On Friday Invenergy announced a $3 billion minority, growth equity investment from Blackstone. Existing capital provider, CDPQ, and Invenergy management retain majority control, and Invenergy’s management remain in control of all operational decision making. The press release can be found here. Invenergy was a founding partner to the Energize Ventures story. The Invenergy cofounders, Michael Polsky and Jim Murphy, have seats on the Energize investment committee and provide me with invaluable firm-scaling insights.

Blackstone is at the pinnacle of private markets investing. Blackstone has traditionally focused their infrastructure investments on the traditional hydrocarbon markets, but that focus is changing. The firm has actively discussed (as recently as their Q3 earnings announcement) their intent to deliver more capital to the energy transition.

On ESG. So, what I’d say on that is I think the most relevant areas for us are three areas. We actually talked about this at our Board meeting this week. In the energy credit and energy debt areas, if you went back in time, there was much more orientation toward hydrocarbons and E&P. That — a lot of those activities we’ve deemphasized in a significant way over the last 3 years or 4 years. And we’ve been doing much more around the energy transition and have great success. We announced a big transmission line of hydro-power from Quebec to Queens a few weeks ago. We put an investment into a public company called the Array Technologies, which moves solar panels. We did a preferred with warrants. So, we’ve had a lot of success in that state.

And I would expect the next vintages of our energy equity and energy debt funds will be heavily oriented toward the transition, toward sustainability. I think investors will react well. And I think similarly, we’ll do more in infrastructure, another way investors can play it with us at Blackstone. So, there is a lot of investment demand. And then I would say in some of our more liquid structures and areas, some of the things we do in insurance on asset backs, I think you’ll see more there. So, I think overall as an asset class, the demands for capital are enormous and I think a lot of it will come from private capital. So, I think that bodes well, but it’ll be expressed at our firm in multiple areas.

Jonathan Gray, President & Chief Operating Officer @ Blackstone

Invenergy Renewables is now one of the largest (if not the largest) privately held renewable energy developer in the world. To-date, Invenergy has built 175 projects totaling 25,000 MW and Invenergy is currently developing the largest wind and solar sites in North America.

With more of Invenergy’s customers: utilities, corporations, banks… all looking to own more renewable assets to meet their decarbonization goals, Invenergy is in a fortuitous position where demand for energy assets exceeds the current development cycles. This investment pairs Blackstone with CDPQ as the two premier capital partners enabling Invenergy’s growth.

The Invenergy team is pleased to welcome Blackstone, a leader in the renewable investment space, as our partner. We greatly value our long-term relationship with CDPQ and are thrilled to continue to accelerate the clean energy transition with Blackstone’s additional investment and capabilities.

Jim Murphy, President & Corporate Business Leader at Invenergy

For Energize, we are quite fortunate. We have had a tremendous learning relationship with Invenergy. We get to learn what technology their engineers need to meet the scale of the renewable energy revolution. CDPQ, a premier pension fund, has also already been a foundational partner for Energize and we continue to learn and provide value to their global footprint. With Blackstone now as a new “cousin” I am looking forward to how Energize can begin to become a thought partner to Blackstone and their infrastructure portfolio. The energy transition is still in the early innings.

Earlier this morning Axios published an analysis on the ongoing consolidation in the climate modeling arena.

You can find the article here.

Energize made an investment in the space in early 2019 when we led the Series B in Jupiter Intelligence. Our belief then was that new climate modeling techniques, enabled by the newest data sources and latest machine learning models would outperform older systems.

As evidenced by this article, the incumbents: mega firms like S&P, Moody’s, McKinsey… they are all scrambling to keep up with the changing expectations of their own customers. Most of the incumbents have now acquired a newer generation technology start-up. The prices for these M&A events range from undisclosed to $2 billion.

We still believe Jupiter is the best of this generation and that they will be a big, standalone company. Here is a snippet from the article on Jupiter.

If you have followed this site, you have seen me post some positive endorsements about Ford. I’ve been quite consistent that I think they are the most proactive incumbent automotive OEM to pivot to the electric vehicle movement. In addition to taking their flagship vehicles and making them EVs (Ford F-150 and Ford Mustang) the firm also made a commitment with Sunrun to deliver full-home electrification solutions. The net is that they are “burning the combustion engine bridge” and making the commitment to electrification.

I think Ford will be successful because they are a trusted brand with a diehard following and they aren’t being subtle about their interest and dollar commitment to EVs.

When Ford CEO, Jim Farley, launched the electric Ford F-150, he projected 40,000 cars per year in interest. In September they increased that total to 80,000 vehicles and just yesterday they nearly doubled the figure again: Ford is now building capacity to meet over 150,000 electric Ford F-150s per year.

While Tesla is the undisputed leader in electric vehicles, I think Ford’s trajectory is the most exciting and is going to be the clear #2 player in EVs over the next decade. And they might even make the move to #1. The company’s stock is up 181% in the past 12 months, so I think the market is starting to realize the company’s commitment and opportunity.

Yesterday I wrote about the return profiles for emerging managers. That Pitchbook data showed how emerging, specialist managers outperformed the market. This morning one of my teammates shared an article about how LPs are thinking about Fund allocations in 2022.

This data, shown below, indicates that LPs are looking to allocate more capital to emerging managers. Given that most investment firms in the broader energy and sustainability markets are on a newer vintage fund, this likely means more capital coming to the sustainability and technology markets. Energize is seeing an increasing number of excellent investment opportunities, so I firmly believe this capital can be deployed successfully over the coming years.

I saw an analysis recently on performance details around “Emerging Managers”. Emerging managers are investment firms, like Energize, that are in the first 3-4 flagship funds, and within 10 years of founding. Most of the below data came from Pitchbook, a data platform owned by Morningstar. The key takeaways are below:

• Contrary to conventional wisdom, there is little differentiation in step-ups between larger emerging manager funds ($500 million+) and smaller funds.

• Also contrary to conventional wisdom, emerging managers do not consistently outperform established managers, although there are some nuances. First funds exhibit the most performance variation, while second funds underperform and third funds slightly outperform. However, these trends vary significantly by vintage. Very large emerging manager funds ($1 billion+) perform in a tighter band, with less outperformance. Additionally, first-time funds return capital more quickly than second and third funds.

• Since the global financial crisis (GFC), specialist emerging managers have outperformed generalists. (This point is a pillar for Energize – industry expertise and access is a big driver of our returns)

• At each stage of progressing from Fund I to II, III, and IV, about one-third of managers fail to raise the subsequent fund. The success rate for subsequent fundraises increases modestly as fund number increases.

• Because managers often begin fundraising well before they have realizations from their previous fund, LPs primarily look for persistent strategy execution when deciding whether to reup with an emerging manager. Failure to raise a subsequent fund can often be traced to early portfolio losses or key personnel turnover. (Do what you told your LPs would do!)

The Energize team is going to release a more formal summary of our 2021 activities. I can’t wait to share more about that – and about some key events we have underway. (We have 4 investments to announce in Q1!)

There is a lot of change and growth in the market. With so many moving parts it is easy to get disoriented. The times may change, but the basic rules stay the same. And the most important rule is to work with great people, who you trust.

Energize began 2021 with 10 team members. Right now, we have 19 team members (16 onboard, 3 scheduled to start in Q1). Our 2022 team plan has us around 25 by year-end. Why the growth?

We believe the unique characteristics required to be a successful asset manager at the intersection of sustainability and technology necessitates an entirely new type of firm. And we are building that new firm from the ground up. These new team members will help us serve our most important stakeholders: the entrepreneurs. We intend to double down on our commercial value-add, but also grow our platform to better serve the entrepreneurs all the way to their IPOs. We will also better emphasize our approach to sustainability: financial and impact returns are very aligned within our investing thesis, and we are going to help our portfolio better elevate those insights. Of course, we will also grow the investor ranks with 4-5 new investors hires in 2022. Most of these jobs will be posted here.

Our team has been tracking the carbon markets and what voluntary and regulated structures may grow into over the coming years.

Like with any growing asset class or trade-able security, there are several parameters around measuring and quality that need to be confirmed. A recent McKinsey report highlighted the market size opportunity and the key details for the voluntary carbon markets. That report can be found here and we thought it was a good summary of the structural improvements required to create a more scalable carbon market.

Building on other recent work aimed at developing the voluntary carbon market, in particular that of the Task Force on Scaling Voluntary Carbon Markets (TSVCM), the paper proposes six steps to address these deficiencies:

1. Define net-zero and corporate claims: Agreement is needed on NCS standards and certification under one commonly accepted international-standards body. This would provide a more solid foundation for companies to make and validate claims concerning targets for carbon reduction and compensation, and to show precisely how they intend to attain net-zero emissions.
2. Highlight good practice for supply: To address public concerns about the validity of NCS in achieving real and permanent carbon reductions, practitioners need to publicize recent progress in establishing good practices—for example, more rigorous measurement and verification methods and advances in sustainable land-use policies.
3. Send a demand signal: Carbon emitters should agree to prioritize high-quality NCS credits with large co-benefits: this would send a powerful demand signal to build confidence and solidify pricing across carbon markets, and it would encourage policy makers and credit originators to increase the project pipeline.
4. Improve market architecture: Standards, infrastructure, and financing need to be developed to support the growth of NCS producing tradable credits, as set out in the recent TSVCM report. Necessary steps include the creation of carbon reference contracts that allow prices to reflect co-benefits of NCS, a radical improvement in the availability of quality market data, and the development of centralized carbon exchanges.
5. Create regulatory clarity: Policy makers must focus on turning national and corporate carbon-reduction targets into actionable plans, underpinned by binding regulation. Clarity is also needed around how NCS projects can be accounted for within national carbon-reduction goals, how to integrate voluntary and compliance carbon markets, and how to organize the international transfer of carbon credits.
6. Build trust: There is a need for greater collaboration among stakeholders in order to address the perceived credibility issues of NCS. A coalition of high-level champions can help amplify the call for high-quality, high-ambition NCS.

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As I wrote to my team, the banks showing up are a proxy for the readiness of the market. The scale of the carbon markets will create many banking & fee opportunities for the investment banks. And when they show up, they will bring institutional process, credibility, and capital to help address a number of deficiencies labeled above.

There are a few notable firms in the venture landscape that have emerged with a bang over the past 5 years. One of those firms, Lux Capital, is led by Josh Wolfe and Peter Hebert. While the Lux Capital name is now well-know, the firm’s journey really is a “20 year overnight success”.

Lux Capital was founded nearly two decades before deeptech was a common term. At the time of their founding, most of venture capital was moving away from hardtech and towards internet businesses. The firm has managed the cycles and is now symbolic with meaningful innovation.

The Lux Capital team has been a friend to Energize since our earliest days. I first met Bilal Zuberi (Partner at Lux) when Energize invested in Nozomi Network’s Series B in 2017. Bilal had co-led the Series A and has been a tremendous thought partner on that investment over the years. In 2019, we co-led a Series A into ZEDEDA… where Juan and Bilal took board seats. Over the years we have also become closer with Brandon Reeves. Last year, when Energize was growing both Peter Hebert and Josh offered me and our team great advice. Peter even met with a few of our teammates in the Bay area a few months ago to provide advice on the next stage of growth for Energize.

The net here is that the Lux Capital team are great people with great ethics and drive. We are fortunate to have them in our ecosystem. I suspect we will do more together over the coming years…

Earlier this month, Peter Hebert sat down with Samir Kaji on the “Venture Unlocked” podcast. I strongly recommend you listen.

Lux Capital’s co-founder Peter Hebert on the firm’s 20 year journey, creating multi-generational success, and the changing dynamics in VC 

In the podcast you will hear about how to build a great investment firm, how to support great talent, what traits to optimize for in a hew hire, and how to keep a world-class culture. Check it out.

The past 2 years have seen great volatility in the software (and broader) markets. As shown below, COVID unknowns, digital adoption accelerating, and then a hype bubble popping have caused troughs and peaks in valuation multiples for software companies.

Looking at the following charts below from Goldman Sachs and you can see that we are still near all-time highs for these software multiples. There are a few narratives going around to be bearish on software stocks over the coming year, that could drag these multiples down even more:

1- interest rate increases. Software stocks tend to be about long-term investments with distant payoffs. Interest rate increases increase discount rates on those future earnings, lowering present valuations.

2- uncertainty in budget direction. Are we going back to the office? Hybrid? What IT systems should corporates invest it today? This uncertainty may hurt purchases for enterprise-scale software purchases.

3- distraction of outliers in growth rates. Some large software companies (Snowflake, for example) have re-accelerated sales above the $500M revenue level. This is a rare feat. These companies get major multiples (40x+ run-rate revenue) and become a beacon for other firms… and receive a lot of coverage in the press. However, most firms below 60% do ultimately fall in the 8-12x revenue multiple range.

My takeaway here is that we still may see more multiple contraction in the coming year(s). But, as the pandemic proved, software businesses are the most resilient to system shocks, and therefore have the staying power to live and grow through cycles.

A mentor frequently tells me “time is a natural form of diversification” – meaning to invest at a consistent cadence regardless of current position in the cycle. At Energize, we are maintaining our cadence, but continue to model out-year exit outcomes at historical multiple averages so that there is no multiple appreciation required to hit our targets.

Yesterday I wrote a post for Forbes about the current activity – and types of deals – being done in the sustainability market. You can see the article here.

I’ve also posted it below, for convenience..

2021 was a monumental year for the sustainability-focused capital markets. Almost every type of financing vehicle related to climate tech and renewable energy hit all-time highs: SPACs, IPOs, M&A, Growth Equity, Venture Capital. While I am partial to the venture capital and growth equity stages, there has been a fascinating trend in the M&A markets that warrants a review.

The reason M&A is so exciting is because there is now a clear strategy delineation between firms inventing the new energy economy, adapting to this new framework, or trying to adjust exposure to catch minor tailwinds with the theme. But first, what is the new energy economy?

The new energy economy is the framework for our evolving energy supply and changing energy consumption habits. On the supply side, we have a growing interplay between renewables like wind and solar, alongside baseline fuels like natural gas and resilience structures like batteries. On the consumption side we have mobility going electric, energy efficiency products taking over residential and commercial avenues and new products like carbon credits gaining interest. Influencing these moving parts is the unknown of climate change and how our infrastructure can handle new perils like extreme flood, fire, and wind. Holding this jigsaw of interwoven parts together are new digital tools that are designing, balancing, and maintaining the whole structure. Artificial intelligence based design systems and predictive analytics are the pillars to the digital backbone of our new energy economy.

With that background, let’s review the 3 types of M&A events occurring now and what each event says about the participants.

#1 Building a New Energy Firm for the New Energy Economy

These acquirors are new company platforms, usually started in the past decade, that are purpose built for the new energy economy. These firms are digital-first and deliver real value by combining subject matter experts with next-generation digital tools. The acquirors in this case are already large, and are looking to bolt on other, energy-forward companies to complement product skill sets or geographic footprints.

Aurora acquires Helioscope: Aurora is the number one platform to design residential and commercial rooftop solar. The company is digitally aligned to help simplify the deployment of solar across the world and represents the best of the new energy economy. Aurora’s leadership was looking to add greater product strength in large scale commercial solar design and acquired Helioscope. This deal cements Aurora’s leadership and allows the firm to be a one-stop shop for any installer. They are built and growing exclusively focused on the new energy economy.

STEM acquires Also Energy: STEM, a recently public company, is the global leader in AI-enabled energy storage. The firm works with their customers to customize and manage batteries and energy loads across all usage profiles. Battery storage is very complementary to solar energy’s intermittent production characteristics. Also Energy, a technology platform for solar operations and maintenance, was therefore the opportune target for STEM to acquire as they look to bolster their brand from battery storage to a broader leader in energy operations and maintenance. These two combined companies now well-positioned for decades to come and will be synonymous with solar and battery pairing. Another similar transaction here is Vista Equity buying Power Factors.

SparkCognition acquires Ensemble Energy: SparkCognition is an AI-enabled data platform that helps Fortune 500 customers in nearly every vertical better optimize their business. The company’s solutions work very well in traditional energy and SparkCognition wanted to gain market share in renewables. Earlier this year the firm acquired Ensemble Energy to provide instant access to the high growth renewables market. Now SparkCognition’s core technology can access and improve our renewable energy infrastructure.

#2 Traditional Energy Firms Integrating New Energy Products

This group of acquirors have existing business lines in traditional energy but are thinking ahead. These older firms have a business that, if managed successfully, can navigate the energy transition and are businesses with strong brands, active distribution channels, and employee bases that see the new energy economy as an opportunity. These firms are deliberately looking to incorporate new digital tools to better bring their own customers into the energy transition- an admirable and likely profitable endeavor.

Generac acquires Enbala: the maker of diesel or natural gas generators is now focusing on electric battery resilience solutions within the office or residence. But batteries are new to Generac so they wisely sought out a technology partner to help them incorporate the new product suite. Enter Enbala, the firm that now gives Generac its’ own microgrid software management platform. The two firms together now enable Generac to compete with the new generation of battery-first energy service providers.

EON acquires Envelio: EON is one of the largest utilities and energy providers worldwide. They are also forward thinking about renewables. The growth of renewables is causing a big backlog in interconnection requests. Interconnection requests are created when a developer or asset owner is looking to add an asset (wind farm, rooftop solar, EV charger) to the energy grid. To keep up with the tidal wave of interconnection requests coming to EON they knew they needed a better technology system. Envelio is a European-based platform that provides exactly that service and now EON should be better positioned to bring new energy assets onto their energy grids. EON could have tried to manage the growth internally but was smart to bolster on new capabilities to ride the renewable wave.

#3 Private Equity or Traditional Service Providers looking for Climate-related Growth, and Retentive Customers

The acquirors in this space are either more traditional, low-growth technology providers, or private equity firms. Both types of buyers like this segment for two key characteristics: higher growth in climate change related products, and very retentive customer relationships in the critical infrastructure world. Climate change tailwinds are driving demand for technology products that provide resilience to our infrastructure or helps accelerate the deployment of climate-ready assets.

Bentley acquires Power Line Systems: Bentley is a premier infrastructure engineering software company with customers throughout the energy ecosystem. The firm is growing about 15-20% per year and looking for even faster growing segments. The increased perils affecting our energy grid are causing utilities to need to model and improve predictive analytics around power line maintenance and tree-trimming, to avoid fires and increase uptime. These changing conditions therefore drive demand for the technology that Power Line Systems offers. With the acquisition, Bentley staples on a climate change aligned business to their core energy technology business and this addition should further strengthen their baseline growth.

Blackstone acquires Irth Solutions: Irth is a software services platform that provides predictive analytics and damage prevention for the energy industry. Energy firms tend to be slow to acquire as customers, but these energy targets are highly retentive once onboarded as customers. Irth and other firms in the space may not grow 20%+, but the customer repetitiveness provides high certainty of cash flow for private equity buyers. Additionally, these platforms may provide a private equity buyer, like Blackstone, the ability to staple one or two other M&A add-on products that can be sold through the existing Irth distribution channels. While steadier companies, these are the types of deals that are less likely to adapt to the new energy economy.

In Summary

The new energy economy market is continuing to heat up. As the recent cohort of public companies and the industry incumbents look to stake claims in this space, there be an active M&A markets in making. I believe that each of these acquisition types will be successful. As an early-stage investor, however, I do expect that the new energy platforms that are purpose-built for the next generation of energy and sustainability will ultimately capture the most market share.  Either way, this will be fun to watch over the coming years! If there are other types of acquisitions you are seeing, please reach out to me.