Episode #59 Martin Hahn – An Overview of the Private Equity Investment Space

Martin is Chief Executive Officer, Head of Business Development and a member of the Executive Committee of Capital Dynamics. He has over 30 years of experience in sales, marketing and general management. Prior to joining Capital Dynamics, Martin was an independent management consultant and CEO at TestQuest, Inc., a start-up software company in the US. Earlier in his career, he held general manager positions at several publicly traded technology companies in the US. Martin holds a Bachelor’s degree in Economics from the University of Minnesota and an MBA from the University of Chicago. Capital Dynamics is a global private asset investment company founded 1988 with over $17 bn Assets under Management.

In this episode, we talk about private assets, including a very broad range of private equity topics: from Primary Fund-of-Fund investments to secondaries and co-investing. This is followed by a discussion about the characteristics of private credit. We then talk about clean energy infrastructure, the importance of Responsible Investing and, as always, Martin leaves us with some great career advice. 

Links

https://www.capdyn.com/

https://www.capdyn.com/about-us/responsible-investment/

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EPISODE 59

[INTRODUCTION]

[00:00:04] ANNOUNCER: Welcome to The Wall Street Lab Podcast, where we interviewed top financial professionals and deconstruct their practices to give you an insider look into the world of finance.

[INTRO]

[00:00:23] AVH: Hello and welcome to another episode of the Wall Street Lab Podcast. My guest today is Martin Hahn, CEO of Capital Dynamics. Capital Dynamics is a private asset investment company with $17 billion assets on the management and nearly 50 funds raised. So they have quite a bit of experience. And Martin himself has over 30 years of experience in sales, marketing and general management.

Before becoming the CEO, Martin was the head of business development at Capital Dynamics. And before that, he was CEO at TestQuest and held several general management positions at several publicly-traded technology companies throughout the US. Martin holds a bachelor’s degree in economics from the University of Minnesota and an MBA from the University of Chicago.

In this episode, we talk about a very broad range of private equity topics. We start talking about the different silos that are within private equities. For example, primaries fund to funds investing. We talk about secondary. So sale of stakes and funds. We talk about co-investing, and we talk about private credit. And then later we talk about green energy infrastructure.

And with someone that has experiences as Martin, I of course ask for some career advice. So I hope you enjoy the episode. And if you like the episode, please leave us a five star review on Apple Podcast, or wherever you get your podcast from.

And now without further ado, enjoy my episode with Martin Hahn.

[INTERVIEW]

[00:02:12] AVH: Martin, welcome to The Wall Street Lab podcast. I’m happy to have you on the show.

[00:02:24] MH: Nice to meet you.

[00:02:31] AVH: Martin, could you tell me a bit about yourself. Who are you and what is it that you do?

[00:02:38] MH: Sure. From a business perspective, so I’m the CEO of Capital Dynamics. And Capital Dynamics as you know is a private asset firm. I’ve been the CEO here since 2015. The company is a European-headquartered. It’s headquartered out of Switzerland. It is a European-headquartered firm. But we have operations around the world, and quite a significant operation in the United States. So I split my time generally between our different offices, and the US headquarters is in New York. Now, these days as you know, there’s not much travel around the world. So we’ve got most of the employees in our larger offices working from home given the current situation. And my home happens to be down here in Southwest Florida. So I’m coming to you from a hot and humid Florida. But as I said, I’ve been the CEO since 2015. Prior to that, I was running what’s called business development for Capital Dynamics since the beginning of 2012 when I joined the firm.

Background, I guess generally in what you would call general management. So my prior career before joining Capital Dynamics was running a number of different technology firms. Both firms that were publicly-traded as well as private firms. Some that were venture-backed. Some that were, as I said, publicly-traded.

So I did that from, I guess, about 1987, ’88 until this job that I took with Capital Dynamics. So I had a lot of terrific experience, because, well, I came from the finance side of the business after business school back in the middle, early 80s. I was able to get a lot of experience in many of the important functions, whether that’s sales and marketing, finance, treasury, strategic planning. I had the really good opportunity and fortunate to be able to run software development teams, hardware development teams, manufacturing teams that were placed around the world. Really, I was able to get a lot of really strong general management at the firms that I worked at.

I guess in the end, one of the skills that I sharpened and became particularly [inaudible 00:05:08] at was in working with companies that were going through some level of transition, whether that was a strategy that had changed in an industry or the markets that they were in that were changed. And where some type of reengineering, it went by a lot of different names at the time. But basically a lot of companies that were in some type of turnaround situation. So I had the great experience in coming in to firms that were good firms, but had some portion of it that needed to be reengineered and getting them restarted or getting them on an accelerated path.

[00:05:44] AVH: And then how did you end up at a private asset investment firm?

[00:05:50] MH: Well, that’s an interesting story. I hope you find it interesting. So I was the CEO of a technology company that was venture-backed that was headquartered in both California and Minnesota in the United States. So we ended up selling that firm. And so one of the investors in the firm, particularly like the work that I had done, and reached out to me after we sold the firm and said, “What are your plans?” And at the time, I had plans to help the company transition into the new firm that had purchased it. But that was a transition in a temporary situation. So they told me they had an opportunity that they would like me to take a look at. And it was for a situation with what is called a venture fund to funds business out in California that had run into some challenges. And this venture fund to funds business was somewhat famous and that it had three very famous San Francisco football players that were the leaders of that business. And they had had a wonderful run building their business. They got particularly close to venture capitalists in the West Coast or in Silicon Valley, and they build a really great business. And it worked really well, their model, until it didn’t work. And that was around 2008 and 2009 when they ran into some trouble.

And so the particular investor that called me was one of their financial investors. When they ran into trouble because of the way fund to funds and these private asset firms work, most of the money comes from, as you know, from pension plans and fiduciaries. And so there are a lot of treatment and special kind of consideration for that money, because it’s people’s retirement money. So they asked me if I would take on a temporary assignment to help these three guys. At the time, one of them had left – These two guys to reengineer their business and make sure that all of the capital that had been committed didn’t evaporate, if you will, or not get lost in what turned out to be the great financial crisis.

So I had that opportunity. I moved out to California for what turned out to be about a year and a half long engagement where I helped run the company and found a new partner for that company, because they needed some additional capital and they needed an additional partner. And it turned out to be Capital Dynamics that was the winning what’s called General Partner that kind of bid for the company. And so I did some work with Capital Dynamics to integrate that business that they acquired into their own US business, which was quite small at the time.

After that was finished, I went off to do some other things. But eventually Capital Dynamics called me back and said, “Would you be interested in a permanent position.” That was a nice break in my career. I had been started off in finance and then moved into this corporate business where, again, I shared with you. I was able to generate to build all these general management skills. But honestly, I was ready to go back into the financial services world, which is where I had originally started.

So after the appropriate amount of discussion and negotiation, I joined the team and came in to first build out their North American business development. And then shortly thereafter, took over their worldwide business development. And just to explain what that is. In a private asset firm, there are really two sides to the business. There’s the investment side. Those are the teams that take the capital that is raised from various investors and deploy it into the strategy. And then there’re fundraisers, and that’s what I’m calling business development. And that’s the team that goes out and creates a relationship with potential investors. Usually those are pension plans. Think of teachers’ pension plans. It might be fire and police pension plans. It might be city workers’ pension plans. Anyway, you get it. It’s typically retirement money.

There are other types of clients, high-net-worth individuals that like to invest in private investments and private markets as well. But the majority of the investment often comes from large pension plans and midsized pension plans. So that was how I got to Capital Dynamics and through a series of kind of fortunate progressions for myself. I was able to roughly 3 years later take over the position or be put in the position of Chief Executive Officer.

[00:10:29] AVH: That was a really interesting description of how the whole thing developed. And I think as our listeners already know, we will have a career section later. For now, let me just ask one question. So Capital Dynamics bought the company you were currently turning around. And the company that you were turning around is also fund to funds business.

[00:10:51] MH: It was a fund of funds business. Yes.

[00:10:54] AVH: Okay. And then they integrated it into Capital Dynamics who has several business lines. Not only fund of funds. Can you quickly go over what are the different investment areas that you are active in?

[00:11:06] MH: Sure. So let me kind of frame this in terms of what we do and what we don’t do, and that will I think help your listeners get a good sense. So there are a lot of different private investments. Again, private investments are investing in opportunities, whether those are companies, or projects, or real estate, or loans that you cannot access through the public markets. So a good example in private equity is we’re investing in companies that aren’t listed on any stock exchange.

And as you know, more and more increasingly, the majority of companies don’t exist on the unlisted exchanges. And so to get access to those, you have to come through some type of private assets investor like ourselves. So Capital Dynamics, there are a range of things that private asset firms can be involved in. Capital Dynamics is involved from a macro perspective in two particular market segments or markets. One is what we’ll call the global middle market. So that is generally providing some type of financing or investment into midsize companies that are private companies around the world.

Now, the size, middle market is a fairly – It’s a term that has some variability. A middle market company in Europe tends to be smaller than a middle market company in the United States, and even smaller in some of the Asian countries. But it is not what you’d think about as a large cap stock, or a very large stock, or on the listed kind of exchange, Fortune 1000 or Fortune 2000 type of company. It’s a middle size company where, generally, we believe the biggest opportunity to invest and make money over the long term for our investors exists.

So one of the big kind of areas we focus on is the global middle market. The second is in deploying clean energy renewable projects throughout the United States, the United Kingdom and Europe. So those are the two things we do. We don’t invest in venture businesses or startup business. We don’t invest in large cap businesses or big companies that might be private. We don’t invest in real estate or other real assets like timber, etc., like that.

Within the middle market focus, we have a number of sub-strategies. So different ways that we can invest in two middle-market companies. So one of the ways is our fund to funds business. Now, that’s the most traditional business in some sense for Capital Dynamics. And what that means is there are a lot of GPs are a lot of private equity firms out there that are investing – Their fund is made up of investments in say 15 to 20 middle market companies. What a fund to funds is, is we don’t invest directly in those companies. We invest in, let’s say, 15 to 20 of those funds that are investing in 15 to 20 companies. And there, the kind of the strategy and the value is that you can get lots of diversification. As you can imagine, you could do the quick math here and say, “Roughly, it’s 15×15 in terms of the number of different companies that you’re going to own a piece of as an investor in that particular fund to funds if it’s a middle-market fund to funds.”

Again, the real value there is diversification and the fact that if any one company out of those roughly 225 companies has bad performance, it’s not going to affect the overall return in any tragic way in terms of investors returns. So many private investing investors like fund to funds because it is very diversified and it really has a lot of downside protection in terms of the risk return that’s generated.

So that’s one way that we invest in middle market companies is by investing in the GPs or the private equity firms that are directly investing in them. A second way, no pun intended, is the secondaries business. Secondaries business has grown rapidly over the last 10 to 15 years, and it’s the concept of whether – As I said, there’s no liquidity in these private markets, because there’s no secondary market for it, except the secondary market that’s made by other private asset managers like ourselves. So we make a business out of calling on GPs on other private equity firms who might have pieces of their portfolio that they would like to sell. There’s no place else to sell it, because there’s no stock market or there is no publicly-traded forum in which to sell it. So investors like ourselves would come and say, “That commitment, we would be interested in buying.”

Generally, those commitments have already been partially made. They may have been completely made. And for some reason, an investor or a GP has determined that it no longer strategically fits their portfolio and they’re willing to sell it. So what you get from a secondaries fund is typically you’re going to know what’s in that portfolio, because a number of the investments have already been made. They’ll have a certain kind of value to them because some of the comp underlying companies may have made good progress already. So you know a lot about what’s in there. There’s not as much of what’s called a blind pool. When you’re in the initial fund to funds business, you’re committing to a number of private equity firms many of who haven’t deployed any of their money yet. So, you believe in the underlying private equity firms, but you don’t know what companies they will actually own when you come into that fund to funds.

In the secondaries, you know a lot more about that already, because much of the money has been deployed or committed. It may not have all been invested yet, but it’s been committed. There could be some that still hasn’t been committed. So there’s still some blind pool risk, but much smaller. It also is because it’s already a lot of the money has been deployed, it tends to be much further down the – Let’s call it the liquidity scenario, and that there is an eventual end to all of these funds when the underlying companies, of course, are bought, or they go public. In a secondaries, because you’re coming in much later, some portion of that fund life has already occurred. So a typical secondaries spot is much shorter in nature. Roughly half the kind of average term of a fund to funds.

The third way we participate in the global middle-market is we make a business out of what’s called co-investing. So as I shared with you, there is the primary fund, the private equity firms who are making the underlying investments. Well, they look for other partners to come in and make minority investments alongside of them. And this is the business where we directly invest in companies, not into the private equity firm. But we don’t have the majority position. We have a minority position. So, we don’t have as much control, of course, as the principal capitalist does. But we know the capitalists that are investing, we know them very well, and there are benefits to kind of co-investing for investors. Typically, the average terms historically if you came into a private equity primary fund was you’d be paying a management fee. And that’s how private equity firms get reimbursed. You’d be paying a management fee of 2% of the commitments that you make, of the asset commitment that you made. And you would have something called carry, which is the performance fee that an investment firm earns if the fund does well.

In a co-invest find, you have a minority position on those companies, not a majority. And you also end up typically paying 1% and 10%. So it’s roughly half the fee structure of what it would be if you were investing in that company through a direct fund or a primary fund. So, investors like that, because, again, it’s a much reduced fee and that tends to turn up in the return, right? And the way co-investment funds work is we work across all of the private equity firms that we know and we get to selectively take minority positions maybe across 20, 30, 40 different private equity funds. So not all of our minority positions are never in one private equity fund or partner. They’re across all these partners. So you get good diversification. You own a piece of the company directly. Not a piece of the fund. You own a piece of the company directly, but you own it across lots of different fund managers that you are very familiar with.

Again, good diversification, half the fees, and kind of a minority position. Both secondaries and co-invest funds have become very popular and have grown significantly over the last, as I said, 10 to 15 years and are now a really large part of the private asset private equity market.

The final way that we participate in the global middle market is we have what’s called a private credit business. Similarly, we raise a fund there, and that fund invest in it makes loans to middle market companies. So we are targeting the same types of companies, midsize companies that we believe are well-run. We’ll directly investing into them, right? And by way of providing them loan financing. In our particular business, it is only to US middle-market companies. Maybe they have some hiccups and you need to help them. And we take a very senior position. Meaning, that you need covenants in place to be able to steer some of that direction to them.

So you’re actively involved with the company in these funds or the leaders of this fund is, but they pick a series, let’s call it 15 to 20 companies that they’re going to lend money to. So the investors that come into our fund are investing in our fund. They’re giving us the capital. That capital then is lent out to a selection of qualified, what we think are highly attractive middle market US companies. That’s kind of the way to think about our middle market private asset business both credit and equity solutions and within the equity solutions, three different types of approaches. Secondaries, and that tends to be investors maybe when they get started and they want shorter-term exposure. They don’t want to be in a fund for 15 years. And these funds, as I shared with you, have less blind pool risk and they’re shorter, or co-investing strategies. And there, again, that is a more sophisticated strategy in the sense that it’s not as diversified as a secondaries fund or a primaries or a fund to funds. And so there, you’re relying on the team to really know how to pick companies. Because, generally, you have exposure to 15 to 20 companies. Of course, if one or two of those companies does poorly, that could tank the whole portfolio. So there is more risk in that, and therefore there is more expected return as well.

[00:23:43] AVH: Thank you for the very broad and good answer. You actually anticipated some of my questions. I think what is firstly very interesting is why are the different investment types a thing? For example, why would I not directly do invest in the funds? For co-investments, I would like to dive a bit deeper. And in preparation, I read a bit on co-investments, and that the skills needed in, say, primaries versus co-investments are very different, right? So not many private equity investors do co-investments, because they don’t have the necessary skills. Can you explain a bit how does skills differ and may be why not everybody is doing co-investments?

[00:24:31] MH: Sure. So let’s look at the different skillsets. For a fund to funds, or sometimes called our primary strategy. There are people are obviously highly-skilled. But what they’re picking are the best managers. They’re trying to get in the best funds that have the best track records. They’re not looking at the individual companies they might underwrite. They’re looking at the strategy, the track record and kind of the quality of the fund manager.

So their job is to go out and build relationships with those people and really underwrite the manager as a manager that knows what they’re good at, that sticks to it, that doesn’t wander into areas that might expose them to risk that they really aren’t familiar with. And so that’s kind of the underwriting criteria that they would look at, is more what is the long-term track record of that manager, that fund manager in picking companies and in delivering the returns that they promised to their investors.

There, again, we’re looking at how consistent are you about your strategy.  You can’t know everything about everything. And if you like to diversify and wander, there’s a good chance that you’re going to, on the first time you invest in a new industry, you may not know enough and kind of run into some challenges. So that team just focuses on long-term relationships with all of the private equity managers and making sure the good ones, of course, it’s hard to give them money, because they don’t need it. They’re called what’s oversubscribed. So it’s about building relationships with the ones that you’ve said this is going to be a really good part of the portfolio or this fund to funds.

If you contrast that to the co-invest business, there, the team is just like a primary funds team. They are picking companies. Now, of course, in a co-invest kind of fund, generally, you’re picking the companies from the fund managers that you know on the primary side of the business, because that’s who the whole firm gets to know pretty well. But you’re actually underwriting the company just like a credit or a debt instrument would, or just like you’re putting equity like you would into the stock market in an individual company. So there, you are doing all of the analysis about how the company’s position in their industry. Are they number one? Number two? Number three? Kind of what’s their competitive advantage, right? What are the kind of market implications that are coming at them? Where do they have kind of – What’s the strength of the management team? What are the legal issues that they face? How attractive are they positioned in kind of emerging markets? Things like that. So the team there kind of got a whole different set of skills. They know how to underwrite a company. The fund to funds teams knows how to underwrite a manager.

Now, as you can imagine, in terms of the risk. Because just from a very macro perspective, because in the fund to funds business your investing in – Eventually, you’re investing, of course. You own a piece of each of these underlying companies. But in a fund that’s typically made up of 15 or 20 investments, and each of those investments has 15 the 20 firms that they’ve invested in, there’s a reasonable chance that you’re going to hold a piece of 400 different companies. So it’s kind of quite straightforward, of course, that as a shared with you before, if anyone goes bad or has troubles, it’s not going to wipe out the rest of the portfolio.

On the co-invest side, that’s not the same. There, you’re typically investing in 15 to 25 companies. And let’s say it’s a billion-dollar co-invest fund and you’re investing in 20 companies. On average, you’re putting 15 million into each one of those companies. Clearly, one or two, let’s call it stinkers, could really kind of – Or bad decisions could really have a very meaningful impact on the returns of the overall fund.

[00:28:55] AVH: I am quite curious to exactly understand how the structure is. So as an investment, I can decide I want to go into a fund to funds, so primary market. As an investor I then kind of also decide I want to go into a fund to funds that only does secondaries and nothing off the others. And then how does co-investments does the fund of fund co-investment?

[00:29:24] MH: No. We have a dedicated fund that is just a co-invest fund. So it’s a fund that a dedicated team raises with us. And all they’re investing in is 15 to 20 companies as a minority investor.

[00:29:40] AVH: Okay, I got it. But they all wake very closely, but they’re different teams. So there’s one team for primary, one team for secondaries, one team for co-investments.

[00:29:48] MH: That’s right. So we approach the market this way. With our fund to funds investing, or when we invest in primary funds, which is the same thing, because these are different markets, we have a team in the US that just knows US managers. And they know the best US managers, and that’s their job to get into the best US managers. We have a team in Europe that just knows the European managers. And then we have a team in Asia that just knows the best Asian managers. We believe if you’re going to kind of invest in those, you need to be in the market. So you got eyes and ears on what’s really going on. Obviously, all of these fund managers that we call on, they’re all good marketeers. So it is important to kind of really be in the local market and know them over a period of time. If you don’t and you’re not a savvy buyer, you’re going to hear good story for everybody.

[00:30:42] AVH: You actually mentioned a very interesting point. You said you have relationships with the best fund managers. And I’m curious, how do you develop the relationships with the best fund managers? Is this some kind of strategy over the lifetime with a GP relationship, say, “There’s a new fund at that the market.” You’re like, “Okay. I like this guy. I like the strategy,” or like this team. And they have a good strategy. The market sounds good. Let’s just invest a very, very small portion of the fund to funds. Then you grow it over time. And then they kind of have like this relationship lifecycle. Well, how do you get in touch and how do you filter out the best managers?

[00:31:23] MH: Sure. So we have a dedicated team, as I shared with you in each of those markets, and it’s their job to regularly survey the market. Understand who’s coming to the market to raise money. So they’ll know in Europe across the different countries which GPs will be coming to market when. It’s their job to do the analysis on which of the most attractive ones and why, and develop a relationship with those people.

Now most of the relationships that we have and most of the managers that we invest in. A critical criteria for us is they’re not first time middle market GPs. There is more risk obviously in first time in terms of do they have a track record of being able to execute the targets in the returns they say they are. So almost all of our primaries, our fund to funds business, we know all of these investors quite well. They of course are looking for money from LPs, and we’re considered an LP, of course, our fund to funds. So there’s an obvious – They need capital from us, and we need to find the right partner to invest in.

So both sides are working to kind of optimize their strategy from that perspective. But as you say, once you find a manager that you like, you would tend to look at underwriting them in their next fund provided that they’ve done a good job and they’ve hit the targets that they told you they were going to hit. So every year, or every quarter, there’s a reviews of so many of our core managers to make sure that we have a recent and informed view on how they’re doing, and that we would like to invest with them again.

[00:33:10] AVH: Perfect. Thanks for clarifying that. You mentioned something earlier that you also have the clean energy infrastructure business. Can you give us some details on what is clean energy infrastructure?

[00:33:27] MH: Sure. So you know what infrastructure. There’s a big private market on infrastructure, whether that’s putting in roads and toll roads, or water systems, or airports, or bridges, public infrastructure. And one of the largest markets in infrastructure is putting in energy infrastructure. So building up the power grid and the energy sources.

Within the largest segment energy of the infrastructure market, there is a very large sub-segment, and I think it’s over 50% of the energy market, and that’s what’s known as the clean energy or renewables portion of that market. And there are a number of different renewable strategies that investors like ourselves have. In our case, it’s generally three strategies that we deploy. One is solar. The second is onshore wind. And the third is battery storage. That third one goes along with it, because you can generate a lot of sources, as you know, in the renewable space. If there’s no place to store them and nobody needs the energy right then, it kind of goes to waste.

So those are the three technologies, if you will, or sub-strategies that our business is particularly focused on. And then we also take a view that because these energy markets are so different even within the United States, if I can pick on it, the way all of the federal kind of charges, the different where you license energy. And not even speaking of how do the winds and how does the sun shine in California, versus North Carolina, versus Texas. So there’s a lot of work to know, those markets. Which are the good markets? Where are you going to get the most energy per investment? And what’s the seasonality of it and all of those things, right?

So our business goes – Our clean energy business, while it’s run by a single – The investment side is run by a single individual. There are teams that are dedicated to the two, the three major markets that we make investments in. One of them is the United States. One of the traditionally is the UK, which has been a very good renewables market. And the third for us and a newer kind of focus is the European Continental Market.

[00:36:05] AVH: And on what kind of decision criteria do you base those investment decisions? What makes a good clean energy infrastructure? Do you only look at how much renewable energy you can produce or how is the relationship between the finance side? So how much money can those make? Versus how much good can the investments do?

[00:36:31] MH: Yeah. Look. Of course, remember, we’re doing this on behalf of a group of investors who give us money and say, “I want to deploy my money into renewables.” Maybe because of diversification. Maybe because of the sustainable factor. Meaning, they’re responsible investors and they believe this is the way that the world should go or the world is going and they want to participate in that. For various reasons, clean as well as sustainable.

So in terms of how – Here, to be clear, we are direct investors. Meaning, we are putting up these projects and then we are managing these projects through their lifecycle. So an infrastructure fund like this, unlike a private equity fund, the return to an investor comes from two things. One, it’s our job to get the infrastructure up and then to start producing annual income. And that annual income after we – Obviously, our revenue after we cover the expenses. That annual income or the residuals profits are then distributed on an annual or a quarterly basis to the investors in the fund. That’s unlike a like a middle market find, where you’re holding on to that fund until the exit strategy occurs for each of these companies that’s underneath there, right? Here, these are all projects. So the fund is made up of maybe 5 to 25 projects. Each of those projects is generating income because it has source of energy it’s generating. It’s negotiated sale agreements with some power purchaser who might be a utility. It might be an independent company like Google who has their own energy sources.

So there we are putting together all of that. Not just getting the plant and equipment up after we select the site, do all the studies to make sure the solar is the right way. To make sure not in somebody’s backyard and kind of run in to kind of legal issues, all of those things, right? So once we’ve decided on that, the project has to be built. So we’re managing all the subcontractors that come in and build this stuff. And so we’re organizing all the contracts in the project management for that.

Once it’s built, of course – And before we even start building, we’re negotiating the sale of the energy that we’ll eventually produce and making sure that we’ve locked-in prices, long-term prices. One of the advantages of working with us is we don’t take a lot of what’s called a merchant risk. Meaning, the price of energy goes up and down, as you know, all the time. And that can kind of destroy the promised returns or the expected returns that an investor would get from investing in a clean energy fund.

What we do is we typically have long-term contracts. Let’s say, 10 to 20-year, somewhere in between there. Contracts with the buyers of our energy, locking in the price that we will sell the energy for. So there’re some protection as kind of the price of energy goes up and down.

Anyway, it’s quite different, because, there, most investors are not necessarily looking for long-term return. Meaning, sell that plant and equipment, and sell it for a big multiple on what you’ve invested in it. Sometimes that happens. It depends. Often it doesn’t. So often it is what you’re promising them is a good annual return once you get all of the plant and equipment up and functioning.

[00:40:07] AVH: And what would be an exit strategy for one of those projects? Say, you raised a solar farm in South Carolina or something? And then what’s the exit strategy? Are you keeping the project until you can’t no longer use the solar panels or until a buyer comes in? What’s a typical –

[00:40:29] MH: Both. Some investors, we’ve raised funds from investors who say, “I want to hold on to this stuff for 25 years.” Okay? Other investors that say, “Look, I want an annual return from the dividends or operating income. But I would also be interested if somebody comes along that’s interested in buying this. 7 to 8 years from now, I’d be interested in selling it, provided we can sell it at a gain. And there are new entrance and new kind of participants that come into the market that might have a lower cost of capital and say, “I want to buy that project.”

And so that might be a good thing for our investors. So there’s a process to take those things to the investors and make sure they’re interested in selling that particular project. And so sometimes that works out quite attractively.

[00:41:18] AVH: Makes sense. Now, you mentioned they are responsible investing. And I’ve had on the show [inaudible 00:41:26] Investment Management and Generation Investment Management, both big players in the sustainable business. What does, for you, responsible investing mean?

[00:41:38] MH: Well, look. That is one of the key drivers for our business and something that we believe and we intend to take a kind of major position on and leadership position. So, as you know, there’s lots of ways to make money. Some of them good and not so ESG-oriented, and others kind of that. Certainly, a lot of investors historically have been interested in making sure that companies that that have good practices, that run, that treat their employees well, that treat the environment well, that have good governance structures and are run well, that they kind of are the types of companies people want to invest in.

Capital Dynamics started down that path in the early days when the first principles of responsible investing really took shape and form over in the UK. I think it was in 2008, when we’re an early participant in that. And as you know, I think the complaint for many investors is that many private equity and private asset managers pay a little bit of lip service to this. Everybody says they have good ESG practices.

Increasingly, investors have held us accountable to show me exactly what are the criteria for choosing these, and then how do you manage this? Let me give an example in our clean energy business. The large investors will say, “I’d like to know how you source your solar panels and how you make sure that the labor that they use to basically stuff those panels. Isn’t some child labor in China? Okay? And what are you doing to make sure that that’s the case? How are you checking that out? And how are you reporting that to me? And if you find out that they are, what are you doing about it?”

Increasingly, investors are much more responsible about how they implement the ESG portion of their investment strategy. And so I hope that they would tell you that Capital Dynamics is kind of either ahead of them or kind of right there, kind of pushing boundaries there.

So over the last several years, we’ve had – I would say, we’ve really doubled-down on the focus within our firm to principles like this across all of our investment strategies. So we have a group. It’s a dedicated group that permeates all parts of our business, whether it’s investing, whether it’s fundraising. It’s our own corporate staff functions. It’s what we use as furniture or what we provide as beverages. How we travel? Etc. That permeates and pervades our practice just how we run our own business as well as how we invest in other businesses or projects.

So that’s from the top down, from my level down, a very pervasive and I would say infiltrated practice. Every one of our investment groups has a review on each investment they do that has to be signed off on by the responsible investment committee. It’s given a grade. It’s reviewed after we make the investment on a regular basis. So we take it quite seriously. We report on it.

Increasingly, investors are asking for even more detail on the reports. So our reporting partners who we often subcontract with are connected with us or aligned with us in terms of making sure that we are giving good reports to our underlying investors about how their investments are meeting these objectives. So I would say it’s pretty all comprehensive. It has lots of different components to a diversity. How do we hire and make sure that we are committed to the principles of diversity in our workforce?

As I said, how are we kind of using resources and sustainable resources within our own firm? We have carbon offsets to our travel that people like myself and other have to make sure that we’re doing that. If you got on our website, you would see how much carbon we’re offsetting in terms of our clean energy business on a minute-by-minute basis. We keep a ticker there. We invest part of what we make back into the communities.

So there’s a whole number of elements that’s managed by a couple of leaders in the firm and make sure that all of us stay attentive and kind of make sure that we all have good practices here. But increasingly, it’s just common sense. But I would say for a long time, that wasn’t the case. Certainly, investors in your country that historically have driven a lot of really kind of strong ESG practices. And of course, the challenge has always been early days, especially to maybe the folks that might’ve been doubters and that might’ve been principally focused on returns. Does it somehow mitigate strong returns? Or does it actually – Do you end up getting just as good a returns if you follow this practice?

And I think there’s been a lot of academic studies on that. Of course, that takes a long time to kind of prove these out. But I think the theory and the hypothesis now is that, generally, investing in companies and projects that have really strong ESG and responsible investing practices actually leads to better outcomes, because those are the companies in the end that will be more responsible, that are better run and just the – Not coincidence, but just the alignment of that is going to lead to better returns over time.

[00:47:37] AVH: That actually is the theme that I also got from my previous conversations with those sustainable investment companies. You spoke about challenges. And if you feel comfortable talking about what where some challenges in your transition to more responsible reporting, investing?

[00:48:01] MH: Well, there’re a lot of resources that go into this if you’re not just going to pay lip service. I think I shared with you a little bit of what investors are looking for. Regular reviews of what we’ve done. How we’ve monitored this? I think if you, at some point, have the opportunity to talk some of our clean energy leadership. I mean, there are scientists that every one of those projects on a regular basis measuring inputs and outputs and doing reports on that. We provide all of our data too. There are some rating agencies, if you will, that look at how you’re doing, and they give you ratings. I’m proud to say that we’ve done very well and been selected generally as a top kind of performer with respect to responsible investing, sometimes the best. But that doesn’t come because you’re faking it. It comes because you’ve committed a lot of resources to kind of doing all of the constant heavy lifting that’s associated with making sure on a day-to-day basis that good practices and good companies are being invested in.

[00:49:08] AVH: Perfect. It absolutely makes sense. I think you really have to do a commitment. And lip service just doesn’t cut it in this world.

[00:49:16] MH: Not more. Not anymore. I would say there was a time when just saying that’s really important to us. You got by. I would say most investors have kind of said, “Well, enough of that.” Exactly, what are you doing? And how do you reinforce it? Show me. And I think they found that they scratched the surface and there wasn’t – In many cases, there wasn’t much besides some good marketing.

[00:49:42] AVH: Yeah. I’m excited for the times when there’s really, really good data also about ESG. I know that one of the big troubles in ESG is to really get the data in public and especially also in private companies. But for the last couple of minutes, I want to switch gears a bit, and I already announced it in the beginning that I love to do a little career section. I just wanted to, first, generally ask you. If you could give yourself some career advice or just imagine you’re coming out of university and then you can give yourself as a master or a senior year student some career advice. What would you tell yourself?

[00:50:27] MH: Well, maybe I would direct this. I have my own children who are all kind of work age. And I certainly note that that group of individuals has been raised where they are looking for accelerated movements and success really quickly. I would say one of the things that I’ve learned as I look back on my career, which has been a good career. But what I tell my own kids who might be frustrated or some young people that I’m mentoring might be frustrated that things aren’t happening as fast and things are over for them.

I tell them that – We can talk about kind of what I did to get there. But I got the best career of my life when I turned – I don’t know. I guess it was probably 54 when I took this job, right? It wasn’t when I was 30. It wasn’t certainly when I was kind of 24 out of college. It was a series of working hard, getting kind of recognized for that. And along the way, being smart about the opportunities that I took. But also even when I took ones that probably I look back and say, “That wasn’t necessarily.” Learning from that and not doing it again.

So I guess that turns into thoughtful patients. If you work hard and you are a good problem solver, you’re open to a lot of experiences, because I’ve learned a lot. I mean, I I’ve had this advantage, of course, I shared with you for one reason or another. A lot of it was just – It just was timing. And I had a great mentor. I had this opportunity to work in all sorts of functional areas that really I didn’t know anything about. I don’t know anything about running software development or didn’t at the time. Certainly, nothing about running a manufacturing line. Strategic planning in kind of a technology business was probably not something I studied in college or certainly not or in my MBA program. So I was certainly the beneficiary of a broad set of experiences. But I would say what I think I brought to that is a really organized way of thinking about a problem and kind of organizing an approach to kind of get through it and come out with a resolution to it.

I guess the other message that I would say is I’m sure I didn’t always make the right decision, and I don’t beat myself up on that. I generally have the view that you got to take a number of risks. If you’re not trying things and taking risk, you’re probably not going to be as successful. Because I think, really, good leadership and successful people, they are organized about thinking through the options. They take one, and they are not always right. Just kind of that’s just how it works out, right? Experience counts from a lot, for a lot. And a lot of times, they don’t have experience in that particular area.

But if you’re thoughtful, if you listen, if you find kind of surround yourself with good mentors, you can kind of adjust those decisions. You just got to learn from it and kind of get on with it as long. As you don’t make an unrecoverable error, you haven’t done your career any disadvantage, and you’ve learned a lot.

When I used to be the CEO that venture capitalists would bring on, something happened during kind of that time. Historically, venture capitalists, as you know would go out and find somebody really super, super bright and back them. And as the venture capital industry matured, they moved more to serial entrepreneurs. And part of the underlying issue was, look, there are lots of really super smart people out there. But a big kind of a set of advantages are people that have played that game or played that series of downs, sorry to use a football analogy here, before. And that’s in some sense more valuable than just being a smart person.

Having said, “Look, I’ve run into that problem before. There were three or four options. I took this kind of approach, and it worked out or didn’t. So I wouldn’t do it that way again.” So I would say just experience and thinking through things on an organized way, that’s really kind of helped to me a lot in my career. Of course, I’ve have been surrounded by really good people, and I think that’s the other career advice I would give, is surround yourself by really talented people, and we have at Capital Dynamics. And that’s made all the difference in the world. A lot of kind of great people thinking together in a really collaborative environment really propels.

If the team doesn’t get along, it can sink a company. So, really, I would say I look for when I join new opportunities, the opportunity to build the team or there’s a team that work together, respects each other, that knows how to listen to each other. Doesn’t necessarily agree, but they know how to professionally disagree and still kind of go forward as a collective unit.

[00:55:44] AVH: I love the answer. You actually made it really easy to do my job, because many of the follow-up questions that I wanted to ask, you already answered for me. Thank you for that.

[00:55:55] MH: Well, it’s getting late in your time and you’ve been very generous with your Friday evening. And I’m quite sure that it hasn’t been as exciting as you thought it might be. So I appreciate. I’m glad I could help you through some of that.

[00:56:06] AVH: It was absolutely as exciting. And I think, actually, one typical question comes off at the end is how we how do you think about mentoring? And I think I got a very clear yes. And not a question I wanted to ask was like how did it help you to have this entrepreneurial spirit [inaudible 00:56:24] like to be an investor. And I can only imagine dead really helped, because you can step into the shoes of the people you’re working with, right? So you understand everything from front to back. And I think this is really, really good thing.

[00:56:43] MH: I would say with respect to entrepreneurial spirit. So I think I’m a kind of moderate risk taker. I would say one thing that you said that I think I have and that I encourage good leaders to have. Obviously, you have to have a vision of what you’re driving towards. But I think a really critical skill that makes things work is empathy. What I mean by that is it’s not important to me to be the smartest person in the world, or in the room. It’s really important that I learn how to kind of assemble good people. Let those kind of good people make their contribution.

When we put together a solution, it’s generally a combination of what a lot of experience people have shared. And I hope it’s the best of the best, because we’re taking pieces from everybody’s kind of good perspectives and experience. So experience counts for a lot, as I shared with you. And I think good listening skills, empathy, and being able to kind of collaborate is really important.

I’m not. It’s just you see where teams don’t work together very well. And how little gets done when that happens.

So I would say that’s for me a really clear lesson, is you have a lot of people. Everybody can make a contribution, and kind of listening and empathy for where they’re coming from, and how they’re trying to contribute is really important.

[00:58:25] AVH: Perfect. Thank you. And I can fully agree. If you’re the smartest person in the room, you are in the wrong room. And I think on that note, I want to be respectful of your time. Thank you so much for giving us those amazing insights into private investing and into the career advice. I really learned a lot, and it was the perfect Friday evening so far. Thank you very much and have a great weekend.

[00:58:56] MH: Well, it was my pleasure, Andreas, and you are most kindly welcome. So you have a great weekend as well.

[END OF EPISODE]

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