As global utilities seek to adapt to a digital world, Energy Impact Partners offers a collaborative platform to invest in technologies that will help them transform.
New York-based investment firm Energy Impact Partners is leveraging a unique investment model to transform the energy and other asset-intensive sectors. EIP’s philosophy is to create a collaborative platform, where industrial players including the likes of Southern Company, National Grid, TransCanada and Alliant Energy, actively participate in providing capital to innovative companies. And in doing so, support their transition plans to becoming cleaner, more resilient energy companies of the future.
EIP’s origins link back to GE Capital, where CEO and Managing Partner Hans Kobler led GE’s Power technology investment effort. In 2015, Kobler launched EIP to focus specifically on the digital transformation of the energy sector. Now on its second fund, EIP is extending the transformation theme by focusing on a broader set of assets beyond energy.
Heading up EIP’s investment activities in Europe is Managing Partner Nazo Moosa, who tells Private Equity Wire: “Large industrial corporates make up a meaningful proportion of our LP base. Our flagship fund, which launched in 2015, provided a platform for accelerating the pace of innovation by bringing together these forward-looking energy firms and innovative technology start-ups.”
From the beginning, EIP’s model and approach has centred around the belief that in order to transform asset-intensive industries such as energy or transportation, active participation from the incumbents along with the innovators is a critical key to successful investing.
“With billions in hard assets on the ground, sectors such as Transportation, Energy, Infrastructure and Telecommunications are not going to transform with the creation of an application,” states Moosa.
Quantifiable value creation
To bake quantifiable value creation into its funds, EIP has a group of business development specialists who dedicate their time to understanding the idiosyncratic needs of its industrial partners, in order to source companies that are apposite for their transformation objectives.
These industrial partners have the buying power, the need to transform, and this is what lies at the core of EIP’s value creation story.
In Fund I, USD175 million of revenues flowed between EIP’s investors and its portfolio companies.
For a technology company that might be generating revenues of USD10-20 million, potentially bringing USD5 or USD10 million of revenues on to the balance sheet in addition to the original investment capital equates to a fair amount of added value to support EBITDA growth.
“Increasingly, we have to demonstrate how we are adding value to portfolio companies and above market returns our investors. The EIP platform has value embedded in it. In addition to equity dollars, we bring industrial partner relationships and the buying power of billions in capex over to these smaller innovators we invest with,” says Moosa.
She explains that EIP will look to develop more regional-specific funds over the coming years.
“The first fund was focused exclusively on utilities in the energy sector. Whilst these asset intensive firms are often thought of as laggards in their adoption of digital technologies, there is now a tremendous amount of innovation taking place, and we are just at the start of that multi-sector transformation.
“Relative to the US, the European Energy market has been deregulated for much longer, and has therefore lead the way in innovation, especially with regards to technology adoption in the energy sector – and these technologies are bandwidth hungry. Smart meters for example, increase the amount of data that a utility needs to manage by about 30 times relative to conventional SCADA systems. That means that in the coming years, new data sources will likely increase that ‘data load’ at least 2-3x.”
To pursue the energy transformation story, EIP follows a number of themes, including: distributed energy (including mobility), operational technologies (smart operations using 5G and the IoT), and cybersecurity, which is very much at the core of its investing programme.
“There is a subset of innovations we categorize under the bucket of ‘Intelligent Operations’ e.g. low cost sensors, 3D printing, drones, AI, edge computing, 5G, technologies that are radically transforming a whole range of asset-intensive industries. This digital transformation will result in tremendous value creation, especially for progressive incumbents who chose to become early adopters,” explains Moosa.
Avoiding a vacuum
By listening to its industrial partners, what EIP has learned is that transformation of utilities and energy sectors can no longer be looked at in a vacuum. “If you follow the logic of electrification and all of the new technologies and energy resources coming onto the grid, those implications have a far broader impact on other asset-intensive industries like automotive, manufacturing, and infrastructure for smart cities,” says Moosa.
EIP’s first fund allocated growth capital to an array of companies, including AMS, which uses an AI-based platform to enable optimised trading of complex energy assets; Particle, a full-stack IoT platform and Dragos Inc., an industrial cybersecurity company.
Cybersecurity is something that all global industry needs to address head on. This is though, especially important for energy utility, automotive and telecommunications industries as they develop their digital footprint. Sooner or later the Internet of Things will form the fabric of society, as smart cities evolve, connecting every device we use.
Remaining secure will be a top priority for utility companies as they make the energy transition over the coming years.
“Incumbents in the energy sector own a substantial portion of our critical infrastructure. Given that much of this infrastructure is not built around a typical IT stack, these companies are highly susceptible targets for cyber criminals. On the one hand, energy incumbents manage assets at the highest threshold for what needs to be cyber secure, but on the other hand they have a very distinct set of system requirements around which the technology must adapt and solve for within their operations,” observes Moosa.
As EIP’s name suggests, impact investing is a clear part of its ongoing investment mandate.
“Whilst we target a standard growth return,” says Moosa, “much of our investment activity – though not all of it – is connected to technologies that support the transition to a cleaner energy future by reducing carbon emissions, increasing the efficiency of operations, and lowering power consumption from fossil fuels. We closely monitor and measure the impact of our portfolio companies and make that part of our reporting to our LPs.”
5G communication networks will support much of the ongoing transformation activities, which will re-shape all industries, not just energy, and literally change the way we interact with the world.
Spotting the right technologies to invest with to guide them on their growth journey under 5G, could lead to enormous value creation if done properly.
“5G is literally the backbone, the enabler of so much innovation,” says Moosa.
“If you look at industrial applications, predictive maintenance is one area where historically only the very largest assets could be monitored, mostly because the underlying technology was clunky, bespoke and expensive. Now with cheaper sensors and the ability to gather huge amounts of information, 5G enabling lower cost volume data will enable asset owners to extend that capability to every factory shop floor.
“The full potential of 5G is harnessed when millions of low energy end points are interconnected in a low latency environment such as in a smart city with networked streetlights, sensor enabled manhole covers and street furniture that help to intelligently control traffic or detect noxious fumes.
“That is where the link to technology transformation across all these asset-intensive industries comes from, and it will be facilitated under the 5G network.”