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Resource Shortages are Rife with Opportunity, Says Asset Manager

GreenFutures
GreenFutures | Friday May 24th, 2013 | 0 Comments

By Anna Simpson

“When the rains fall in the Sahel, the pasture can be quite dense for a short window. But if the herds go to the wrong place they’ll overgraze, and this makes the desert spread.”

Ian Simm began his career in West Africa, using satellite imagery to study the spread of the Sahara Desert, with funding from the European Commission. It’s a far cry from Pall Mall, where grand offices stand shoulder to shoulder with gentlemen’s clubs, and where Simm now heads up an asset management firm managing assets of some £2 billion. And yet the fundamentals of his role haven’t changed: it still requires precision in observing and mapping resources, and specialist expertise and insight in valuation.

After five years in environmental consultancy, with McKinsey, and a Masters in public administration, Simm was convinced that the one of the best ways to help solve environmental problems was via the private sector. He found a way into corporate finance (“a lumpy, unpredictable business, particularly at small scale”), and specialized in renewable energy until 1998, when he was awarded a contract from the World Bank to help design and run a solar investment fund in India and Africa. This was the beginning of Impax Asset Management, which now invests in “the opportunities created by the scarcity of natural resources.” From the vantage point on St James’s Square, Simm observes global markets for resource efficiency, from energy to water to waste and food and agriculture, and persuades mainstream institutional investors – pension funds, insurance companies and rich individuals – that this can be a good place to graze.

“We don’t have an ethical mandate per se,” Simm is quick to assert. “We’re trying to make money for investors in this area. We are often attractive for ethical investors, because what we do fits their objectives, but we also manage funds for investors who would say they are agnostic on ethical investing, at best! They’re attracted by exposure to a high growth area with a manager who knows what they are doing. They ought to be able to make good, if not better, returns in the long term from this area than from anything else.”

So why focus on resource efficiency at all? Does it come down to Simm’s personal sensitivity to strain in the Sahel and pollution on Pall Mall, or are there more hard-nosed, market-based factors at play?

If you stack up the drivers of business growth linked to environmental problems, it’s a pretty compelling story. World population estimated to reach 9 billion by 2050, rising standards of living, increasing urbanisation, weak infrastructure in developed countries, lack of infrastructure in developing countries, water in the wrong place, high costs of energy outside the US, the political risk for Asia in particular of importing fossil fuels… Put all that together, and you can see why there’s growth and demand for products and services addressing these problems – from LEDs for efficient lighting, or filters for water recycling, to wind turbines, PV and so on. It’s clear those are going to do well.

This begs the question: if the case for investment in these areas is so obvious, then why aren’t more asset managers crowding the space? Partly, Simm believes, because a lot of individuals with similar expertise (a combination of environmental management and business nous) have set up venture capital firms. He wasn’t tempted to join them.

“It’s actually very difficult to make money from venture capital. The regulations in our markets can change with no notice, and many business plans depend on the successful development of technology. In addition, there’s also a shortage of high quality management teams in this area.”

Impax isn’t the only asset management firm investing in this space; others include clean energy and resource solutions in broader portfolios. However these markets are complicated and, Simm argues, recognising the opportunities requires an in-depth understanding of the technology, regulation and the wider market context in different parts of the world. So, how does he spot something worth investing in?

“Fundamentally,” he explains, “the underlying market has to be growing at an attractive rate. A good example is the demand for water infrastructure in China. Then, the business model of the company has to be compelling. A small business in the China water industry is not going to get many contracts, because it’s going to be undercut by bigger companies. In that type of environment, you want to go for a big company that’s going to be able to satisfy the regulators, and meet contracts to build the new infrastructure. Or, you may want to think about backing the company which is supplying the equipment which will go into those projects. This may not be a Chinese company at all: it may be an American or a Japanese one. So, the market comes first, the business plan comes second, and then obviously we want to see that the management team has all the expertise – and a track record.”

But even when all of these factors line up, some green investments don’t take off. Why not? Because, says Simm, investors don’t always see eye to eye on the likely growth of a market, or a company’s long-term potential, making stock market reactions hard to predict. Take biofuels.

“Six or seven years ago there was a flurry of new biofuel businesses in the U.S. We knew it wasn’t a particularly difficult sector to enter: people have been making alcohol in their kitchens for thousands of years, so doing that at scale is not the proverbial rocket science. However, it takes a huge amount of capital to build a shiny new biofuels plant, so someone else could easily come in, with just slightly lower costs, and steal market share. The key issue for an investor is not whether biofuels will be consumed or not, or whether that’s a good thing or a bad thing. If you take the law and targets as they stand, and believe the regulations are going to be robust, then you have to ask, who’s going to make money? Clearly, it’s not the ones building expensive kit in a world where kit is not giving you a competitive edge. So, we didn’t invest in any biofuels businesses, and we were not surprised when the stock prices collapsed.”

Long-term, stable regulation is a topic to raise groans from many in the UK. In 2011, the Government back-pedalled on feed-in tariffs for solar photovoltaic panels, cutting them by half, and causing demand for installations to drop by almost 90% in three weeks. Is Simm looking for more clarity on policy? Would he like to see more regulation, or less?

“The absolute golden rule is that regulations need to be reliable and robust over the long term.

It doesn’t really matter what they are, within reason, because if the market doesn’t work financially, then we and everyone else will just invest elsewhere. If you take the case of the European renewable energy sector, a huge volume of money has gone into German renewable energy over the last 20 years – not only because the feed-in-tariff prices been high, but because they’ve been stable and reliable.”

Simm now watches shifting appetites for energy across the world in the same way as he used to watch the rains in Africa. But not all markets are subject to such flux: demand is much less “patchy and volatile” for water-related goods and services, he notes. Moreover, “companies in this sector span a nice spectrum, from utilities, which perform well in weak financial markets because they’re seen as safe, through to high-growth, technology-driven businesses, which do well in buoyant markets.” The firm’s investments include technologies to clean water used in shale gas exploitation. While Simm admits that U.S. interest in shale could stifle its renewables market in the short term, he sees no conflict of interest in directing money both towards solutions that contribute to the efficiency and regulatory compliance of fracking, while rooting for growth in renewables. I’m reminded that a keen eye for opportunity can be reluctant to see the wider implications in full color.

Recently, Impax launched a new listed equity fund investing in food and agriculture: a sector hungry for solutions to support a growing population, and one that’s consuming ever more calories per capita. Simm admits that the impetus came from the firm’s investors, who were drawn to opportunities to improve production. Of course one of the key ways in which we’re going to meet growing demand for food is through cutting waste in the supply chain.

“Absolutely,” Simm affirms, “We’re investing in both food production and efficiency. ICT is one of the most interesting areas, even for optimising ordering systems between supermarkets and wholesale packagers. Appropriate packaging for transportation has made a huge difference, and refrigeration is key in warmer climates [see ‘A solar fridge for fresh food in hot climates‘]. Then there’s the simple feature of road infrastructure in places like Brazil: it takes a lot of time and money to implement, but reducing the shipping time between the hinterland and the ports is very important.”

Often, it’s the seemingly simple questions that lead to the most surprising and significant new ideas in business. Impax is sponsoring the new Ashden UK Award for Energy Innovation. It’s clearly an opportunity for the company to raise its profile in this space, but Simm believes Impax can bring something to the party.

“We firmly agree with Ashden that if you back the right entrepreneurs, you’ll facilitate the transition to a cleaner world. With our experience of seeing how clean energy companies grow, we’ll be able to contribute to the selection of the most compelling innovative and commercially viable proposition, and offer a little bit of coaching and guidance to the winner. In the past we’ve funded many very early stage businesses, and we’re familiar with the sort of challenges they face.”

An award-winning innovation combined with a high growth market, a sound business plan and a mentor to boot… Investors had better get in there, while the pastures are dense.

Anna Simpson is Editor, Green Futures.

Photos: iStockphoto/ thinkstock; Impax Asset Management


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