We talk with Peter Horsburgh, a founder of ETF Partners, a London-based private equity firm specialising in sustainability technologies investments.
What are your criteria for investing in a company?
At ETF Partners we are sector agnostic but companies we invest in must be growth companies which means early stage. We are a private equity company but at the venture end rather than the buy-out end. Our focus is the E in ESG and we look for products that have a material and quantifiable benefit in terms of sustainability.
We see around 1000-1200 companies a year that meet our criteria but only invest in 3-5. These typically have revenues of EUR 2-5 million. Companies must also demonstrate a good management team, be European and the product must have a global application. We typically invest EUR 5-15 million in a company owning 15-40%. Our total portfolio is around EUR250m in three funds and we target a return of 25% and a 3-4 year minimum exit.
Who are your investors?
A third of our investors are traditional financial institutions such as pension funds & investment companies, a third are “corporates” either their own corporate venturing arms or from their balance sheets, the final third is from family offices and other such third parties.
What types of product or service are the companies you invest in producing?
We invest in environmental technologies which you could say comes under the umbrella of cleantech, but after the crash in the 2000s, this has become something of a dirty word. Our approach is more encompassing than cleantech as we are completely open to consider anything as long as we understand what they are producing and they meet all the criteria.
Our focus at the moment is on software such as artificial intelligence and the Internet of Things that have a sustainability benefit. This includes such things as smart cities, smart energy, traffic management and national grid technology. A lot of the products are applications with a strong machine learning element such as predicative software. This has a very wide scope and can be used in energy management and monitoring systems in urban applications such as smart street lights. Transport is a big sector and AI software can be used for such things as journey predication and transport control systems. Supply chain control is another application.
Do you look at renewables such as windfarms and solar energy?
Not really. Many projects, which we generally don’t invest in per se, are subject to government subsidy, feed-in tariffs or other support mechanisms which can be removed at any time (as happened in Spain) and, above all, are very capital intensive. In any event, renewable energy data is questionable with such figures as power output, on windfarms for example, being overstated; or as with the Severn Barrage just not economically viable. There is also little intellectual property associated with renewable projects.
Our interest here extends to such things as AI applications to e.g. the national grid for renewable energy after it has been generated. For example, one company in our portfolio called QOS has a software product that improves the integration of renewable energy plants such as large-scale solar farms and wind farms into conventional utility systems. It collects data from sensors to optimise operations, integration and maintenance.
Where are most of these companies based and where is the innovation coming from?
We only deal with European companies and most of our investments are based in northern Europe. That’s mainly the UK, France, Germany and Scandinavia. A great deal of innovation is happening here in the UK as we have the advantages of a history of VC investment and the research infrastructure in universities etc.
Do most of the companies you invest in go on to IPOs?
No, hardly any in fact. This is because there isn’t a great deal of appetite amongst investors for immature or early stage companies with low revenues and cash flow. Most companies also don’t get to be listed since getting to the IPO stage would trigger a trade sale. I believe that if you want to invest in a meaningful way with regards to ESG, it is far better to do this directly into private companies rather than buying shares. Private companies are where the innovation is happening. The problem is that most funds are in listed companies. Going to shareholders meetings and making a fuss achieves very little and you are not actually doing any good. Even disinvesting means that you are no longer involved with a company and so cannot affect any change. Our goal is to cause major disruption through the development of innovative technologies.
What will be the next major trends in sustainability technology?
There are several big trends that are coming. Artificial intelligence is very important along with blockchain such as trading energy using blockchain and machine learning. AI is valuable in the use of control and monitor systems and is going to be central to sustainability applications.
Carbon capture development, especially at power stations, remains one of the holy grails and would be a huge game changer. This would allow the clean use of coal which, despite its unpopularity, is still a very efficient energy source. Others are the use of agricultural surpluses to make bio-fuel and nuclear fusion.
Has your firm benefited from the growth in ESG investing in the past few years?
I have been involved in what I would prefer to call sustainable investing since 1980. I was actually described as a pioneer in sustainable investing as far back as 1982 but now sustainable investing has come of age, and in a big way. ESG is an unstoppable trend so firms like ours have benefited from the growth in the market. Sustainability will soon become the raison d’être of what everyone does. Everyone will have to be sustainable in maybe 10 years. The exception will be to be a non-sustainable fund.