Q&A: A conversation with Reid Capalino

1. How did the idea for Aligned Intermediary come about?

Aligned Intermediary arose from combining two streams of activity: one focused on the investment opportunity of solving climate change, and the other focused on asset-owner collaboration. Three premises underpinned the founding of our firm:

1. Trillions of dollars of investment are needed to reduce global greenhouse gas emissions and protect our planet; such capital needs create compelling opportunities across multiple different asset classes, and especially in “climate infrastructure” (i.e., clean energy, water infrastructure, and waste-to-value).
2. To source and execute climate-related investment opportunities, asset owners require domain and financial expertise, and frequently will be most successful when collaborating with other asset owners.
3. Asset owners seeking to capitalize on climate solutions will benefit from having a shared, outsourced, independent advisor to help source, diligence, and structure deals.

Four of Aligned Intermediary’s co-founders — Peter Davidson (our CEO), Tracey Durning (who now serves on our board), Alicia Seiger, and Sarah Kearney — had varied experience mobilizing capital into climate solutions. Another co-founder — Dr. Ashby Monk (chairman of our board) — had the stature and relationships to bring large asset owners to the table. Their combined efforts resulted in Aligned Intermediary.

To make our organization operational, we then assembled a team with the relevant financial, industry, and regulatory expertise. Our CEO, Peter Davidson, had previously served as executive director of the Loan Programs Office (LPO) at the U.S. Department of Energy, where he (with the aid of my colleague Brendan Bell) oversaw a $30 billion portfolio of loans and loan guarantees for clean energy projects and companies. I had previously worked at Deutsche Bank Climate Change Advisors and had exposure to the US solar industry. Our other colleagues all come from similar backgrounds.

2. What is the process for making and managing Aligned Intermediary's investments – are these functions outsourced to third party managers? A mix of in-house and outsourced?

Aligned Intermediary operates in four areas:

• Large-scale direct investments (i.e., $25 million and up): Our team of seven people sources and structures private direct investment opportunities for institutional investors with whom we work. These span debt and equity and include asset as well as corporate-level investments. The first such investment to close via our platform was a $37 million water efficiency investment that the University of California Regents made in December 2016.
• Aligned Partnerships: We also structure smaller-scale (i.e., $1 million-$10 million) private direct investments, which we call “Aligned Partnerships.: Whereas the large-scale investments we syndicate exclusively to institutional investors with whom we work, we syndicate our Aligned Partnership deals to a broader universe of investors (including family offices and high-net-worth individuals); we also invest personally in these deals. Our first Aligned Partnership deal closed in June 2017, when we raised $6 million to seed Summit Ridge Energy, a developer of US distributed commercial and community solar projects. A key goal of Aligned Partnerships is to “seed the pipeline” for deployment of climate infrastructure assets (i.e., by providing higher-risk corporate and development capital).
• Externally-managed funds: For most asset owners, externally-managed funds — as opposed to direct investment — will be the most feasible means to access climate infrastructure (and often the only means). At the request of several large asset owners, Aligned Intermediary is exploring how we might add value in the managed funds space.
• Emerging markets and blended finance: Two-thirds of the investments needed to solve climate change relate to emerging-market economies. Finding ways to attract private capital into emerging-market climate infrastructure is therefore a key priority. My colleague John Morton (formerly of OPIC and the White House) leads Aligned Intermediary’s work examining how to “blend” private, concessionary, and philanthropic capital to de-risk and scale climate infrastructure in emerging markets.

3. Does Aligned Intermediary make fund investments (closed, open end), co-investments, separate accounts, listed, other?  

Currently we do not source or manage fund-related investments. As noted above, we continue to evaluate our strategy in this area. We do look at co-investment opportunities alongside managed funds and have on occasion explored setting up separate account vehicles for large institutions with whom we work.

4. What is climate infrastructure and why should investors include it in their investment portfolios?

We define climate infrastructure as encompassing three areas:

• Clean energy: Solar, wind, geothermal, hydro, biomass, energy storage, smart grid, electric vehicles, etc.
• Water infrastructure: Water pipelines, wastewater treatment plants, desalination plants, water efficiency technologies, water rights
• Waste-to-value: Projects or companies that transform a waste stream (e.g., carbon-dioxide, municipal solid waste, etc.) into a valuable product (e.g., electricity, liquid fuels, chemicals, etc.).

Climate infrastructure can enhance investor portfolios via sound risk-adjusted returns. Many of the deals that Aligned Intermediary recommends (e.g., portfolios of distributed US solar projects) offer contracted cashflows with creditworthy counterparties (which provide genuine diversification) that earn high single-digit or low double digit returns. In a world of 3 percent yields on Treasury notes, we view that as attractive.

On other deals we recommend to investors willing to embrace higher risk (e.g., by investing in pre-construction assets), we see expected returns of mid-teens or higher.

Climate infrastructure also represents a growth market – from 2005-2017, new annual clean energy investment has grown by 12% per year.

Finally, in a world where 75 percent of the world’s energy still comes from fossil fuels, investing in climate infrastructure provides a hedge to make portfolios more resilient amid the transition to a lower-carbon economy.

5. Can institutional investors meet their fiduciary duties to pay liabilities while also investing capital to help manage climate change — are the two compatible?

Unequivocally yes. The need to solve climate change is creating opportunities for commercial returns that can help institutional investors to fund their liabilities. We do not ask institutional investors to neglect or diminish their core responsibilities (i.e., to generate returns to pay pensions, fund endowments, etc.). Rather, we work with them to identify climate-relevant sectors and transactions where their capital can earn competitive rates of return.

6. Are opportunities to invest in climate infrastructure limited by the size and capabilities of a particular investor – for example, could an Borealis/OMERS and a Marin County Employees Retirement System invest in the same type of vehicles to access climate infrastructure?  

As in other sectors, investors should seek climate infrastructure opportunities that match their individual risk appetites and internal capacities. We do, however, see attractive opportunities of varying sizes (from less than one million to one billion or more) across both funds and direct investments. The key is for each investor to identify (1) where its capital can be competitive; and (2) what risks it can effectively underwrite (since, as Warren Buffett has observed, “risk comes from not knowing what you’re doing”).

For example, greenfield development of offshore wind is a space that requires billions of dollars of capital and highly specialized technical, regulatory, and financing expertise. Hence, such projects have typically been the province of infrastructure funds or very large and sophisticated asset owners.

At the other end of the spectrum, almost any asset owner has the ability (whether directly or via a dedicated fund) to invest in a “climate-aligned” bond issued by a company, project, or government (i.e., one whose proceeds support the transition to a low-carbon economy). As of September 2017, HSBC and the Climate Bonds Initiative identified an “investable universe” of climate-aligned bonds worth $389 billion; “investable” here means having an issuance size of at least $200 million, some degree of liquidity, and denomination in a currency that is included in the Barclays Global Aggregate Index.

7. What is the market cap of climate infrastructure opportunities – private and public?

Since 2014 new annual clean energy asset finance (across both large-scale and distributed assets) has averaged $286 billion per year. These flows reflect both private markets activity as well as funding from the balance sheets of listed utilities and power producers. Over the same period, new annual public markets clean energy investment (e.g., via IPOs, secondary offerings, etc.) has averaged $13.5 billion and new clean energy private equity/venture capital has averaged $5.5 billion.

As noted above, the current “investable universe” of climate-aligned bonds is $389 billion — and growing strongly. Global issuance of labeled “green bonds” hit a record $155.5 billion in 2018 (up 78 percent over 2016) and may reach $250 billion-$300 billion in 2018.

On public markets equity, as of Q12018 the combined market cap of all 105 pure-play companies in the WilderHill New Energy Global Innovation Index was $367 billion (equivalent to 1.5% of the S&P 500). This understates the “climate infrastructure” market cap, however, as many non-pure-play companies — from electric utilities to oil majors to diversified industrials — are significantly ramping up investments into climate-related projects and technologies. Distinguishing the leaders from the laggards in this area ought to be a focus of any prudent public markets investor.

8. Is there anything else you would like to add about Aligned Intermediary and climate infrastructure?

Our mission is to mobilize profitable investments into solving climate change. From pension funds looking to invest billions to family offices looking to invest millions to philanthropies looking to provide impact capital, consider Aligned Intermediary a partner in the business of financing climate solutions.