Alexa Binns 00:11
We are so thrilled to have two remarkable guests from Capricorn Investment Group, a 13 billion impact focused outsource Chief Investment Officer, Michaela Edwards is a partner Portfolio Manager and on the Investment Committee, and Marie Celine damnon is the investment director at Capricorn that’s leading GP stakes for emerging managers, something we’re very curious about. So today, Michaela and Marie Celine, they’re going to speak with us today about how Capricorn builds portfolios that align with their clients, values and return goals, what their clients, like families and foundations, are asking for in this current environment, and why they’ve added GP staking to their mission and strategy. Thank you both. We’ll get started today with Michaela,

Alexa Binns 01:05
Michaela, you started out as an allocator at the Norwegian sovereign wealth fund, I believe. And could you just share a little bit about that journey and what brought you to Capricorn?

Michaela Edwards 01:18
it’s been close to 25 years now, so it’s been quite a journey. And my path to impact investing actually started at Norges back in 2009 and it started with oil money, the Norwegian oil money. And what most people know about Norway is really stunning. Fjords a universal health care, but it’s also one of the world’s major oil producers, and the country used its oil revenues to create what’s now the largest sovereign wealth fund in the world, worth over 1.7 trillion and in 2009 right in the middle of the global financial crisis, I was asked to launch the fund’s first environmental portfolio. Of course, at the time, very few people thought that the financial markets could be used to drive any positive change at that point. But my assignment was really the first step for me, personally, into thinking about how capital markets could be used for good. And over the next nine years, I spent the time building a $2 billion Portfolio. I backed a dozen emerging fund managers and strategies across clean tech, renewable infrastructure, some water strategies, and I was lucky enough that along the way, I had the chance to co invest recap record Investment Group, specifically into new clean tech managers. So it was pretty obvious through that collaboration that we shared not just an investment philosophy, but truly a mission, which was to support a new generation of firms rising to meet this growing demand from impact focused investors like ourselves at the time. So when Capricorn invited me to join them in 2019 it was a perfect fit. I mean, this has truly been a firm that’s been pioneering impact investing and being early investors in the energy transition in the early 2000s I mean, they backed David blood and Al Gore in launching generation Investment Management in 2006 so it really was the mission that drew me in from day one in terms of joining Capricorn. And you know today that mission feels even more urgent and more full of opportunity, in the sense of trying to move institutional capital towards impactful investments.

Earnest Sweat 03:38
Michaela, one thing that typically comes up is always that, you know, history doesn’t repeat itself, but it rhymes. And so I’m curious, from your early experience in the sovereign wealth fund seeing the problems of our environment and the need for sustainability focused funds, but maybe they’re not really being there like it might not be as mature. Have you utilized that experience and the tactics that you took to today’s market?

Michaela Edwards 04:12
No, I think it’s a great, great question. thinking back to those days, off the shelf products didn’t exist with an impact or sustainable investments. I mean, surely responsible investments have actually been around for decades, but not to that institutional degree and at the scale that was needed. And I truly think that is part of the impact movement of being innovative you have to be, because the strategies, the solutions do not exist. So leaning into that forward thinking mentality of if it doesn’t exist, sometimes you actually have to create it.

Alexa Binns 04:52
Are there other LPs that you collaborate with today or. Resources that you lean on for those best practices. Who would you say is at the forefront that you really respect?

Michaela Edwards 05:08
I would say there’s a great ecosystem within the impact investing movement.going back to the launch of gin, right? We were a founding member of the Global Impact Investing network. And when you think about those founding members, those were really the ones who said, well, there are great global challenges. We need global solutions, and how can we collaborate and find those solutions, and that ecosystem has expanded and grown dramatically since then. Of course, there’s also been pushback and backlash to that, and we can touch on that. But what I truly, truly appreciate with the impact investing ecosystem is that it is so collaborative. Coming from an investment banking background, a trading background, where sharp elbows really tends to be the approach to success. That is not the approach to success with an impact. It’s all about sharing ideas. We tend to share due diligence be references for each other in terms of deals, and even if something is not a good fit for us, it may be for some of our peers and knowing others investment philosophies and kind of their maturity stage in terms of investing, that has really helped us in elaborating and collaborating and expanding that ecosystem and hopefully galvanizing more capital To worthy investments.

Earnest Sweat 06:37
the Capricorn model, I think it’s pretty similar to the macro level of impact investing and the views that outsiders see with impact investing, but specifically with Capricorn, what do you think is some of the most misunderstood aspects of the model, especially around balancing impact and returns.

Michaela Edwards 07:03
I think that is the question around impact investing, not just Capricorn, but one of the biggest misconceptions we run into is the idea that you have to trade off returns to do good. You know, people hear impact and assume we’re giving up performance for the sake of values, but that’s not how we operate at all. In fact, we believe the opposite, that investing in solutions to big global challenges is one of the smartest ways to generate long term returns. So at Capricorn, impact isn’t a side strategy. It’s really embedded in everything we do. It’s not about screening out the bad stuff. It’s about ac tively investing in the good. That means that we’re backin companies, managers that are building the future, whether that’s in climate tech, sustainable infrastructure, inclusive innovation, and these are really high growth areas with real financial upside. And then I would say the other misunderstanding is that somehow impact is soft or less rigorous, and our process is incredibly disciplined. we underwrite every investment with a sharp focus on what really drives returns and the interconnectedness of impact and performance so they can co insist, and we’re trying to show that they can actually reinforce each other.

Alexa Binns 08:27
Is there an example or a story you can share of one of these investments so that we can understand how the two go hand in hand?

Michaela Edwards 08:37
I would say that our DNA really was formed in the early 2000s when we were early investors in the clean energy transition. That seems to be a common kind of accepted investment segment today. It wasn’t in the early 2000s right? So not only did we see that climate change was real, but a challenge, but it was also an investment opportunity. So instead of investing through our client portfolios into what we deem to be stranded assets in terms of traditional energy oil and gas assets, we partnered with fund managers within renewable energy. So think solar, wind, energy, storage, but also we were at an early stage. We invested in early stage clean tech VC firms at the time as well, which was very niche at the time, if not today, but thinking about where we are now, 15-20, years later, those investments have been, some of the best in our clients portfolios, because we saw the momentum around the falling cost curves. There was supportive policy coming on board and truly a rising demand from. The various utilities and electricity consumers. So the interconnectedness of all of those forces at once, while having investment solutions to actually investing proved really profitable for our clients.

Alexa Binns 10:17
Has that changed? I guess lessons learned since those first early climate bets, any anything change in terms of what you look for or how you think about winners,

Michaela Edwards 10:32
not necessarily how we think about winners, there’s certainly been lessons learned., this journey really came with real challenges, right? think about the early 2010s we had a Fukushima disaster in 2011 that really shaped the views around nuclear and energy policy. Now we’re seeing a reversal of that of the market now actually being more receptive to thinking about nuclear as a future energy source. We had the Paris Agreement in 2015 really a turning point in terms of aligning global ambition around all of this. And we saw,, clean tech really took off in those early, early stages. And now the question is, well, what is the new innovation for the next 10 and 20 years, and we’re seeing great innovation around various clean techs. Regenerative agriculture is really interesting. We’re seeing electrification of transport beyond just cars. I mean flying taxis is something that could be revolutionary, not just from an emission standpoint, but how people think about travel, how we commute, how we deliver packages. So there’s just a lot of evolution. And I think that is what is interesting about the impact space, is that the market evolves really fast, and it’s why we need to have active management. We need the next generation of fund strategies and managers, the ones who understand the science, the policy, the business models

Earnest Sweat 14:01
How do you think we should, you know, fund managers should approach that. Are they, is there something they’re getting wrong there? Or just want you to kind of unpack that?

Michaela Edwards 14:38
No, I think it’s a great conversation to have, and one that we’ve had with many new fund managers into the space. And one thing I think is helpful to just stress is that this isn’t philanthropy dressed up as finance. This is real investing, real returns and real outcomes. impact investing follows the same principles as traditional investing, it just adds intentionality. And some of these biggest misconceptions are, one, you have to give up returns, or two, is just for venture capital, and it’s really hard to measure those outcomes. I would say the return side of it tends to be a really common myth. It’s simply not true. Our track record speaks to that. But the key here is to focus on the fundamentals. Right? We focus on the same things that everybody else does. We focus on strong teams, scalable solutions, real market demand and impact and performance are not mutually exclusive in that due diligence process and in terms of venture capital. You know, surely, impact investing has definitely had its roots in early stage innovation, especially in areas like clean tech, health tech, etc. But it’s not limited to venture today. we find tons of impact strategies across all asset classes, private equity, infrastructure, even public markets, that can lower your carbon emissions and values align with those strategies.
Alexa Binns 17:12
From a GP perspective, is there additional reporting that you expect so that you can measure some of this impact as well as the financial returns, so that they can start to sort of Mull on how they want to spend their time and their energy.

Michaela Edwards 17:34
I think it’s a very good question, and one that we’re really sensitive to, because what we don’t want is for GPs to be bogged down in compliance and reporting, and we’re actually quite sensitive around impact investing becoming a compliance function, because that’s not what it was intended to do. Yeah, and the frameworks that are out there people are referencing, you know, the UN SDGs, etc, and those were not established as investment frameworks, right? They are the same with the European SFDR framework. They’re reporting frameworks. They’re not underwriting or investment process frameworks. So having an understanding of that, that a reporting comes at the end, our focus is really much on the intentionality of how GPS underwrite investment ideas and decisions, with that intentionality of it having a positive outcome. So for example, within healthcare, or even what we believe to be big obstacles to wealth creation and prosperity around education, health care, access to finance and wealth creation. We think of solutions in three very specific ways. You have to have solutions that try to improve the quality of the service that you’re providing access to. So are you broadening the customer base so people that were under banked or didn’t have access to health care or education? Are we crowding in more and or are we also thinking about lowering affordability? Right? So things should be made more affordable. You should have more access, and there should be higher quality.

Earnest Sweat 20:17
, you’ve spoken a lot about how Capricorn has an approach of not only investing in these next generation of fund managers, but helping really provide infrastructure for the entire sector. What are ways that you look to do that ecosystem building? I know we’re going to talk about with your colleague, kind of GP staking, but what else are you guys looking to do? Is there a certain type of value add you try to provide fund managers you work with,

Michaela Edwards 20:46
definitely, and I’ll let Marie Saleen dig into this specifically on how we think about GP staking within the impact ecosystem, but quite broadly we engage with The ecosystem and try to build that field work in multiple ways. One is really sharing our lessons learned. So we’ve created various white papers around how we worked with certain families, certain foundations on their impact journey, so that others may be more informed, but also not make the same mistakes we did, but also understand that it’s not overwhelming. You know, try to get started, and there are people that you can lean on specifically within the impact ecosystem. People are so collaborative. Talking to other families and foundations that’s done what you are trying to do is really helpful. So when we try to do that in person, but also through our white papers, we’re very active in organizations that tend to be field building. So that could be the global impact investing network, that’s series, that’s creo, that gratitude railroad. I mean, we try to show up in all of these areas where there’s knowledge sharing. We can leave these conveniences smarter, more connected and hopefully with ideas on how to improve some of these challenges, and then specifically with our managers.

Alexa Binns 22:50
and speaking of the families and foundations you work with, I’m curious what your clients are coming to you, what questions they have, or what conversations you’re having with them today in this particular environment?

Michaela Edwards 23:04
Well, there’s certainly been, they’re not immune to a backlash that we’ve seen in the market. We’re seeing state level bans on certain types of investing. Nomenclature, for sure, is changing, not just from a fund perspective, but also with our clients, on how they talk about the work that they want to do. But what I think is important here is that the fundamentals haven’t changed. Climate Risk is still real. The opportunity to invest in solutions is stronger than ever, and we’re seeing what I think now is a very healthy shift from labels to outcomes. And I think that’s a good shift that’s happening, and it’s making it possible to have real conversations about what clients really are expecting in terms of outcomes and how we can help them solve for that. So it’s not really about being political. It’s about trying to be forward looking. Let’s be grounded in the long term values and so, you know, we try to stay focused. We’re back authentic managers. We continue to build our strategies around seeking to deliver both impact and performance, and our clients are leaning in. We’ve had questions asking us of if there now are dislocations in the market, what opportunities is that bringing us and can be lean into that and that I really value with our clients

Earnest Sweat 24:40
to that point, are there any strategies you’re looking for currently, or that you’re surprised that haven’t emerged that you would want to see from fund managers?

Michaela Edwards 24:51
I think we’re still early. I don’t think there are obvious dislocations. There’s certainly uncertainty around the client. Climate Policy and any support specifically in the US that could come from a government on both states and federal level around the IRA, but right now, we’re not seeing huge dislocations. There is uncertainty and duration is elongating, because people are waiting. But what I would say is that I wouldn’t be surprised if we’re seeing in the next few years, those dislocations trying to emerge, similar to what we saw after the collapse of Silicon Valley Bank and first republic, et cetera. There was a huge pullback from the banks in terms of capital being provided to small and medium sized businesses in the US and what did we see as a result of that, we saw huge emergence from private capital firms and strategies being available, which I thought was terrific, right? This is how the capital market evolves, right? In the sense of the government, there’s government steps back, there’s a dislocation, the private market steps in. But what where we leaned into was really partnering with impact oriented credit providers who came in with the intentionality of not just replacing banks and other credit providers that were stepping back, but doing so with an intentionality of, how are we increasing that access, specifically to the ones who haven’t historically been included so small and medium businesses in areas that are not on the coast,

Earnest Sweat 28:27
Now we’re going to take a quick break to speak with our sponsor.

Jeremy Rich 28:30
Hi. I’m Jeremy Rich, senior vice president on the catalyst 2045 team at SBB, a division of First Citizens Bank. For over four decades, SBB has been the financial partner of choice for the innovation economy. We understand the unique needs of founders, fund managers and investors building in fast moving, high growth sectors, because we’ve been there every step of the way through the catalyst 2045 team. We work closely with venture firms and institutional investors to help them grow their platforms, raise capital more efficiently and unlock new opportunities across the venture landscape. When you work with SBB, you’re not just getting a bank, you’re gaining a partner with deep sector knowledge, extensive networks and tools to help you scale. We’re proud to support swimming with allocators and the people shaping the future of venture.

Alexa Binns 29:17
And now back to our LP interview.

Earnest Sweat 29:21
Could you talk to us about Capricorns GP stake strategy?

Marie-Celine Damnon 30:57
Yes, absolutely. I’m happy to kind of lay the ground initially on what GP stakes are and the kinds of players that are out there, which will give good context on where Capricorn specifically plays. So in the GP stakes world, you have two main kinds of strategies. So on the one hand, you have GP seeders who are really focused on helping de novo firms get off the ground. And so they will often be back in teams with a large LP commitment to their first fund in exchange for revenue share, which can subsequently turn into an equity stake in the platform. So they’ll be back in teams that you know, have a track record from a prior platform, are spinning out, are starting fresh, and most of their capital is going towards an LP check. At the other end of the spectrum, you have very large GP stakes, firms that focus on mature platforms and often solve for succession planning, and so they’ll usually take a minority acoustic into a scaled, profitable platform. Their strategy will often be yield oriented, and they will help provide some liquidity to the founding partners, and they will help the next generation of partners access firm ownership, because Capricorn focuses on the impact asset management space, we have historically sat in the middle of these two strategies. We have been active as a seeder, helping new impact firms get off the ground, and more recently, because of the evolution of the impact Asset Management landscape and the emergence of new firms, we have really focused on helping existing firms that have launched a strategy that have reached a certain amount of scale actually get to the next level of their growth. And so our capital can be used for, you know, working capital for these firms to make key hires, strengthen their investments team, strengthen their operations, and become more institutional. It can also be used for GP commitment financing as they raise a larger fund, or as they launch a new strategy.

Alexa Binns 33:21
can you lay out for us what asset classes you’re most interested in, or where you’ve made the most commitment so far,

Marie-Celine Damnon 33:42
yeah, so we have made commitments in GP stakes across asset classes, and for the good and simple reason that, you know, we really started this activity as a necessity for us, we were tasked with aligning our clients portfolios with both financial returns and impacts in the past two decades. And as Michaela mentioned, if you think back to 1520, years ago, there really weren’t that many, or if any, asset management platforms, that were deploying capital at an institutional scale, both for returns and impact. And so we really had to help create some platforms, or help accelerate some existing platforms that needed to reach a next level of scale. We’ve done that really organically out of our clients balance sheet over, you know, the past kind of two decades, and in 2021 we decided to have a strategy really dedicated around it, and to raise a fund around that strategy. We have been active across asset classes. I will say that the asset classes that tend to lend themselves well to the strategy, because. And of the resources they require and their scalability potential without compromising on returns, are generally private equity, private credit and infrastructure, as well as real estate.

Earnest Sweat 35:14
You know, I think that you spoke a little bit about kind of the criteria or the opportunities set right, whether it’s speed or acceleration. How, based on those two different moments in time, how do you find the right moment for that specific GP? What goes into that decision making?

Marie-Celine Damnon 35:37
So we tend to form relationships with GPS over many years, and it’s always a good time for us to engage with a GP, whether they’re thinking about launching a new platform, all the way to them having already scaled and mature to a certain extent, because our capital is flexible and we have the opportunity to create partnerships with GPS at all of these stages. When it comes to seating, it’s really when they’re getting off the ground. The this is a team that tends to have experience in the space to have ideally worked together and built a track record in the strategy that they’re looking to launch, and they’re really early in their process and looking for these anchor LPs to kind of get off the ground when it comes to the growth oriented GP stakes activity that we really focus on. You know, these GPS tend to have between two 50 million to about $2 billion in the sum. They have reached a certain level of scale. They’ve often bootstrapped their firm in a very impressive way, and managed to get, you know, a set of LPs invested with them. And what they’re seeing is that they are at an inflection point in their growth, and so they’re gearing up to raise the next Fund, which hopefully will be larger, or they’re thinking about expanding their investment focus into a new strategy, a new asset class or another sector, and their partnership with us can really provide them with not only The capital, but also the support to go into that next phase and to reach that next level of scale.

Earnest Sweat 37:27
are there any core qualities or signals that you look for when evaluating a GPS long term potential, especially how competitive things are? You want them to be able to thrive, not just survive, right?

Marie-Celine Damnon 38:04
like any investor we look for investment excellence. And so there’s a few key criteria that help us identify investment excellence in the GP. It starts with a well thought out investment strategy that has the potential to generate both the right risk adjusted returns for this asset class while driving impact and so we really layer in both this assessment of the investments strategy the investment team’s ability to execute the strategy, and often that is assessed through really looking at their track record and understanding what they have executed on until this point. And in that analysis, because of our impact focus, we also try to assess the impact alignment of the strategy, where are these dollars getting allocated, and what outcomes is this driving, and the impact authenticity of the GP. So that’s investment excellence and impact integration. Because we back GPS and we take an equity stake into the actual asset management platform. We also assess GPS as an entrepreneurial team, and so are these? Is there a strong fundraiser on the team that is able to create really high quality relationships with LPS over the years and strong partnerships to make sure that they will be able to fundraise for the long term? Is there a team that is able to attract and retain high quality investments, talents and to build very high quality, you know, institutional level operations to serve their service, their clients, is the way that they’re thinking about growth. Growing their platform, both ambition, ambitious, but also realistic.

Alexa Binns 40:43
and how does this play out then, with filling the fund, I’m curious what the relationships are like with other LPs, if you’re helping bring those to the table, or you’re in a unique position compared to The other folks on the cap table?

Marie-Celine Damnon 41:01
Once we create partnerships with a GP, we really try to be a thought partner for them and to be supportive for them when it comes to their business development, their brand building, of course, their impact on integration and reporting, and we try to champion them in the markets. So what we usually will do is that we’ll create a strong relationship with them, have an ongoing dialog, help them think through some of their hiring decisions, especially when it comes to investment talent, we will sometimes make strategic introductions to people in our network who could be interested in their strategy. We organize events where we showcase these GPS and we just generally champion them in the market.

Alexa Binns 41:53
Yeah, can you share a story of a GP who has thrived with your support? Any, any narrative would be really helpful?

Marie-Celine Damnon 42:02
Yeah, absolutely. I can tell you about Community Investment Management, which is a GP focused on private credit. It’s a it’s a funny anecdote. So the first time that Capricorn got in touch with this firm, one of our partners, Bill Orem, actually reached out to community investment management through the information page on their website, and that was back in 2016 we at the time, they were focusing on private credit for small and medium enterprises in The US and so to Michaela’s point, really providing financing for some of these sometimes overlooked businesses, and so we really created a strong relationship with this GP over the years, and in 2020 as Community Investment Management was thinking about launching A strategy focused on emerging markets, technology enabled lenders for both small and medium enterprises, but also for underserved borrowers. It was the great kind of inflection point in the GPS growth. First partner with them, with our GP stake strategy. At the time, they had between 100 to 200 million in total. And since we started partnering with them, they have grown tremendously to now managing over a billion dollars in AUM,

Alexa Binns 47:05
you’ve talked about helping people figure out how to become mission aligned and how to market themselves for GPS. Who is considering this path, what are they? What’s one thing that you end up teaching a lot of GPS, particularly in this market, it’s it’s interesting how you talk about yourself, or how what mission means

Marie-Celine Damnon 47:27
GPS needs to come back to the fundamentals. We’re backing GPS, both from a return perspective and from an impact perspective. For us, impact is really focused on the energy transition, on healthcare access and equity, on education and on financial inclusion. And we’re looking to drive impact, but we’re looking to do so in, you know, the relevant risk adjusted returns for each of the asset classes that we’re looking to do this in. And so whatever the market environments, whatever the policy environment, you know, there is a place for these GPS to exist because they, you know, fundamentally, the investments that they’re making are aligned with the asset class that they’re investing in. Of course, GPS needs to be aware of the LP base that they’re managing capital for and all the sensitivities they need to make sure that their communication aligns with the opportunity sets that they’re going after, and really that the outcomes that they’re driving. So I think Michaela said something to the effect, it doesn’t have to be political. Let’s refocus on what you’re solving for, what your capital is going to drive, both in terms of returns, but also in terms of outcomes.

Earnest Sweat 50:15
Is there anything you’ve learned recently about navigating this current market?

Marie-Celine Damnon 50:26
I think that one thing that we want to put more emphasis on in our due diligence process is making sure that our GPS investment strategies are not too dependent on a certain regulatory environment or on a certain policy or incentive. So of course, we want our GPS to take advantage of the regulatory environment they are in and the incentives that they benefit from, but we need to make sure that fundamentally, the projects or the companies that they’re backing make sense financially, even without ease. So that’s, I think, one point of attention in our due diligence process that was always there, but that we will spend a little bit more time on in a more volatile policy environment. I think one other aspect that has become increasingly important is diversification, both from a sector perspective, but also from a geographic perspective. I’m hearing anecdotally, more and more allocators think about allocating to European managers where previously, their portfolio might have had more of a home country bias in the US and so really leaning into that diversification.

Earnest Sweat 51:50
Thanks so much beyond but how can GPS engage and find Capricorn?

Marie-Celine Damnon 51:57
Absolutely you can find us on the website, Capricorn llc.com, we have an email address specific for GPs to reach out to us. And you can also find us on LinkedIn. We have offices in New York and in Palo Alto, so in case it makes sense to meet in person,