Having worked with some of the largest and best institutional investors in the world, we believe the systemic risks posed by growing resource limitations will require LPs and GPs to rethink traditional investment and diversification models:
A New Approach
Now is the time to assemble a consortium of institutional investors to fund, develop, manage and upgrade the clean, resilient infrastructure we all need – but it requires a business, investment, and execution model matched to the problem.
Technology impacts and disrupts every sector of the industrial economy. Yet investment partnerships are steering away from clean energy and related technology investments at the very moment that we critically need to scale proven and emerging technologies to enhance our world’s resource productivity and efficiency and when traditional sources of capital increasingly want an investment vehicle to participate in a risk-appropriate manner in that transformation.
Infrastructure is the basic building block of a sustainable economy. Thriving, sustainable economies require access to affordable, clean, and reliable energy, water, food, mobility, and information. Much of our infrastructure needs to be upgraded, replaced, or supplemented in ways that are more modern, more cost effective, cleaner, and more sustainable. Building and improving this infrastructure in communities across the country is good for economic development, job creation, risk management, competitiveness and growth.
We don’t just need to build out the required infrastructure, we also need to provide for its active and ongoing management and for continuous technology-based improvements that provide for greater asset productivity and efficiency and thereby support investment yields.
Achieving high rates of economic growth in the U.S. requires transitioning to a more modern, more resilient and more “resourcient”[1] infrastructure model. Getting there involves four elements of change:
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Restructure the historic LP/GP relationship to one that far better aligns interests;
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Replace the siloed, systemic-risk-blind model with a more integrated model of long-term asset management;
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Integrate a private-public-corporate partnering model that reduces risk for all involved;
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Use a consortium approach to reduce the risk of moving into nascent investment areas
[1] Resourcient: Resourceful, Resilient, Prescient, Efficient
Restructure the LP/GP relationship:
We need a new investment model that replaces the traditional 2/20, ten-year fund structure with a purpose-built entity, directly owned by its investors, that is lower in cost and better aligns the interests of all stakeholders. This entity structure mirrors the relationship that GPs have with their portfolio company investments – including differentiated stock classes, market-based employment, equity vesting, and traditional board control over budget, capitalization, and asset sales. This approach addresses significant challenges with both the current private equity model and the often-suggested “Infrastructure Bank” structures; and provides a path to better results than most institutional investors have been able to achieve through their direct investment programs.
Replace the siloed, systemic-risk-blind model:
The traditional categories of private equity, public equity, debt, current yield, infrastructure, etc. were designed to reduce risk through diversification. They have not proven themselves as protective against the systemic resource and infrastructure risks the global economy now faces, nor do they productively apply emerging technologies to traditional industries within acceptable tolerances for risk-adjusted returns on invested capital. Our model acknowledges the important relationship between the underlying safety of real property / infrastructure holdings, the critical need to actively manage those holdings with traditional and new business models, and the opportunity to improve the long-term yield of those holdings by infusing them with new technologies. This approach also provides a much lower-risk means of investing in and benefitting from innovative technologies – those that have reached inflection points of affordability and effectiveness but need a platform for adoption and scale.
Integrate a private-public-corporate partnering model:
Government funding can play an important role in building this infrastructure, but success is more likely in a model of public-private partnership where private funding takes the lead in designing the capital formation process and public entities take the lead in prioritizing projects that meet private funding criteria. Our model focuses on letting investors specify their risk-reward appetite, by having them set the financial requirements for the capital needed to build out the infrastructure this nation needs to remain competitive. It also recognizes the critical importance of partnering with state and local governments to identify, bundle, and facilitate the needed infrastructure improvements and new-build opportunities, and the important role major corporations can play in both helping to build out this infrastructure, populate it with jobs and integrate new technologies - bringing corporate balance sheets to the table.
Use a consortium approach:
Appropriate risk management dictates a consortium rather than an “individual pioneering” approach to these investments. Getting started requires both initial capital and support of those with the power to convene and activate the necessary institutional investors. We have recently seen (and participated in) two private efforts to organize capital around similar objectives. The first is Bill Gates’ Breakthrough Energy Ventures, a successful effort to pool the capital of some 30 of the world’s wealthiest individuals to support the development of new technologies for a carbon-free future. The second is the Oil & Gas Climate Initiative, a consortium of 10 large oil and gas companies similarly pooling their capital for carbon solutions. We believe a similar model can be built to pool the resources of some of the world’s largest institutional investors to build the clean, resilient, and resource-preserving infrastructure this nation and the world needs.