a company that’s successfully dealt with it, that’s been able to surmount a specific technology challenge. They might be very interested in simply purchasing it and getting ten years of learning in one transaction.

Q). What is the fundraising environment right now for cleantech, and has the politicization of the DOE loan program and concerns about returns for the sector, impacted your ability to raise money?

A). I think the environment for raising money for cleantech is reasonably negative. We’re not a cleantech investor so we’re not raising money for cleantech because cleantech implies technology risk. The reason cleantech has disappointed investors is a little bit of excessive exuberance and that tech risk is very often resolved on the wrong side of the equation. Or the cleantech investment works out okay but then doesn’t get the growth capital to reach commercial scale, and kind of dies on the vine.

I think cleantech generally is in under a cloud, made that way in part frankly by the tendency of venture firms to get into this field and then many of them welcome social media and they’ve got another girl to take to the dance. The secret of success is constancy of purpose. There hasn’t been as much of that in the venture world as perhaps is needed. I think it’s important for growth capital investors like us who won’t take technology risk to make that clear to investors early on.

I think we’re getting really good reception in the fundraising market.  We have a very experienced team, very operational, no investment bankers at all. A lot of people believe this could be to the next ten years what information technology was to the 90′s, a lot of very slow primary demand growth.

Q). In 2010 you gave a talk at the Imagine Solutions Conference, in which you opened by discussing discouraging figures related to the global environment — 90 percent of large ocean food fish are gone and unrecoverable, 50 percent of tropical forests have now been cut down, the U.S. is 5 percent of the world population but produces 25 percent of global CO2 emissions. How do you maintain hope and how does being an environmentally oriented investor figure in your worldview.

A). By nature I’m an optimist and in the broader world situation I’m a reluctant pessimist. I think the future of the world is in dire shape.

But that doesn’t mean that there aren’t really interesting business opportunities in the near and intermediate term. And the inefficiencies, resource exhaustion, all these other factors, they do offer commercial opportunities. What we’re trying to do here is earn a maximum bottom line for investors not because we’re greedy but because we realize without that, you won’t grow private capital for these problems. And without private capital for these problems, you won’t solve them. Government has neither the policy consistency or the resources to solve them. We have to show the way, that private capital can productively flow into these problems and earn a competitive return. I’m quite optimistic that there are significant opportunities.

Q). What would an ideal solution look like? In an ideal world where you could intervene in the market, what would that intervention look like?

A). There would be four planks to a solution — you need all four.

1). The first plank is intelligent regulation and some economic incentives to go after energy efficiency. Forty percent of the solution lies in buildings and the appliances that operate in buildings. Buildings leak energy and appliances consume excess energy. You’re not going to fix that without regulation. California has kept per capita electricity pretty constant over the last quarter century. Whereas the U.S. overall is up 28 percent per capita and Texas is up around 46 percent per capita, showing Texas is a massively energy inefficient state.

2). Turn carbon into a factor cost — that’s clearly needed. Whether it’s done through a tax on carbon or a cap and trade, whether the tax on carbon generates revenue to retire the public debt that gets distributed back to the public itself, you could argue but it doesn’t really matter. You must turn carbon into a factor cost despite the myth that the right wing has sold the nation that doing so would harm jobs.

3). Selective government assistance to help technologies reach commercial scale where they can compete against heavily subsidized carbon alternatives. CCS is an example of something the market could never develop. If you’re ever going to get smart and begin to build your nuclear portfolio, you’re going to need significant amounts of government funding, if for no other reason than taking 15 years to build a nuclear plant, including permitting, suggests it’s not a commercially plausible private investment.

4). Reverse the negative trend in the U.S. carbon sink. There’s a major opportunity in restoration and conservation to protect more natural land. We really need to have our own carbon sink as an offset to greenhouse gas emissions. That’s actually a very cost effective opportunity, pretty simple to do.

Q). From a personal perspective, how did you get interested in climate change? You started at McKinsey, how did environmental concerns shift to your professional life?

A). Everybody to some extent, but maybe me to a greater extent, has a connection to nature. I’ve been deeply connected to nature. I can see over the longer term what’s happening. It doesn’t take much to wake up one day and realize that everything that’s been done by the Nature Conservancy over the last 50 years—and they’ve saved well more than a single Switzerland inside the U.S. domain—and all of that is going to be destroyed by climate change. When climate change first came to my consciousness in 2004, because I was asked to give a talk about it over at the U.N., it dawned on me pretty quickly that this was going to destroy much of what I held to be really dear, which is the functioning and the outlook of the biodiversity in the natural world. Once I reached that conclusion, I got very concerned and very active. The world has never seen a challenge like this where the cost of acting on it is now and the penalty of not acting on it is tomorrow.

Related research and analysis from GigaOM Pro:
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  • After Solyndra: analyzing the solar industry
  • Connected world: the consumer technology revolution
  • Flash analysis: lessons from Solyndra’s fall



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The 6 angels & 6 devils of environmental investing

Carter Bales, the co-founder and Chairman of private equity firm NewWorld Capital Group, is driven by dire pessimism and over-whelming optimism that converge through his livelihood: environmental investing. While he’s pessimistic about the direction of the planet when it comes to climate change, a pending resource crisis and decaying infrastructure, he remains confident that private equity can help the crisis by showing it’s possible to invest in businesses geared toward helping the environment and make a good return.

NewWorld Capital Group previously raised $ 170 million and has made two investments in diesel emissions limiter Cleaire Advanced Emissions Controls, and energy efficiency AC producer, Coolerado. This year NewWorld Capital Group plans to raise at least $ 300 million more with a goal to do 8-12 deals, at $ 30-50 million each. I caught up with Bales late on a Friday afternoon to discuss his investment principles, which include the 6 angels and 6 devils of environmental investing, and a 4-plank strategy to fix our global problems. Also don’t ever call him a cleantech investor (at least not to his face).

(This interview has been edited for length and clarity).

Q). When we first met, we talked about the six angels and the six devils of environmental-oriented investing. What are the angels?

A). The six angels characterize the attractiveness of the environmental opportunities sector. We invest in energy efficiency, clean energy, water resources and reclamation, waste-to-value, and environmental services. The six angels are the six things that make these sectors attractive:

1). It’s already big. It’s over 300 billion in the U.S. alone, middle market.

2). It’s growing at 2-4 times GDP, among the fastest growing sectors in the U.S. economy. Rapid growth is a beautiful thing.

3). A substantial amount of innovation is going on in the market, some of it driven by all the money that went into venture capital in the last decade, some driven by simply technology or regulatory push.  Innovation is a beautiful thing because it creates more diversity in the market and less competitive intensity.

4). Diversity. The cyclicality of the sector will be far less because the end industries that are driving the segments we invest in are very diverse. You’re not going to see the problem that many investors fear, which is investing in a sector fund and the whole sector goes into decline or cyclic downturn.

5). A lot of complexity. It strongly favors the prepared mind or the expert, and tends to keep the journalists at the door. You’re going to get less copycat behavior.

6). It’s undercapitalized. When you track all the firms that play in this big sandbox, the venture firms kind of grew up small with the exception of Kleiner and a few others, but basically they grew up supporting computer software innovation, which are first cross businesses and you can revolutionize the whole market. In our industry, these companies are kind of capital hungry so they require growth capital to get to scale.

Q). And what are the six devils that you’re trying to avoid in all your investments?

1). Technology risk. We’re not a venture firm and we’re not a cleantech firm. We will not take physics risk or science risk. It isn’t just whether the product works or the technology works, it’s whether you can scale the manufacturing without getting a lot of risk. That’s a golden rule around here.

2). We will not take on hydrocarbon pricing risk. We don’t invest in renewables because we don’t take hydrocarbon pricing risk. Renewables rely on high hydrocarbon prices, and hydrocarbon prices are highly subsidized. They’re asking us to compete against it with virtually no subsidies, and the subsidies being so temporary that you don’t have any policy stability. It’s better to just avoid all that stuff.

3). We don’t want to take capital scale risk. We don’t want to write big checks. We’d rather write more small checks. We’d rather do follow-on investing, milestone-based investing, rather than take a big first cost by writing a big first check.

4). We do not take on foreign competitor risk. If China really wants something bad, they’ll throw large amounts of commoditizing capital at it to drive down value and ultimately win on volume.

5). Business scaling risk. We accept it but we want to mitigate it as much as possible. We’re prepared to actually do that and be deeply involved in helping these companies grow, but we want to be paid damn well for doing that because it is a real risk. One of my complaints about the venture world is that by betting on technologies, they run the risk of hanging one man twice. They have to have a technology risk work out to their benefit. And then after that they have to take the business scaling risk. We’re prepared to take one of those risks.

6). Regulatory and subsidy risk. We’re perfectly happy to take advantage of a subsidy. But we will not base our investment case on the subsidy.

Q). Do you think technology risk is a job for the venture capital industry or should that function shift primarily to government programs, like ARPA-E?

A). It depends totally on the nature of the business. If the business requires enormous scale to function and it’s competing against an established hydrocarbon based business that’s fat with subsidy, then you do need government participation. These are very often second mover businesses. The first mover breaks the sword.

Let’s take CCS [carbon capture and storage] for example. CCS patent protection is not going to help very much. You’ve got so much social resistance to running a CO2 pipeline near somebody’s backyard. You’ve got a long, long process of educating the regulators and getting the permits. The first mover very often get’s screwed. The second mover comes in and buys the assets cheaper, discounts the first mover, and earns a respectful return.  Patent protection isn’t a very good protection, and you want to make sure that there’s some return for the risk taken by the first mover. If it’s true capital scale business, then government has a role to play.

If it doesn’t require a big investment like carbon capture and storage, then it probably doesn’t require ARPA-E or whatever. Venture investment ought to be adequate.  But venture firms, as you know, can’t write really large checks.

The government isn’t particularly good at picking winners. But there are energy innovations that are needed where there is significant technology risk for which the venture industry is not fully fitted. You go to places like GE and so forth — rich corporations. Most of them don’t want to take that kind of chance around technology risk. They’d rather buy a company that’s successfully dealt with it, that’s been able to surmount a specific technology challenge. They might be very interested in simply purchasing it and getting ten years of learning in one transaction.

Q). What is the fundraising environment right now for cleantech, and has the politicization of the DOE loan program and concerns about returns for the sector, impacted your ability to raise money?

A). I think the environment for raising money for cleantech is reasonably negative. We’re not a cleantech investor so we’re not raising money for cleantech because cleantech implies technology risk. The reason cleantech has disappointed investors is a little bit of excessive exuberance and that tech risk is very often resolved on the wrong side of the equation. Or the cleantech investment works out okay but then doesn’t get the growth capital to reach commercial scale, and kind of dies on the vine.

I think cleantech generally is in under a cloud, made that way in part frankly by the tendency of venture firms to get into this field and then many of them welcome social media and they’ve got another girl to take to the dance. The secret of success is constancy of purpose. There hasn’t been as much of that in the venture world as perhaps is needed. I think it’s important for growth capital investors like us who won’t take technology risk to make that clear to investors early on.

I think we’re getting really good reception in the fundraising market.  We have a very experienced team, very operational, no investment bankers at all. A lot of people believe this could be to the next ten years what information technology was to the 90′s, a lot of very slow primary demand growth.

Q). In 2010 you gave a talk at the Imagine Solutions Conference, in which you opened by discussing discouraging figures related to the global environment — 90 percent of large ocean food fish are gone and unrecoverable, 50 percent of tropical forests have now been cut down, the U.S. is 5 percent of the world population but produces 25 percent of global CO2 emissions. How do you maintain hope and how does being an environmentally oriented investor figure in your worldview.

A). By nature I’m an optimist and in the broader world situation I’m a reluctant pessimist. I think the future of the world is in dire shape.

But that doesn’t mean that there aren’t really interesting business opportunities in the near and intermediate term. And the inefficiencies, resource exhaustion, all these other factors, they do offer commercial opportunities. What we’re trying to do here is earn a maximum bottom line for investors not because we’re greedy but because we realize without that, you won’t grow private capital for these problems. And without private capital for these problems, you won’t solve them. Government has neither the policy consistency or the resources to solve them. We have to show the way, that private capital can productively flow into these problems and earn a competitive return. I’m quite optimistic that there are significant opportunities.

Q). What would an ideal solution look like? In an ideal world where you could intervene in the market, what would that intervention look like?

A). There would be four planks to a solution — you need all four.

1). The first plank is intelligent regulation and some economic incentives to go after energy efficiency. Forty percent of the solution lies in buildings and the appliances that operate in buildings. Buildings leak energy and appliances consume excess energy. You’re not going to fix that without regulation. California has kept per capita electricity pretty constant over the last quarter century. Whereas the U.S. overall is up 28 percent per capita and Texas is up around 46 percent per capita, showing Texas is a massively energy inefficient state.

2). Turn carbon into a factor cost — that’s clearly needed. Whether it’s done through a tax on carbon or a cap and trade, whether the tax on carbon generates revenue to retire the public debt that gets distributed back to the public itself, you could argue but it doesn’t really matter. You must turn carbon into a factor cost despite the myth that the right wing has sold the nation that doing so would harm jobs.

3). Selective government assistance to help technologies reach commercial scale where they can compete against heavily subsidized carbon alternatives. CCS is an example of something the market could never develop. If you’re ever going to get smart and begin to build your nuclear portfolio, you’re going to need significant amounts of government funding, if for no other reason than taking 15 years to build a nuclear plant, including permitting, suggests it’s not a commercially plausible private investment.

4). Reverse the negative trend in the U.S. carbon sink. There’s a major opportunity in restoration and conservation to protect more natural land. We really need to have our own carbon sink as an offset to greenhouse gas emissions. That’s actually a very cost effective opportunity, pretty simple to do.

Q). From a personal perspective, how did you get interested in climate change? You started at McKinsey, how did environmental concerns shift to your professional life?

A). Everybody to some extent, but maybe me to a greater extent, has a connection to nature. I’ve been deeply connected to nature. I can see over the longer term what’s happening. It doesn’t take much to wake up one day and realize that everything that’s been done by the Nature Conservancy over the last 50 years—and they’ve saved well more than a single Switzerland inside the U.S. domain—and all of that is going to be destroyed by climate change. When climate change first came to my consciousness in 2004, because I was asked to give a talk about it over at the U.N., it dawned on me pretty quickly that this was going to destroy much of what I held to be really dear, which is the functioning and the outlook of the biodiversity in the natural world. Once I reached that conclusion, I got very concerned and very active. The world has never seen a challenge like this where the cost of acting on it is now and the penalty of not acting on it is tomorrow.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

  • After Solyndra: analyzing the solar industry
  • Connected world: the consumer technology revolution
  • Flash analysis: lessons from Solyndra’s fall



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