“The reason I made money in infrastructure at AIMCo and Ontario Teachers’ was because I was an early adopter. The market used to be incredibly inefficient. Others followed the example, but didn’t always understand that it’s not just about buying infrastructure assets. The price matters. I’ve lost most of my bids over the past year and a half, and so have my very disciplined peers. What worked in the past, almost by definition, won’t continue forever. You must find new opportunities.
A lot of successful startups end up selling for much less than they’re worth. The structure of their venture capital financing forces them to sell too early or IPO [initial public offering] at a poor time. And when a company hits on a very good product or service, there’s often not enough capital available to bring it to market. The big players want to invest in this sector, but they’re looking for a solution to high costs and mediocre returns. Too many people in venture capital are getting paid for nonperformance.
Furthermore, listed companies have become very, very short term: They are unable to make investments that take 10 years to pay off. We don’t have any Bell Labs anymore. Cenovus, a Canadian energy company, just disbanded its innovation group. But long-term institutional investors can fill the gap. We can provide capital when it’s needed most, and capital that can afford to be extremely long-term. That’s attractive to other investors, start-ups themselves, and corporations.
For example, AIMCo has been very active with a company called Bloom Energy, which makes fuel cells. Corporate clients have said, ‘Look, we’d like to pay you like a utility every month, instead of buying the equipment and amortizing it on a monthly basis.’ We found that we were part of an effort to engineer equipment financing.
Getting new technology into energy has the longest fuse—the longest J-curve—of any sector except pharmaceuticals. Moving a new drug to market can take 10 to 15 years, and energy technology has a similar timeline. You need investors that don’t really care when the return comes and how it comes—in cash or total return. If we know a company very well, and we’re comfortable financing the commercialization of its technology, we can shorten the market cycle. The combination of real engineering expertise and our financial expertise has the potential of paying off rather handsomely.
We have to change the whole food chain from angel investing to pre-commercialization. We will also have to train a lot more people to help these start-ups be efficient. What I’m trying to do is recruit retired engineers and executives to work with these companies. The province likes this initiative for energy investing, and it feels it’s necessary.
Right now, directly financing innovation is only feasible for a few major institutional funds. But that’s no different from when I started investing in infrastructure and timberland and commodities. In fact, the only reason I could at Ontario Teachers’ was protection from my CIO, who said, ‘It sounds interesting. Do it, and see what happens.’ I predict that in five or ten years, investing in technology this way will be as common as infrastructure investing is now.
We’ve been working with other investors to socialize some of these ideas. But the problem is, it takes guts. It takes guts on the part of management; it takes guts on the part of boards. And often that is not in big supply.
There is a lot of career risk in this—and I’ve felt it personally. People have come at me and said, ‘You shouldn’t be doing this.’ But experts in the industry—people like Keith Ambachtsheer, who’s running the Rotman International Centre for Pension Management—have said, ‘You are absolutely right. This is the area where pension funds can find a new application and make real money.’ And this is where I want to spend my post-retirement efforts.”