Could lower mid-market investments be key in tackling climate change?

_{Stuart Barkoff, Founding Partner, GEF Capital Partners}

VC and infrastructure have long been natural homes for private capital funds targeting climate change solutions. But could investments in lower mid-market companies have a more immediate impact in the global race toward net zero? 

Stuart Barkoff, Founding Partner and Co-Head of US Investments at GEF Capital Partners spoke with Jayda Etienne, Assistant Editor of Preqin First Close, about innovation and opportunity in mid-market private equity for climate impact investing, and key takeaways from the successful final close of their second US fund. 

What do you do at GEF Capital Partners? 

We are a returns-focused impact investor, targeting climate-related industries. In 2018, we spun out of the Global Environment Fund which has been a pioneer in climate investing since 1990. I’m one of the six co-founders of GEF Capital, and we consider ourselves the next generation of the Global Environmental Fund. We currently invest across three geographies, India, Brazil, and US, with separate teams overseeing those programs in each region. I’m responsible for our US investment program alongside Daniel Prawda.

GEF recently completed the final close of its latest climate fund. Why is now a good time for LPs to invest in climate change? 

For a long time, climate investing was done in the margins. No one understood what it was or why to invest. But the drivers are obvious. I think we’re all experiencing some sort of consequence from the change in climate. Temperatures are rising, the weather is becoming more extreme, and there’s just generally less certainty around the world. From our perspective, this is creating opportunities in two key areas: cost savings in the face of rising energy prices, and revenue opportunities in climate solution products and services. 

Who’s invested in the fund?

It’s been encouraging to see an influx of new capital come into this space. We’ve added several new investors when raising this time around. What we found is there are a lot of investors curious about climate change and what an investment strategy for this sector looks like. There are also many investors that are veterans in this sector, and we’ve managed to foster relationships with them. Big names include Blue Earth Capital, INGKA Investments, Nordea, and Quilvest Capital Partners.

Has it been difficult to raise money for this kind of fund from certain US institutional investors, such as public pension funds?

We seek to generate returns through investments in companies driving impact from energy and emissions reductions. We’re not yet quite big enough to attract some of those larger public pension funds. However, we believe that investors such as these should be interested in what we are doing because our strategy is one that aims to drive investor returns and US job growth while also lowering costs for the portfolio companies' customers. 

What makes raising a climate impact fund different from other private equity funds?

Most investors that come into our program would agree that there are more similarities than differences. Ultimately, we’re a lower mid-market buyout investor across four sectors: clean energy, energy efficiency, waste, and water. We’re trying to reduce energy emissions within those sectors. It’s not much different to a healthcare or tech-focused mid-market buyout firm. We just target the sectors we know best. 

Why the focus on US lower mid-market companies?

Within the climate change investment ecosystem, much of the capital has gone to two ends of the spectrum: venture capital and infrastructure. Those investments are obviously impactful, but more of a developmental, long-term approach to solving climate change. We try to focus on where we can make an impact today. That means looking for companies already reducing emissions or saving energy.  

For instance, our company Next Step Energy Solutions, an LED retrofitter, provides commercial lighting solutions for hospitals to reduce energy costs. LEDs have not been as heavily adopted in the US as in other markets such as Europe. But if implemented cost-effectively, they should have about a one-year-payback and as much as 80% reduction in lighting utility spend. It's therefore transformational for customers and for the environment. Plus, there’s huge growth potential. With our knowledge, experience, and network, we help companies like Next Step scale up to become more impactful and profitable.

How much do ESG-considerations factor into your investment decision-making process?

We consider both ESG and impact as critical parts of our portfolio investment strategy. It’s vital throughout our screening and due diligence processes, but also a key component of our portfolio company’s professionalization process. Almost every company we invest in is founder-owned, and ready to begin the professionalization journey. They’ve built their business model, secured a customer base, and are turning a profit. The next step is about levelling-up. This usually involves building operational systems (with ESG-factors in mind) and using data rather than instinct to make decisions.

What lessons did you learn when raising your first fund that helped you this time round? 

We started by making three investments to prove the model and have something to show investors. One of the main things we learnt was that engaging with large institutional investors takes a lot of time. Most of our initial capital was raised from family offices and high-net-worth individuals, which for us was a much quicker and simpler process. So, we had to re-orient to the length of time required for institutional investors, while also building our internal operations to support them, as they require more attention. But it’s been great for our firm to grow and develop systems to service those investors over the long term.

What do the next five years hold for GEF? 

We’ll definitely be continuing to invest in the lower mid-market. It’s what we love. The founders are innovative, and the companies are eager for that next step in their business evolution. It’s a very fragmented market segment, so finding opportunities requires expertise, but we’ve been really successful. We’ve already made six exciting investments with our latest Fund. We want to continue doing this on an even larger scale to maximize returns and impact. 

Jayda Etienne is the Assistant Editor of Preqin First Close, the essential newsletter for the global alternatives market. It’s quick, easy, and free to subscribe here.

_{The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and GEF Capital Partners accept no liability for any decisions taken in relation to the above.}