March 31, 2014
Interviewed by: David Snow
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Profits, Impact and Energy Efficiency

Carter Bales and former New York State First Lady Silda Wall Spitzer discuss the investment strategy of their firm, NewWorld Capital Group, which backs companies that battle energy inefficiency.

Carter Bales and former New York State First Lady Silda Wall Spitzer discuss the investment strategy of their firm, NewWorld Capital Group, which backs companies that battle energy inefficiency.

Profits, Impact and Energy Efficiency

With Carter Bales and Silda Wall Spitzer of NewWorld Capital Group

David Snow, Privcap:

We’re joined today by Carter Bales and Silda Wall Spitzer of New World Capital Group. Welcome to Privcap. Thank you both for being here.

Silda Wall Spitzer, NewWorld Capital Group:

Thank you for having us.

Snow: You’re an impact capital firm. Different people define impact in different ways and that’s what we’ll be talking about, but I’ll throw the first question over to Carter. What is New World Capital? Why did you found it and how is it different from other types of private investment firms?

Carter Bales, New World Capital:

New World Capital Group is a private equity firm, first and last. That means we’re not really truly an impact firm. We don’t only invest for impact. It means we’re not a venture firm or a clean-tech firm that takes technology risk. We take companies that have retired technology risk, have been market validated and are in what’s called the “lost middle” and we help them by providing capital and management assistance and to get to full commercial scale. We’re in the environmental opportunities sector and environmental businesses of the kind we support do require capital.

We’re pretty distinctive in that we’re taking businesses that have retired technology risk and that are valid and generate significant economic value to the end customer. We’re helping them get to scale so they can compete successfully.

Snow: Silda, can you talk a bit about your background and how you became an investor and, specifically, an investor with Carter and New World?

Wall Spitzer: Working every day with Carter. I did a lot of work in building efficiency and alternative energy and sustainability as first lady of New York. I’m a firm believer that you can pursue issues whether you’re in the public sector, the private sector or the nonprofit sector. That is the way I have always lived my life. 

I had a wonderful opportunity in a more public role and then was looking for how to take this passion and care about those issues and move it into the private sector. I feel that some issues are more effectively addressed with different sectors leading it. For the environmental opportunities sector, this is something the private capital needs to lead. You can do lots of wonderful things to help out with that using philanthropy and, of course, you need some public support behind policies that can encourage that, but real impact and real change comes from the private sector here because there’s so much capital needed, as Carter’s pointing out.

Snow: I’d like to talk a bit about a white paper your firm just put out that you, Silda, and Carter co-authored. It argues a number of things, but one key thing it argues is that it is indeed possible to make a profit and have a social and environmental impact via private business. Can you walk us through that and why you thought it was necessary to try and drive home that point?

Bales: First of all, you’re right. It’s an obvious point that shouldn’t need to be driven home because, if you look at energy efficiency or clean energy, you’re able to earn a good return on your investment but you’re also reducing pollution or hydrocarbon emissions. You’re reducing pressure on climate change. You’re getting what I call “free ride” or “societal co-benefits” or “collateral benefits.” It’s obvious to me that you can get those without having to trade off your return. The way the human brain works ain’t so smart because it assumes when you go for a second objective you’re giving up on the first objective. That’s just ridiculous logic. 

Our view is that you ought to be able to get these “free rider” benefits by doing a good job of bringing private capital. As Silda said, without private capital, we’ll never get these companies to scale and to success because, frankly, government capital is limited—it’s quixotic. Social capital is very limited and very quixotic. You need to draw in private capital and the only way to do that is to show you can earn a good profit.

The other point I would make is, if you look at the environmental sector, clean energy, energy efficiency, water resources and reclamation, waste to value, for example, and the segments within that sector, the inefficiency in the way the U.S. economy manages these resources is so stunning that by managing the resources more efficiently, you ought to be able to earn extra-normal returns, not just normal top-tier returns. You ought to get super-normal returns and the societal co-benefits. We make no apology when we say we’re a single bottom-line firm. We’re going for top-tier returns and we smile deeply and widely and continuously at our societal co-benefits.        

Snow: Silda, briefly discuss the need to write this white paper. Have you encountered skepticism among some investors or people who think there can’t possibly be a profitable way to address some social and environmental challenges?

Wall Spitzer: Yes. There’s skepticism and also a great deal of confusion about what impact investing means or can you earn top-tier returns in this space and have the societal co-benefits, as well? It has been a bit muddied. Part of what we have to do is help educate the folks we’re speaking with and engage to help them understand better how the sector functions and where we can make a difference and make the most profit.

Snow: When you think of examples of your firm’s style of investing, where a profit can be generated as well as the fringe benefits of impact, what do you often think of?  What’s a good example?

Wall Spitzer: One company we have been working with quite closely has a compressor-less air conditioning technology. It’s indirect evaporative cooling with staging. It’s the first new technology and 100 years since Mr. Carrier first created his company and that technology. It can save up to 90% of your energy cost for air conditioning, which is a substantial part of any business expense. That is something we’ve been very excited about, trying to help this company grow and build out the adoption cycle with a distributor channel to be able to access. That would be transformative because it could actually stop the need to build out new peak power plants. That’s how much energy could be saved.

Snow: Let’s talk about the interest in impact capital among investors. A lot of the enthusiasm for this new style of investing—or at least a new way of thinking about investing—is coming from the high net worth, the private bank, the family office world. Why is that and where is this enthusiasm coming from?

Wall Spitzer: You have individuals who are out front in terms of thinking and you get more risk-adverse thinking as you get larger institutionally because you don’t necessarily get paid to take risk in that context. Individuals who understand the value proposition and are willing to take that step are the ones, in some of these emerging markets, who will be some of your first movers. Then, as those cases get made, you see other folks starting to edge into that space. A few of the institutional investors are far-seeing enough to be able to see that the timing is right now, but it’s easier to follow the herd than it is to step out front.

Bales: You go back to the institutional side, family offices, a lot of them, are having generational shifts in leadership. People in their 70s or 80s are retiring and people in their 30s and 40s are taking on more responsibility. These people would like to get free-rider societal co-benefits as well as protect and enhance the value of their financial assets.

There, it’s an easier market, in a sense, because the market’s more open and less rule-based. Then, you go to the next ring—I call it the “pebble-in-the-pond” fundraising strategy. The first ring is people who are already prequalified in their interest. They have already been investing there. There are some fund-to-funds that exist just for that. Then, you go in the family offices and you get into the more general institutions—the New York State common fund did a $500-million reserve for environmental investing.  Some pension funds are beginning to see that this is a good idea but, in addition, we have a fiduciary duty towards our pensioners.

If you look at college endowments, why are they beginning to put more money into this? Because the students and their parents who give money want it. Markets work even in funny ways. You’re beginning to see the market re-segment in terms of readiness and understanding and willingness to move in this.

Snow: Both of you mentioned confusion about how impact should be defined—what it is and what the standards are. Can you talk about the due diligence that can and should take place in your style of investing? Is there confusion among some investors that impact investing means you look for a company that is going to have the biggest impact and then you underwrite that based on your expectations of societal or environmental benefits?  Carter, I know you have strong feelings about how that’s not the case.

Bales: If you’re investing money, you ought to apply the same standards of excellence and rigor if you’re investing for impact than if you’re investing simply for economic returns. To think you’re going to buy on economic returns because you’re picking up societal co-benefits is completely silly thinking. But it’s certainly true that most impact investors today are still investing very early stage. Therefore, they run the technology risk and market acceptance risk and so forth. They may not be there in sufficient scale to help the company get to full commercial scale.

A lot of good ideas are started, validated in the product and then never actually enter successfully into the buying process. You’ve got that factor as well.

We argue that, if you’re going to do diligence on an impact investment, do every bit of diligence you would have done on the commercial side of it. Then, depending on your impact preferences, do an impact set of diligences. The view is that, in most cases, the money you’re putting in is not sufficient to solve the problem. What you want to do is cause other money to follow you or work in clubs or maybe invest in a fund-to-funds so that you can actually get scale and continuity, because these problems are gnarly and they take time and they take capital to yield.

Wall Spitzer: That’s one reason our firm focuses where it does, because we think this is the place where we can have the highest and best top-tier returns as well as making the greatest impact, because it’s sustainable, because we’re making the top-tier returns that can then be reinvested into finding other solutions.

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