With the global economic downturn dampening investors’ appetite for risky green technologies, being able to adapt is vital for investment companies wanting to remain competitive
Green technologies have taken a bit of a back seat in recent years, with many businesses and policy-makers preferring to get their finances in order at the expense of generous green subsidies. As a result, many new industries have fallen by the wayside, with a lack of starter funds to support their tentative early growth.
Many investment firms have withdrawn from the market and are looking for more conservative opportunities, or else are focusing on established technologies. Some, however, believe that adapting to the changes of the market and looking at long-term trends can result in attractive opportunities.
You can’t just take one industry, like steel, and assume that by exclusion it will go away. The point is for industries to adapt and change over time
Established in 2008, Roodhals Capital is a Dutch firm that specialises in opportunities and situations that develop from long-term trends. It launched its single fund, the Branta Solutions Fund, in 2009 as a means to invest capital in companies that realise what is needed to adapt to the changing global environment. The fund does not limit itself to green technologies, but looks to see which businesses are responding to major trends that emanate from environmental issues. Founder and CEO Willem Appel tells World Finance the reasons for starting up the fund, and the opportunities he sees in this ever-changing space.
Appel says Roodhals’ strategy sets it apart from other investment houses. “We are unique in two ways. First of all, the way in which we look at investing and the way in which we look at the world. The opportunity for us is really to benefit from demographic, natural resource and environmental investor trends. We believe that those trends transform the global economy, and also lead to businesses changing and adapting. It’s essentially the moment of that change and adaptation that we’re trying to capture.”
The company believes there are three key themes that are impacting on the world, and this drives its investment strategy. As Appel says: “There are three components: sociodemographics, natural resources and environmental impact. So, from those we form the basis of an investment strategy.” The company has had a lot of interest from institutional investors, as well as high-net-worth individuals. “We’ve had investment from a number of fund of funds in Europe and the US. There’s a good group of them in America that have this type of focus in alternative investment portfolios,” says Appel.
Appel describes his company’s strategy as a multi-strategy, which he believes allows it to be flexible in its approach to the market. “We’ve developed an investment toolbox which consists of three strategies. One is an equity long/short bucket. The second is that we look further down the capital structure of the company, for more of a value-oriented play and the credit of the company, in particular corporate bonds. Thirdly, the value of a company has to become the most pronounced when the company ends up in an event situation.
“An event could be a takeover, it could be a restructuring where every aspect of the company is being turned inside out with a specific purpose to create more value, or components of the company get sold for cash and thereby the valuation of the company becomes a lot clearer.”
Although green technologies are obviously a part of Roodhals’ business, it is not the major focus. Appel says that although it excludes some businesses on “ethical grounds”, Roodhals’ style is essentially opportunistic in trying to capture demographic, natural resources and environmental trends. “Our investment strategy is not necessarily based on exclusion of polluting or otherwise difficult businesses,” he says. “We’re not a ‘green strategy’. We look at businesses as they change and adapt, responding to those major trends. We think that those trends are eminent or strong long-term value drivers.”
It is the changing of existing technologies and practices, as much as new ones, that Appel feels will offer the most opportunities. “We believe that a resolution for that will need to be sought, not only through the use of green and alternative technologies, but also through the adaptation and change of the existing, well-established businesses that currently make the economy tick.” He adds: “In our philosophy you can’t just take one industry, like steel, and assume that by exclusion it will go away. The point is that industries adapt and change over time.”
Appel says the reason that the business started came from his experience in emerging markets, and seeing the environmental and social changes that were affecting them. He says: “The reason why we came to it first of all is because both my partner, Cor Timmermans, and I have a background in emerging markets investing, where we saw demographic and resource issues and environmental constraints at work, both in Asia and Latin America, as well as in Eastern Europe and Russia.”
Although Roodhals is firmly based in its London and Amsterdam offices, with a focus on European and US stocks, Appel says there is a “strong desire” to eventually look to other markets. “Having lived in countries like China, where the rapid developments have had severe constraints and even repercussions on the environmental side, you simply become aware that there is a significant cost to business and a significant risk to continuity if you don’t address those costs.”
Appel believes that companies have started to address environmental issues and place them at the centre of the operations. “We have found that board members of large companies and industrial businesses have pushed the environmental issue very much to the centre of their attention.”
However, it is also true to say that as a consequence of the global financial downturn of the last five years, many companies and governments have reduced their enthusiastic support for green and sustainable industries. Appel says: “Sustainability is one of these things that has, up until let’s say 2007 or 2008, had this sort of green notion of doing good while you’re doing business and I think that the last five years got sustainability back into the old notion of ‘Are you going to survive in this environment?’”
Renewable energy, particularly, has suffered from the withdrawal of lucrative government subsidies that helped kick-start the market. Appel adds: “We have to conclude that many new enterprises in the renewable energy companies were decimated due to the European crisis. While you do see that businesses – say, renewable energy through solar and wind – appear to be growing in terms of its installed capacity, what you do not see is the listed, specialist companies, pure players, being successful at translating that into stock value. Many of these companies are managed by people with inventor mentalities. You know, quick start up, high growth, high cost. It was all okay as long as subsidies flowed.
“In fact, there are many examples of companies who are currently fighting for or have lost the battle for survival. That has everything to do with a rapidly changing environment, not for demand for the end product, but simply doing your job as a company and getting your finances in order. Getting your management up to the standard it needs to be.”
The opportunity, says Appel, is looking at companies that are going to be around for many years to come, and this often means larger, more established industrial firms. “If you buy a solar panel today you want to know who is going to service that solar panel in five to 10 years time. You want a company with a healthy balance sheet. The trick is not in your ability to make a good windmill. The trick is ‘Do I have the staying power to service those types of assets for the long term?’” Smaller businesses are likely to struggle in this perilous market. “They’re not in a position in today’s financial markets to attract capital. So we currently see more opportunity with mid- and larger-size industrial companies,” says Appel.
Much of the cause of this retrenchment in appetite for renewable energy projects came at the December 2009 UN Climate Change Conference in Copenhagen, which saw a number of arguments over future policy and an end to subsidies. “It profoundly changed the industry. After the row that occurred, we realised it was not going to happen. Every leader in Europe came back and said ‘I don’t need to spend this money now.’ It’s very clear to me that long-term trends become less relevant when you have a massive downturn. Everybody’s thinking becomes short-term. Our philosophy is if the markets become short-term, we need to respond.”
Being able to adjust and not being afraid to change long-held beliefs is something that Appel says is vital in order to remain competitive in the market. “We regularly evaluate whether or not our long-term assumptions still hold true. Sometimes they do and sometimes they don’t. With the subsidising on renewable energy, they clearly don’t. You have to realise that you can’t, in this market, sit on the idea that everything will be okay in the end.”
The future market is likely to be shaped by three main trends, according to Appel. A constant rise in population, increases in natural resource prices, including for food, and environmental constraints are all set to dominate how businesses and governments behave in the years to come. With that, however, come opportunities. “The long-term trend is clear,” says Appel. “Now let’s find the specific investment opportunities.”