By Dr. Peter Adriaens, Co-founder a CEO of the Keystone Compact Group
At the G20 Summit this past September, the World Bank announced its plans to base a Global Infrastructure Initiative (GII) in Australia. The effort is specifically geared toward bringing more pension fund investment to infrastructure projects, as well as significant allocations of public and private capital into infrastructure, as a support to the backbone of economic development. It is a way to address both a $500 billion a year global infrastructure funding gap and the low returns and investment restrictions many pensions face.
The G20 GII is a step in the right direction for pension funds. It aims to broaden their investment portfolios with enhanced returns that do not require them to take on too much risk. However, the GII is mainly expanding what investment banks and some pension funds do already, i.e. lending to build government-backed infrastructure at long term bond-like returns. To truly broaden pension fund investment into arenas where they improve their investment returns and participate in economic development, the industry and global economies need more than ‘plain vanilla’ project financing that benefits large construction firms and their supply chains.
There is a need to continue to innovate alternative investment vehicles for large funds, that allow them to invest in a portfolio of growth companies, focused in emerging burgeoning sectors. Finland is tackling this challenge head on, building a multi-asset Industrial Renewal Fund, featuring three growth portfolios: smart grid and utility infrastructure innovation, electric mobility and bio based chemistries.
When structured as a value system-driven,multi-asset fund, instead of only project or bond financing, the GII investment in new infrastructure projects could spur the adoption of new materials, new construction methods or improved construction management processes. This in turn could create opportunities for ‘reinvention of the construction industry’. Furthermore, the trickle down effect results in the growth of small to medium enterprises (SMEs) through new services and business models that reduce the inherent risk of project performance, and increase efficiencies in their use and maintenance.
“Providing over 70 precent of jobs, SMEs and disruptive startups are the backbone of any economy,” says Antti-Jussi Tahvanainen, Chief Research Scientist at ETLA, the Economic Research Institute of Finland. “With the majority of SMEs being ‘happy non-takers’ of equity finance, the key is to blend leveraged debt with equity investment, and inject that capital into these innovators.”
As currently envisioned, the GII is not sending money directly where it’s needed most to stimulate innovation, such as small businesses like SMEs. Since 2007, there is a barren desert funding landscape between early stage financing for startups on the one end, and growth equity or leveraged debt for revenue generating SMEs on the other. Typically, the risk/return profiles of pension funds often prevent them from investing directly in SMEs. What pensions and other large institutional investors need, are alternative funding models that help them bundle SMEs and other strong market performers into a multi-asset fund. Such funds are structured to take large investments, such as a $200-500 million check, and step that down to individual asset classes and financial products that allow for capital flow-through to SMEs, while generating investment grade returns..
Addressing this challenge, the Research Institute of the Finnish Economy (ETLA) has started designing its multi-asset Industrial Renewal Fund by analyzing over 150 smart grid-relevant Finnish companies. Since the fund structure is driven by megatrends in emerging value systems in smart grid, candidate firms from other Nordic countries (Sweden, Norway, Denmark, and Iceland in addition to Finland) will be considered as well. Strong candidates for investment are bundled in the debt or equity assets of the fund. Since these assets tend to be illiquid, the fund further comprises a thematic equities index or ETF of diversified corporations with smart grid activities, and fixed income (infrastructure bonds). The aggregate return/risk profiles are attractive to institutional investors. The risk is mitigated by the mix of credit, equity and liquid assets, as well as by a first loss portfolio guarantee against the debt assets. By the end of 2016, the fund will feature three distinct portfolios focused on emergent industries including smart grid, electric mobility, and bio-based chemistries.
“The vision of our project is to drive economic growth by addressing the investment needs of nationally-relevant mega-trend sectors. At the same time, the objective is to design new investment vehicles to enhance the returns of large investors, such as pension funds, on whom the public relies on in retirement,” continues Tahvanainen.
To streamline the massive evaluation effort, ETLA has utilized a suite of multivariate typology assessment tools to evaluate the investability of the smart grid companies. Collectively called the KeyStone Compact methodology, the yes/no questions and complex algorithms in this online tool categorize companies for investability, be it equity, non-equity, and non-dilutive debt financing. The companies thus selected are verified against key financial metrics such as return-on-investment (ROI), return-on-assets (ROA), and their cash-to-total assets position. Keystone is a platform of 72 questions that require no proprietary or financial information. Its design is based on over a decade of research on tacit knowledge for entrepreneurial success, working with serial entrepreneurs of over 100’s of firms, through the Zell-Lurie Institute for Entrepreneurial Studies of the Ross School of Business (University of Michigan).
The KeyStone Compact suite of assessment tools evaluates companies across the business lifecycle, from start ups and SMEs, to global enterprises. It separates a company’s positioning for value capture within the industry where it seeks to innovate compared to its peers, and its investability position. There currently is an online tool for startups and growth companies. Mature companies and large enterprises looking to redirect assets or develop new lines of business are assessed using bespoke analysis.
The method has been rigorously tested using 100’s of companies as part of the research, with over 600 cleantech companies as a part of the Global CleanTech Cluster Association Later Stage Awards, as well as pilot tests with NASA and the Asia Development Bank. Currently, the tools are also in use at Sustainable Energy Association of Singapore, Cleantech Scandinavia, the Wolverine Venture Fund, and several global economic development groups.
The commercial implementation of the multi-asset Industrial Renewal Funds needs to be interplay between the lenders, the asset managers, and the portfolio reinsurers. Its potential to address ‘the barren funding desert landscape’ between early stage financing and growth equity or leveraged debt lending, is striking a chord with these players.
Through today’s traditional channels, both project investment in infrastructure and non-equity investment for SMEs is a challenge to secure. The G20 Global Infrastructure Initiative and the ETLA/Keystone multi-asset Industrial Renewal Fund, are pioneering new alternatives for all parties, and building the pipeline to funnel large institutional investment to where it’s needed most. This ‘blue ocean’ strategy holds the potential to reinvigorate economic development, stabilize small businesses and provide enhanced returns for pension funds. By lifting all boats, these new efforts are building new investment markets that can carry economies around the world into a prosperous 21st Century.
Dr. Peter Adriaens’ career has spanned three decades in venture development and business design. Currently, he is Co-founder a CEO of the Keystone Compact Group Ltd and Equarius Risk Analytics LLC, as well as a professor of Entrepreneurship and Strategy, at The University of Michigan, and a cleantech investor. In addition, he is the Head Judge of the Global Cleantech Cluster Association Later Stage Awards. Previously, Peter has served as director of CleanTech Acceleration Partners, and served as past president of the Association of Environmental Engineering and Science Professors. Peter holds a PhD in Environmental Engineering from Stanford University and a PhD in Environmental Sciences from University of California, Riverside. Peter earned his BS and MSc in biotechnology and bioengineering from the University of Gent in Belgium. He is fluent in Dutch, German, French and English.
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