Anyone arriving at renewable energy-focused Virgin Green's office is immediately disabused of the Virgin Group's environment-friendliness. The UK billionaire and head of the Virgin Group Sir Richard Branson is not launching his first institutional private equity fund solely for the love of the planet.
Turn right out of the lifts, rather than left, you come not to Virgin Green, but to Virgin Galactic, Branson's punt on the commercial viability of space tourism. His rocket planes will not be wind- or solar-powered and are set to make Branson's intercontinental jets look parsimonious with the planet's resources.
But where most billionaires might shrug their shoulders and take the hit, Branson saw an opportunity to improve the bottom line and burnish his brand as a consumer champion. Synonymous with disrupting established markets, Virgin decided to try and overturn the received wisdom that ecological disaster is inevitable.
Shai Weiss, partner at Virgin Green, says: “Back in 2005, two things happened simultaneously; the Virgin Group faced a bill of about $1 billion (€704 million) buying fossil fuels to run the airlines and trains and Richard and the Virgin Group decided that it was their responsibility to combat global warming in a big way. The logical extension was a decision to seriously evaluate investment in alternative energy.”
There is not enough fossil fuel to meet demand. If you look back through history people have always made money in times of change. This is alternative energy's moment
Branson launched Virgin Fuels in September last year with a commitment of $400 million from the Virgin Group and a mission to help reduce Branson's airlines' fuel bill. After investing around $175 million, the partners quickly realised that a diversified portfolio approach using a traditional limited partnership would yield a superior risk-adjusted return.
Virgin Green projects the US alone creating an additional energy demand of 300 GigaWatts during the next 25 years, assuming an annual GDP growth of two percent. Anup Jacob, one of the team's San Francisco-based partners, says: “If every alternative energy source comes on stream in that time, you'd still only supply 10 percent of that additional demand. As much as 90 percent has to come from fundamentally changing the way you think about demand side management.”
This is why Virgin Green is agnostic about alternative energy sources and why its strategy also encompasses resource-efficiency investments. The plan is to invest in businesses that help harness alternative energy, whether wind, sea, solar or any other source and to back businesses that help consumers manage their energy more efficiently.
TIMES OF CHANGE
Evan Lovell, also a partner in San Francisco, says: “Increasingly there is not enough fossil fuel to meet demand. If you look back through history people have always made money in times of change. This is alternative energy's moment. For the first time in history public markets are accepting exits. There are strategic investors. There is an underlying theme. We may be wrong about the different solutions. We are not wrong about the theme.”
During the last five or six years there have been some great investments by great venture capitalists. They are now looking for the next round of financing and traditional VCs don't have the capacity for strategic issues
He says the average consumer may not be interested in the incremental savings of using a more efficient and longer-lasting light bulb, but the chief financial officer of a business is. “If you can save cost, you'll do that all day, not because it's green and clean. That will filter into the consumer sector, if it starts with industry. And that alone makes it an interesting place to make money,” he says.
Eco-awareness looks as if it will be an enduring theme. Lovell says Virgin Green is building businesses to last and the change in circumstances is supporting this: “For the first time we have seen world-class management making the choice to join portfolio companies. It gives it credibility and us another tool in the box.”
The market is also maturing at just the right time for Virgin Green's growth capital approach. Jacob says: “The market is coming to us. During the last five or six years there have been some great investments by great venture capitalists. They are now looking for the next round of financing and traditional VCs don't have the capacity for strategic issues.”
He says growth capital investors will have the greatest impact and two areas in particular are catching the eye at Virgin. Weiss says: “Solar is the next wind. Wind is currently the only renewable source that is cost comparable with traditional fuels.” One of the problems with solar, he says, is its reliance on silicon, which is heavily used in semi-conductors, forcing the price up for solar panels Hence new approaches have been developed such as thin-film solar, which requires less. Silicon, yet are still expected to produce the necessary amount of electricity per surface unit.
Lovell's sweet spot is water. Both he and Jacob worked together at TPG Aqua, a water-focused fund. “It is the largest market that no one's thought of. Nothing can be manufactured without water. Population growth is also putting pressure on water supply.” He says people look at it in slices, in terms of security of supply or in terms of quality. Virgin Green thinks holistically.
Jacob says producing water is energy intensive, but if you can capture the sun's power to do it; monitor and change behaviour; transport, clean and recycle it; these all lend themselves to Virgin's approach.
It is a notable change in strategy for Branson, who has run his Virgin empire much like a private equity firm but without relying on capital from external investors. The fundraising, which Weiss and his team cannot comment on for regulatory reasons, will effectively double the assets under Virgin's management.
He says Virgin Green would draw on Virgin's skill set in company building, but the business would be independent. In time, some of the investments could potentially become Virgin brands, but it is not a prerequisite for a transaction.
Virgin is understood to be investing $100 million in the fund.
Another potential investor says the fundraising would allow Branson's team to draw capital from a wider network of interested parties. These could include investors in renewable energy, traditional energy investors or limited partners such as CalPERS or AlpInvest Partners, both of which have recognised the importance of the sector and set aside significant allocations for it.
The fund will invest primarily in established companies across sectors in Europe and the US, deploying up to $75 million in equity per transaction. It will also have the ability to coinvest, allowing it to target larger deals alongside other investors. Unlike a venture fund, it will use debt where appropriate.
So far the story is playing well with investors. It is almost like a gilt investment: governments are backing the changes that are creating opportunities for Virgin Green. And, as Weiss says: “At the end of the day it is about dollars and cents.”