What is “Sustainable Private Equity” and why should it be a focus?

I built SOIL Funds Management to focus on sustainable private equity. But what does that mean?

On the front-end, we target businesses that we believe generate a sustainable competitive advantage by using a series of financial and non-financial screens. Like Farmers Insurance, we know a thing or two because we’ve seen a thing or two.

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Typical financial metrics include things like Rev Growth, Gross margins, EBITDA growth, EBITDA margins, etc. Non-financial metrics include things like carbon, water, and jobs – metrics that are typically found in the IRIS database or embedded in the UN SDGs. These indicators are helpful for both prospectively for origination of opportunities and prescriptively to optimize investment outcomes.

What amazes me though is that there are still people that think there are holes in the thesis – that there’s no data to bear out the alpha. That’s simply not the case, nor has it been for some time. In much the same way that C&I solar and more recently, solar+ and microgrids, have remained a bright spot for project-level returns, so too has ESG-focused investing for public markets. Study after study has shown that there’s generally a correlation between good ESG performance and good financial returns including a lower cost of capital. And the list of investors that have proved this out in the public markets includes some of the biggest asset managers like Allianz.

Meanwhile, growth equity specifically has returned materially higher returns than other equity asset classes by anywhere from 200-500bps on average and as high as 900bps against larger buyout funds as determined by Cambridge Associates last year. They caution though that multiples for growth equity are stretched as well and that active managers will need to bring the entire tool kit to bear.

So when we put all of this in a mixing bowl, what do we get?

We focus on an area of investment that has historically outperformed (growth equity) with a thematic overlay that has been dismissed by many despite the data demonstrating alpha. We bring with us the experience, skill sets and infrastructure that are necessary to compete in this particular asset class.

One last thought on the Why – small businesses are the job growth engine of the United States. What we need as a country is dollars at scale flowing into growth companies that are going to make a real difference in sustainability and jobs. Getting excited because Blackrock introduced an S&P500 tracker ETF minus the coal companies is fine, but that’s not going to move the needle enough.

And that’s why we do what we do.