NewNet Investor Profile: Russell Read, C Change Investments

1 July 2009

Russell Read

Russell Read discusses the changing attitude of institutional investors to clean energy funds, the opportunities for private equity investors in emerging markets and why he walked away from CalPERS to establish his own green investment firm.

C Change Investments was formed in 2008 to target equity investments in companies which address resource limits in energy, water, food, air and materials.

Prior to founding C Change Investments in 2008, Russell Read served as CIO for America’s largest pension fund, the California Public Employees’ Retirement System (CalPERS). During his tenure, he redirected the portfolio toward international and natural resources opportunities, introduced its Commodities and Infrastructure investment programmes, re-established and enhanced its Forestland investment programme, and established its clean technology and environmental investment efforts as the leader among institutional investors.

Dr Read is also a founding member of the P8 Group, representing the world’s eight largest pension systems, coordinating towards scalable green investment solutions and has provided testimony to institutional investors, the press, state legislators, federal regulators, the US Treasury, the US Congress, the US Senate, and the United Nations on how to invest effectively while protecting and enhancing the environment. He was recognised by SmartMoney in 2007 in its Power 30 list of the most influential people in business and finance and by Institutional Investor in 2008 as #35 on its list of the 75 most effective chief executives.

What is the focus of C Change Investments?

‘We are a private equity firm, dedicated to game changing investments in green energy, green building, renewable resources, projects and companies. We are a global institution with offices in Cambridge Massachusetts and San Francisco, but with some international affiliates that can help us access key technologies and territories worldwide.’

Why clean energy?

‘My background in clean energy stems from work that I began back in the 1970s as a high school student with a research project on solar photovoltaic energy. Ever since then I have had an interest in the role of natural resources on the economy.

In the 1990s I pioneered the first commodity-based mutual fund at Oppenheimer Funds. While at CalPERS I began its inflation-linked asset programme, including a new commodities and infrastructure programme. From my perspective it is all about the efficient use of natural resources and their impact on the economy, and this has been particular focus of mine as an investor.

What has been particularly interesting from my perspective is the changing dynamic, with the rising demand of natural resources, with a particular focus on energy materials.

Since the year 2000, the emerging markets have become the dominant player in both the energy and materials market, in a way that is distinctive in the post-World War II era.

Given the population sizes in the emerging markets, we are seeing a situation where hundreds of millions of people are moving from subsistence-level to moderate consumption level in their habits. It creates unusual demands and strains upon raw materials resources. This demand dynamic does two things, it creates both the strains but also the opportunities for innovation with energy materials – for the first time in decades.

We know that demand will increase for natural resources and without such innovation we are going to create an economic, ecological and a natural resources disaster. The exciting part about this is the re-emergence of energy materials as the centre of technological innovation in our economy. Roughly from the mid 19th to mid 20th centuries, energy materials resources were the centre of human innovation. This changed dramatically in the post-war period with a virtual cessation of new development in those technologies. We are having to rediscover our inventive capability and we are doing this because of necessity.’

What does clean energy offer for private equity?

‘The choice for me to focus on this area was purely an investment decision. I see the natural resources as lying at the centre of capital formation and investment market opportunity for the first time in decades. This will have an impact in every asset class that major institutions will invest in and can hope to profit from.

It implies new private equity ratios for effective energy and materials companies that have been as viewed as deep value in nature, now can become growth since the first time since the 1970s.

It also implies a new prominence for energy materials in major market indices. In 1980 energy companies represented one third of the S&P 500. By the year 2000 it represented 6.5 per cent. While I am not anticipating returning to necessarily that level, we are looking at market capitalisations in excess of 20 per cent, which is more than double what they are today.

I have been excited about the area for years and have had the privilege of working with top investors, scientists and technologies involved with a green energy, green building and renewable resources and truly the market conditions and mandate from key supporters led me to found C Change Investments.’

How does it inform your perspective on the area having previously operated as an institutional investor?

‘In a way I have made the switch from sides a few times, from being an asset manager primarily to being an asset allocator primarily at CalPERS, though with an eye to being more hands-on with respect to specific investments.

The time at CalPERS was fantastic in terms of getting the broad, institutional market perspective, as I looked to ascertain and marry the needs of institutional investor with the opportunities in the marketplace.’

Which areas are of particular interest to you at the moment?

‘I think the real key is that while it is a broad area, we are committed to the transformative technologies that can change the production, consumption or distribution of natural resources, with particularly an eye on raw materials.

What is important that essential there are two camps of investors, policy-makers, scientists and technologists. One camp instinctively believes that any progress or technological innovation in energy materials will be slow and evolutionary in character; such a view would lead them to invest in only later stage infrastructure projects and existing and prevailing technologies.

Our view, however, is that there are decades of pent-up innovation which will be unleashed in the coming years, and that such innovation will be revolutionary in character. Our focus is thus on the scale-up and growth phase of commercialisation with the belief that there will be a process of continuous improvement in our use of energy materials, over the coming decades.’

What kind of investments do you look for?

‘The typical investment size is between $10m and $50m and is intended to provide the critical scale of capital to transform a proven, but not heavily commercialised, technology, into a company or project with global applications.’

How do you feel the attitude of investors has changed towards this area?

‘While at CalPERS we were the leading green investor in the US with approximately $3bn allocated to green private equity and real estate initiatives.

Like the financial markets, private equity investors have witnessed a dramatic change in what their investments recently. Until recently, private equity was all but synonymous in most investors’ mind with LBOs. Private equity is obviously a much broader concept, including venture capital, but also the growth of scale capital and infrastructure capital needed for many of the world’s key development requirements. We expect that the themes of natural resources and infrastructure represent two of the world’s greatest capital-forming needs over the course of the coming two decades.’

What are the advantages of investing in this area?

‘A number of areas show real promise. With solar technologies, currently there are about 200 solar technologies, with about 500 worldwide, with the prospect of only a handful of winners. The opportunity is tremendous, and there will be big winners in the sector.

Given the number of technologies and players also points to the dangers associated with the sector, however. We believe that two key skills sets needed to succeed: one is a technology assessment capability which is stronger than and different from that used by private equity investors in IT and biotechnology, the second is the ability to scale the key energy materials technology to prevail in the international marketplace.

The capital requirements for energy materials-related technologies are far greater than what was needed for IT and biotech, however, the real cash flow benefits can also be commensurately better.

Energy and natural resources prices will be higher and more supportive, continuous technology innovation implies that the fundamental supply and demand characteristics over the coming couple of decades is likely to change dramatically, and we need to meet this.

If we do our jobs right, we will be fundamentally altering the supply and demand of natural resources, and that implies a much higher level of volatility in natural resources markets than had previously prevailed since the 1980s.’

What challenges do you face?

‘The challenges are that the sourcing, production and deployment of the best technologies will typically occur in different geographies. The best wind technology might be sourced in Germany, but produced best in Korea, and applied best in the US, so this international character to production and deployment is distinctive and represents some clear logistical challenges. Our view in what we pursue is an international network to help us with this effort.

Our international network is a distinctive feature that maybe private equity firms in the past did not need for plain LBO activities, or for IT or biotech-related venture capital.

One prominent venture capitalist, and I won’t name him, as recently as two years ago said to me that like information technology, 90 per cent of the world’s great energy materials technologies will occur within 60 miles of Stanford University.

This breathtaking statement, while potentially true with IT, betrays a bias which the industry has to overcome, given the global nature of the energy and materials sectors. Places like South Africa and Australia are critical in the development of green investment technologies. This is very different to what we have seen before, so adapting to the new opportunities will be the biggest challenge for the industry, and will be something we especially need to get right.

Another distinctive feature about clean energy investments in general is the amount of capital that is needed to solve our energy and raw materials problems, over the coming decades. An estimate of capital needed simply to meet the world’s liquid and gas fuel needs over the coming 25 years is in the order of $17tn.

There is no comparable analogue with IT, or biotechnology for such capital needs. Investors themselves will not be sufficient to meet all of the capital requirements for even the fuel sector, so what this points to is that capital will be needed and incentives will be needed, not only from institutional investors, but also from other investors, corporations and governments. They will all need to play a role.’

How can you see the space evolving?

‘There is a great and virtuous competition among government incentives, research and industrial initiatives that are going to help propel the best solutions internationally. What is exciting is that a snapshot of what we see today is unlikely to be reflective of the international landscape, even in five year’s time. We are witnessing energy and materials going from being the least dynamic part of the capital markets, to the most dynamic part of the international capital system and the scientific world. It is a huge change.’

Copyright © 2009 NewNet

Tags: private equity, solar

This story was published on Wednesday, July 1st, 2009 at 9:08 am and is filed under investors, profiles. You can follow any responses to article entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

2 Responses to “NewNet Investor Profile: Russell Read, C Change Investments”

1. Alternative Profits says:

   1 July 2009 at 11:39 am

   Excellent and detailed report, many thanks.

   I think Russell has pointed out with great clarity why investing in alternative energy is unlike investing in many other technologies. Unlike IT in which at least you were clear about the geography in which most breakthroughs will come from, energy is such a complex and interconnected field that it is very difficult to predict who will get the breakthroughs and and how will they proceed with it.

   And energy being the most vital industry, it won’t be market forces alone that will be playing a role in the evolution of the industry.

   And of course, the capital needs of the industry are so tremendously huge that different kinds of investment philosophies will need to come into play as well

   NS @ Alternative Energy Profits – http://www.altprofits.com/ref/report/report.html
2. luke says:

   15 July 2009 at 9:05 pm

   Although it is very difficult to predict who will get the breakthroughs, there are green technologies that are already making a huge difference and huge amounts of money as well. Take for example, geothermal energy or solar energy. People are really starting to look into purchasing geothermal hvac units and solar powered houses because the tax return is 30% right now.

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