Capital Series: Caprock
Mark Berryman
On today’s MCJ Capital Series, we have two guests: Mark Berryman, Managing Director of Impact Investments, and Nick Flores, Managing Director of Impact Investing and Client Advisor for Caprock.
Caprock is a multifamily office that provides customized, comprehensive and strategic financial solutions for a select number of families and foundations. They advise over $8 billion in assets of which over $2 billion has been allocated to impact investments. Caprock is a founding B corporation, which certifies that they meet the highest standards of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose.
Nick Flores
Correction: In this episode, Jason mistakenly refers to Caprock as having over $8 billion in assets under management. Caprock advises over $8 billion in assets.
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Episode recorded on Oct 12, 2023 (Published on Nov 1, 2023)
In this episode, we cover:
[2:05] An overview of Caprock
[3:07] The roles and collaboration between the client advisory and investment research teams at Caprock
[5:38] Caprock's approach to impact, due diligence and monitoring
[8:48] The firm's emphasis on privates
[18:21] Client demand for deeper and more niche impact investment opportunities
[25:19] How Caprock thinks about return profiles
[30:51] Criteria for manager and fund selection
[34:13] Tracking specialists vs generalists
[38:23] Nick and Mark's concerns and what excites them in the climate space
[41:35] Caprock's interest in deep tech
[45:00] Thoughts on first of its kind (FOAK)
[47:31] Evolution of LP base and barriers holding it back
[51:31] Continuous learning and knowledge sharing as a key aspect of Caprock's approach to impact investing
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Jason Jacobs (00:00):
Today on the MCJ Capital Series, our guests are Mark Berryman, managing Director of Impact Investments, and Nick Flores, managing director of Impact Investing and client advisor for Caprock. Caprock is a multifamily office that provides customized, comprehensive and strategic financial solutions for a select number of families and foundations. Caprock has grown its assets under management to over eight and a half billion of which well over 2 billion has been allocated to impact investments. They're a founding B corporation, which certifies that they meet the highest standards of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose. We have a great discussion in this episode and I hope you enjoy it. But before we start.
Cody Simms (00:50):
I'm Cody Simms.
Nick Flores (00:51):
I'm Yin Lu.
Jason Jacobs (00:53):
I'm Jason Jacobs. Welcome to My Climate Journey.
Yin lu (00:59):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (01:04):
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
Jason Jacobs (01:17):
Okay, Nick Flores and Mark Berryman, welcome to the show.
Nick Flores (01:21):
Pleasure to be here.
Mark Berryman (01:21):
Nice to be here, Jason.
Jason Jacobs (01:23):
Thanks for coming. Usually these are one-on-one and today we've got a one-on two, so it will stretch my hosting skills a bit. We'll see how it goes.
Nick Flores (01:32):
We'll go easy on you.
Mark Berryman (01:34):
It highlights our team approach and how me and Nick work together in many situations.
Jason Jacobs (01:39):
Well, excited to learn more about it and you guys are a fascinating firm for a number of reasons, not the least of which is your both commitment to impact investing and also just your longevity in doing it now for quite a while. So I feel fortunate that you made the time to come on the show and I know I'm going to learn a lot and hopefully listen as well.
Nick Flores (01:59):
Thanks. We're excited to talk about our work and everything that we're doing on behalf of our clients.
Jason Jacobs (02:03):
So Nick, maybe kick us off, what is Caprock?
Nick Flores (02:05):
Sure. So Caprock is a multifamily office. We were founded in 2005 and have the good fortune to work with a little over 300 families and a small number of foundations. All of them have come our way for a variety of reasons, but the through line across most of the portfolios, if not all that we create is really a level of customization, an emphasis on the private markets, and for a select number of those clients really dedicated expertise in and around impact investing.
Jason Jacobs (02:38):
Mark, anything to add there?
Mark Berryman (02:40):
Nope, that was perfectly crisp. The only thing I would add, and we'll probably get there, is we've been doing impact investing now for 15 years is when we did our first fund and it became a core part of our firm just a few years after that. So you can see that transgression to where it is today.
Jason Jacobs (02:59):
I don't know if divide and conquer is the right phrasing, but can you just talk about your roles within the firm and how you either divide and conquer or collaborate?
Nick Flores (03:07):
Yeah, I'll go first because I feel like if you've met one multifamily office or registered investment advisor, you've met one registered investment advisor or multifamily office and they're all a little bit different. But the way our firm is set up is in addition to the usual reporting compliance, what we call client experience, the bulk of the team is really divided across one of two disciplines, if you will. We have our client advisory side, which is where I sit, which basically just means I work very closely with the families and foundations that I advise to help not only construct a portfolio but then manage ongoing liquidity, the allocation, making sure that we're in alignment with any investment policy statements they may have, that sort of thing. The good news from my perspective and for the advisors on our team is that we're then able to work very closely with Mark and his team, which is, we would refer to them internally as investments. Other firms probably call it research, due diligence, that sort of thing. Mark, I'll let you talk more about your job.
Mark Berryman (04:10):
Thank you. You nailed it perfectly. But yeah, I'm in our investment and research team. I think that's how we officially call it. I just don't think of research as like writing research papers all the time, like an academic, but we do do a handful of deep dives into various asset classes and sectors where we invest on behalf of our clients. I'm a member of our voting IC. All of our founders are also voting members of our IC as well as our head of private equity. Our team encompasses a group of 11 individuals that have a certain specialization but also are generalists in the way to pick up a different asset class in vertical and be able to do a proper and diligence review of fund opportunities for our clients.
(04:58):
Where we work together is this ongoing collaboration with client advisors like Nick who leads our impact advisory side of what makes sense for a group of clients, all of our clients, and what are the needs of our clients, particularly when it comes to impact investing by impact theme or sector. So we worked very closely to essentially curate and construct an appropriate and top portfolio for a handful of clients. Many of our impact clients work closely with Nick, and therefore there's just this daily interaction between the two teams and particularly with Nick and myself.
Jason Jacobs (05:38):
Got it. So I guess a few clarifying questions, one of which is impact a bucket within the firm or does impact run through everything the firm does?
Nick Flores (05:50):
I'm glad you asked this question because it is I think an important distinction for how we have always approached impact investing, which is namely, it's never been siloed at Caprock. In fact, I think one of the things that really sets us apart is that we were a founding B Corp way back in 2007. One of the first B Corp, one of only three financial services firms to seek the designation. Since that time, we've recognized that the clients we advise are going to have very different approaches to impact investing. We're going to have some that are just generalists who just want to do no harm, allocate in a sustainable manner. Whereas on the other end of the spectrum, we have those that have asked us to deploy 100% of their assets and oftentimes in alignment with whatever their familial values or foundation mission may be.
(06:43):
So you can imagine that as this climate ecosystem, climate investment ecosystem really grew and scaled, we've had a growing number of those clients who have asked us to go deeper. As a result, I think today we've allocated to well over a hundred different distinct, impact investment strategies and to that point have done a few of the smaller, bigger, more impact generalist funds. Mark can talk more about those. But I think what really again distinguishes our work is that we've been able to go into much of the smaller, more niche strategies, especially as the marketplace has matured over the last few years.
(07:24):
So for us it's what makes our job so fun is to really make sure that we're closely aligning the opportunities that we're bringing and putting in front of our clients thanks to Mark and his team that's curating that pipeline and then making sure that they fit within not just again a mission alignment perspective, but also that they're advancing the financial objectives of the family or foundation, whatever they may be.
Mark Berryman (07:47):
The one thing I would add to that is when we think about due diligence and process and approval and monitoring, there is no difference. All of our impact investments go through that same rigor with an added lens that is, what is the impact analysis? What is the impact execution risk? What is the impact strategy when we're looking at a fund or company? So there's an added layer of due diligence, review and discipline. Otherwise, it is the same IC that reviews what we would consider a conventional investment and an impact investment. So I participate in our generalist interval debt funds or our generalist public equity funds or multifamily housing fund, and my colleagues on the investment committee also bring that rigor review and approval in terms of an affordable housing fund or an impact alternative credit fund. The only difference, again, is that added layer of diligence and then follow on monitoring in terms of the impact of that specific opportunity.
Jason Jacobs (08:48):
Nick, you mentioned that the firm has an emphasis on privates. I'd love to unpack that a little bit. Does that mean that if I am a client that whatever percentage I feel comfortable allocating to privates, I'll then go to you or would I work with you across everything? I guess if so, what does that mean emphasis on privates?
Nick Flores (09:07):
Yeah, it's a great question because I think a fair number of our clients, especially on the foundation side, come to us and have very limited familiarity with what private investments look like. To us, we think that that is the best source of alpha or market out performance, especially if you're picking the right managers, which Mark and his team are quite good at. What, again, nearly all of our clients who have come to us have said is we want you to manage the entirety of our assets or corpus. So what that exposure looks like and how much concentration you have to say private equity, venture capital, private debt, real assets is really going to range from one client to the next because again, everything that we're doing is customized to the client's needs. So I in particular work with one large family trust that has hired us to focus exclusively on private investments.
(10:07):
That being said, they're an outlier. Most every other client tends to ask us to invest across all of the six asset classes, namely cash, fixed income and public equities. Those are the ones that most people are familiar with. Where our distinction in segmentation is a little bit different is we then divide out private investments into three other asset classes, namely alternatives or alternative credit, real assets is the fifth and then private investments under which private debt, private equity and venture capital 10 to six sit. So again, that's six different asset classes and the concentrations or exposures to each asset class is going to vary quite widely from one client to the next.
Jason Jacobs (10:47):
Within each of those, is there an impact bucket or I guess how is impact resource to across all of those areas?
Nick Flores (10:56):
Again, it really is going to range from one client to the next. So just by way of example, the last time we ran this number, we had 303 different distinct households or clients and 243 of them held an impact investment in their portfolio. To be clear, we do not have 240 impact clients, but this gets back to your earlier point around whether or not impact is sort of siloed. I think that very clearly demonstrates that these are just good investments. To be clear, most of the clients that hold those aren't motivated necessarily by the impact angle. They're motivated because they recognize the opportunities that many of these impact investments have or are associated with.
(11:39):
So when you then look within each asset class, again, we may have some clients that go a hundred percent and they only want say climate tech focused or climate focused within say, venture. Then when they look at real assets, they may look at something like sustainable lags, sustainable aquaculture, sustainable forestry alongside renewable energy infrastructure. Then within private debt or what we call alternative credit, you may be looking at things that are financing, say renewable energy installations in emerging and frontier markets. So those are just some illustrative examples. I think that answers your question, Jason, but maybe Mark has something to add.
Mark Berryman (12:19):
One thing, we put together this really good document for our clients starting their impact journey or a new client excited to join Caprock because of our impact capabilities. We have this framework, and bear with my hands for a second, but you have impact themes here and then you have asset classes here and it's this like integration of how you can do that. So if you pick a people theme like affordable housing, education, financial inclusion, healthcare, what asset classes can we execute in that impact theme across, right? The same would be on the climate side and we've done a really good job of explaining what you can expect to have in those respective asset classes. So in the cash and cash equivalents, that is high liquidity. At the same time the impact could be higher or low depending on where it is. Is it with a local community development finance institution that's doing amazing local lending in underserved communities?
(13:11):
High impact compared to another place where you may put it, the same goes for fixed income in terms of affordable housing bonds or muni-bonds in terms of the liquidity and the high and low impact, you move into alternative credit where you're locked up maybe for a year or two, but you might have really high impact because it's a microfinance alternative credit fund. So we kind of do that across all those six asset classes. Where you kind of see more opportunities is typically in the private equity and venture and private debt as you can imagine, although there's amazing opportunities for climate in real assets, the people on there would be essentially workforce housing and affordable housing. So this framework is pretty interesting if you pick an impact theme and which asset classes can you connect those two.
Jason Jacobs (13:56):
I guess relatively there's this balance between understanding the individual needs of each client and also any area that you would want to recommend. I'd imagine there's a lot of work and rigor that goes into being able to do so confidently. How much of the areas where you go and do the work in is client led to start versus going and doing the work and then attracting clients that are interested in those areas?
Nick Flores (14:25):
This aspect is one of the challenges, one of the biggest challenges for us admittedly in the last several years because you have this growing body of impact investment opportunities, some of which are extremely targeted in niche. It may be that that is a perspective client's entree into this world. I'll give you a really great example. We have one family that we advise in Colorado who when they first started looking for advisors was really focused on water and specifically water equity.
(15:02):
There are times when we have to really balance clients or I should say temper clients' expectations around what's possible, especially from a portfolio perspective. So while there may be interesting investment opportunities that may even be finance first or have a finance first orientation, their number is rather limited. So what we need to do is again, make sure we're managing clients' expectations so that they don't think you can build out a fully diversified portfolio that's comprised solely of water focused opportunities, but let them know we're going to go out and find the best that exists. So for this one client, we were able to do that, a private debt offering that was supporting water access, sanitation and hygiene in frontier and emerging markets. So contrast that with say a foundation that we started advising way back in 2015.
Mark Berryman (15:53):
Hey Nick, can I jump in? Can you put [inaudible 00:15:55] because that opportunity then ended up being applicable to other clients who wanted to also participate. I apologize if I interrupted you, Nick, but it wasn't just for that family. Other advisors like Nick were like, oh, my clients will love that. So we ended up bringing another eight into that vehicle. To that point of, yeah, that was client driven, client led because that is in the wheelhouse like cherry on top of how they want to build out an impact portfolio, but it was applicable to others. Sorry Nick.
Nick Flores (16:20):
No, I'm glad you brought it up because I think it demonstrates for us a growing synergy that exists within this impact space whereby you have a few opportunities that are maybe a little bit more client led. We have others that we can share as well, but sure enough, as long as we're talking about it with other clients and they hear about the bonafides of this option, they have space or room in their portfolio and we're able to kind of build around that. I think that's, even though I mentioned that it's a challenge for us, I think it's also an opportunity and one of the things that makes us, our job so fun is recognizing that while certain clients have very specific passions, those passions sort of align with others. The point that I wanted to make though on the climate side is in 2015 we had this foundation that hired us to build out a hundred percent focused portfolio on solely climate solutions.
(17:12):
So that sort of enabled us to go deeper and broader within the climate space, which again is now quite broad, but in 2015 it was hard to build out a very well diversified portfolio across every asset class and also important across a variety of different climate solutions. We wanted to make sure we were diversifying within climate as well. So we leveraged the work of Paul Hawkin and his drawdown book to really try to then construct a portfolio that was diversified in every possible way, and for those that are interested, we ended up writing a case study about this, which is available for download on our website, small plug. But because at the time we recognized that there were so much uncertainty about how to do this or where to even start, we decided in conjunction with this foundation to write this case study as really a way to help more and more investors start allocating capital, whether or not it's in climate, the more the better, but it really applies across the impact investing landscape as a whole.
Mark Berryman (18:11):
Nick wrote it and it's excellent. He keeps saying we, but Nick wrote it and it's a great read.
Jason Jacobs (18:17):
Well send us the link and we can also link to it in the show notes as well.
Nick Flores (18:20):
Will do.
Jason Jacobs (18:21):
So what are you hearing from clients these days as it relates to privates? What are you hearing from clients these days as it relates to climate and how are you as a firm thinking about each of those and the intersection of those two?
Nick Flores (18:35):
I'll go first since I'm a little bit more client facing, but Mark intersects with more clients across the firm, so I'd love to get his take on this as well because of the type of client that I advise, I think they're wanting us to go deeper, so not just to allocate and I won't name names, but not just to allocate to some of the big, big growth equity funds which are quite plentiful and very large, but wanting us to look in some of the corners, if you will. So looking at pre-seed and even seed sage opportunities and funds, occasionally allocating to co-investment opportunities. Things in, I think the most recent one we looked at was a sustainable protein or an alternative protein and trying to find managers that now are not necessarily so niche, they're on funds three, four, and five and have track records that we can dig in on and really feel confident allocating capital.
(19:30):
I think one area for us that we're going to look at in 2024, which will admittedly be new, is looking at sort of deep tech or hard tech. That's something that again, trying to balance risk and return in say the late 2010s. We were not comfortable or confident allocating at that time, but as again, more managers developed track records and as more clients demonstrate an appetite for or a risk tolerance for some of those types of opportunities, making sure that we at least have those options available for clients who are interested in them. I'm sure I missed something Mark, but I'd love for you to weigh in too.
Mark Berryman (20:06):
Yeah, I think climate continues to be a significant area of interest for our clients. Now we do have a handful that are really focused on economic development and education, that is the bread and butter or those who are focused on diversity and how we can play that out across the broader impact landscape. Then there are those clients like many of which are Nick's that are, I want a high percent climate portfolio, keep it coming, and our job is to integrate that in these different asset classes. So I don't see a shiny object at this moment within climate and I think that's a good thing. I think the impact investing industry does suffer sometimes from the shiny object where everyone goes in at something and you forget about it a year later. I don't see climate broadly speaking, being susceptible to that, but an example would be, we have clients who are interested in agriculture and sustainable agriculture, organic farming, they read about regenerative agriculture and once you speak with farmers and there's a lot of uncertainty what that actually means even though people are reading about it.
(21:08):
So many of our clients have said, hey, I'm interested in a regenerative agriculture strategy, can we find something? For years we've kind of kept our antennas out there looking for something and it took a while to find something that was really applicable that we've felt would hit home with our clients. Some strategies were like, yeah, we have properties in Costa Rica and in Australia, and that was a hard thing to find of interest for our clients because many of them are in the United States, not all of them. So we waited to find a group that we thought had the most experience in organic and regenerative farming and it was closer at home, it was in the US and we eventually found that and we brought on a bunch of clients about a year and a half ago as an example of something that folks were excited about and reading about and wanted to invest in, but it took a while for us to find the most appropriate one in terms of a vehicle a hundred percent dedicated to organic and regenerative farming.
(22:03):
For climate growth as Nick mentioned, climate tech I should say, we've done a very good job of making sure that we're picking a best in class, but also innovative group in different areas, so the seed, the groups that focus on the A and B, some that might be more deep tech, some that might be more soft tech, and then that later stage and really honing in on that later stage of groups. I've been doing growth equity not for five years but for 30 or 40. Then also, not just in decarbonization, what else is important in terms of resilience and adaptation. Now the two are complimentary and so are there opportunities that we think are important that still have a very strong impact thesis that are in the resilience and adaptation space as well.
Nick Flores (22:46):
If I can add on one thing because somewhat surprisingly we haven't talked about it yet, but one of the aspects that's really important to us about our impact work is a commitment to impact reporting, making sure that our managers are not just assuming that the impact is going to be there. I think we were pretty early in asking or really requiring the managers to whom we allocated capital to sign a side letter that more or less obligated them to report the impact that they were catalyzing with our client's capital on no less than an annual basis. So I'm kind of infringing on Mark's territory here, but I do think that we're looking much more critically and scrutinizing the impact frameworks that these managers have when making their own investment decisions.
(23:35):
Because I can just say from the client perspective, many of them want to make sure that not only are we investing in best in class managers from a financial perspective, but they also want to make sure that there's a fidelity there to impact in the measurement of that impact because while we're not yet at a place where I don't think those impact measurements and figures are making or breaking allocation decisions, I don't think it's far off and I think we've looked much more favorably on those managers who have a very dedicated and rigorous framework, some of whom Jason, you've actually had on this podcast, happy to say. So I do think that's an important point. I know this is a long-winded answer to a short and simple question, but I think it's worth noting.
Yin lu (24:18):
Hey everyone, I'm Yin a partner at MCJ Collective, here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change. Some awesome initiatives have come out of the community, A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done.
(24:53):
Many early stage investments have been made as well as ongoing events and programming, like monthly women in climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks and enjoy the rest of the show.
Jason Jacobs (25:19):
Well, as you guys were talking, I was just jotting down notes because there's a bunch of areas I'd love to dig into more, one of which you didn't actually mention yet, but in my prep I uncovered you using a few words. One is the word catalytic and the other was around outperforming returns, financial returns. So that leads me to a couple questions. One question is do you have a firm wide view on how to think about return profiles or is it bespoke from client to client? Also, just regardless of the answer to that first one, how do those interrelate, catalytic impact and financial returns?
Nick Flores (25:57):
Yeah. So I'll start high level and just say that we're very much a finance first firm, our fiduciary, and as a result, everything that we put in front of our clients is going to be expected to have gone through a very rigorous due diligence process. Having said that, we have clients who are really interested in perhaps more impact forward opportunities. It's not going to be where a majority of our time is spent, but again, if we're going to build out, truly use this word bespoke, customized portfolios, we believe we have an obligation to further those client interests and go out and find those opportunities when they're available. I think it's critical for advisors like myself to make sure that clients understand maybe the slight trade off that they may be making to be a little bit more catalytic, and it's important for us to then underscore that we're doing this per their interests.
(26:54):
But from then a portfolio construction standpoint, this gets I think to your main question regarding the types of returns. We'll make sure that if we do a more catalytic or sort of risk tolerant allocation, one that clients understand, the role that it plays in the portfolio, and then two, make sure that we also underscore the various ways in which we may be offsetting that risk. So again, looking at something that let's just say is a little bit more emerging market focused, is a little bit more niche. Maybe it's a smaller fund, first time fund, I'm not speaking specifically about anyone, but then offsetting that with something like renewable energy infrastructure that maybe is a little bit more tried and true, down the fairway, less risk, maybe even a better liquidity profile and then helping clients understand how they're trade-offs between those two.
(27:40):
If I can answer your other question again, going back to return profiles, knowing that we have this finance first focus, I think most clients can understand and get comfortable with everything that we're putting in front of them, but at the outset of every new client engagement, our goal is to try to sort of reverse engineer a target return across, again, the entire portfolio that will be expected to hit over the long term. That number isn't necessarily based on say a client's risk tolerance. We don't have moderately aggressive or conservative type portfolios.
(28:15):
The goal for us is to build out sort of a lifetime discounted cashflow model that enables the client or the foundation to live the lifestyle that they want or for the foundation to ensure that they can continue making those grants however long they may seek. So the point for us is really then to make sure that each allocation fits into that long-term asset allocation and if one does have say a slightly lower return expectation or a slightly higher risk profile, that it really fits in and isn't making a significant impact on the entirety of the asset allocation and long-term strategy.
Mark Berryman (28:51):
The only thing I would add to that is catalytic can be in different forms. It could be investing in a catalytic impact forward fund, and Nick gave a few examples and there's others that we have done, I think pay for success and outcomes-based financing for nonprofits in many cases. But also we can be catalytic in a finance first impact fund, meaning we went in early and we were able to mobilize other folks to come in alongside us or after us because we often hear folks say, wow, Caprock came in, that helps mobilize other capital. In a way we were catalytic by doing so and we find ourselves doing that still today in a handful of innovative strategies where we get to roll up our sleeves, help structure something, and then we see our peers come in. Hence again, being catalytic for such a finance first fund as well, impact finance first fund.
Jason Jacobs (29:44):
I get the benefit to the manager and to the strategy, but what is the benefit to Caprock and to your clients of sticking your necks out and going in early like that?
Mark Berryman (29:53):
Sometimes we're able to help shape a certain class of shares. Sometimes we can get beneficial terms by doing so. We can help shape some of the reporting early on of how we think it is the most attractive and appropriate for a broader investor base, but for the most part is getting terms that are attractive for our clients, all of which go to our clients.
Nick Flores (30:17):
The only thing I would add is in some of these cases, our clients are quite happy with the fact that more capital has come in behind them to support whatever the cause or impact theme is that motivated them to allocate in the first place. So for us to be able to say, fund A, B, C, we were one of the first, if not the first US-based family offices to allocate and now this fund is a hundred million dollars, that's that much more capital that's going to an issue that motivated them to invest in the first place.
Jason Jacobs (30:51):
When it comes to picking managers and picking strategies, do you find that you have clear criteria that are unflappable from client to client and sector to sector, or is it truly bespoke where you have a different set of criteria with different clients that you work with or different sectors or different stages?
Mark Berryman (31:14):
Every client has a bespoke portfolio to use that word. So every client has your own unique portfolio, but in terms of manager and fund selection, our job is to offer diversified offerings by sector and impact theme across asset classes, but also partner, right? We don't just pick but partner with ones that we think are most likely to deliver on their financial target and their impact target in that respective domain. That is our objective. If it's a specific engagement to do more in a certain area, what's unique? How are these complimentary to each other? The only time it gets different is you look at things differently by asset class, you're going to ask different questions for... Even within an asset class, your questions are going to be different in terms of a seed investor compared to a late stage investor, but otherwise it will follow that same process.
Nick Flores (32:10):
From the client perspective, this is where the integration between the advisory side and the investments team is really important. So looking ahead to 2024, I sort of know not only how much capital we need to allocate within, again, these drawdown funds and write real assets and private investments, but I can look at our client's portfolios and say we're a little light on, just pick something out. Seed stage, climate tech or renewable energy infrastructure. I'm not saying we're light on those now, but just as an example and Mark and I and really the advisory and investments team can kind of work very again synergistically to make sure he's curating that pipeline, going out and finding sort of the best in class or whomever may fit some of those client portfolio needs.
(32:55):
Then I think this gets to your point maybe a little more directly Jason, each advisor sort of sizes up or down, what those allocations are. So again, for say this New York based family that's maybe a little bit more risk tolerant, we can dial up the exposure to that seed stage or maybe even deep tech climate focused fund in 2024, whereas it may be a smaller, almost like a satellite allocation in a more traditional impact portfolio.
Jason Jacobs (33:24):
When it comes to tracking, I get that if you're focused on, I mean if you take climate, you're focused strictly on GHGs and that's your carbon pumped into the atmosphere and then that's your north star, then that's something that's quite trackable. If you're focused on equity and inclusion as an example, there's ways to track that in a space like climate that's not really a vertical but it's kind of across every vertical. Does that then suggest maybe that you have a preference for specialists within that so that there can be tracking? I mean it's something that we struggle with as a generalist across climate is that there isn't really a uniform metric that we can look at across the portfolio that wouldn't be stifling of the kind of impact we're actually stand out to have or creating perverse incentives.
Mark Berryman (34:13):
I'll take that one Nick. It's a combination of both. We in terms of climate venture capital, an area where we put together a great roster of partners is we have both. We have the specialists and we have those that cut across different sectors within climate technology. So we have one that focuses on energy transition, one that focuses on industrials in the built environment, one that may be more focused on circularity and food. That being said, we like ones that are also generalists. I used to find myself saying, and maybe I'm wrong when I think about this, but I often like specialization earlier stage and as you get way, way later in the series C, series D, that is a different type of underwriting. I mean that is really thinking about the exit, thinking about being able to put debt on if need be. Not that we'd like debt, but thinking about M&A, things that are applicable across different impact themes within climate tech, if that makes sense.
(35:11):
Like the disciplines in terms of thinking about a series D investment because you're going to make an acquisition, it doesn't need to necessarily be specific to energy transition or mobility. I mean you want to think about who the buyers could be and all of that, but I don't think it really matters and some VCs say, hey, we don't think there should be a fund specialized in food only because risky and others like you need to understand this space in order to make the best investments in that space. I see both sides and we've done a little bit of both.
Nick Flores (35:45):
The only other thing I would add to that from a client perspective is once again, we work hard to manage expectations so that to your point Jason, they're not expecting across every single impact oriented allocation they've made there to be a silver bullet metric that is comparable and tracks exactly how they're all doing. I think they recognize that impact measurement management and reporting is still very early. It's why folks like Mark are on a variety of different boards with groups like Tide Line that are focusing on auditability and standardization.
(36:20):
We're trying to build that field as much as we can because it's important to us and we think it's important to this industry. At the same time, most of our clients have a flexibility and they fully understand. To your point Jason, and having looked at your fund, not every one of those underlying portfolio companies is going to be even capable of tracking say an impact metric that it rolls up across your entire portfolio and that's fine. I think it's just important that there's a commitment there. There's an authenticity amongst the managers to report something so that we can continue to track their progress over time.
Mark Berryman (36:57):
Two examples would be an earlier stage fund that we just brought onto the platform, really excited about it. They're going to be an SFDR 9, it's a climate fund and every company must have a GHG abatement in metric hands down, so all 25 companies. Then if it isn't a certain vertical in ag or food or in energy, there needs to be an added metric specific to that sector. That is one, and they make projections. Now, they can't necessarily make projections on the secondary one, but every company actually has to have a GHG projection on an annual basis.
(37:31):
The same goes for a later stage fund that we brought onto the platform about 18 months ago. Every investment has to have that same metric and they make annual projections and monitor it. It's harder than it sounds to do, but we're seeing more do this and we hope to see more going forward, the ability to make those projections. Now, if you are a generalist impact fund and there's some great ones out there that hit on healthcare, that hit on workforce, that hit on climate, a little more challenging from the outset, but there's ways that you can work with them.
Jason Jacobs (38:02):
When you look at what's happening in the climate tech landscape in private, so early stage venture capital, growth equity, you can layer in some of what's happening with the debt and the infrastructure and build outs and [inaudible 00:38:17]. What are you most excited about and also what are you worried about as you look at what's happening across the landscape?
Mark Berryman (38:23):
Nick, if you don't mind, I'll take this first and I'll take the what I'm worried about first and that would be the fast-paced. Let's all get into this attractive deal on climate tech. That started to emerge at the end of 2020, that floated all the way through 2022 and you saw just dozens and dozens of funds being launched every year between 2020 and 2022 and 50 or 60 funds a year, some small, some large, and many of those funds had this kind of FOMO of we better be in that deal right now because everyone else wants to be in it. You just saw deals being done like this. Some actors a little more aggressive than others, others a little more disciplined, and as a result, some of our partners are probably sitting on some positions that may have been overvalued and they may have overpaid and they're going to need cash soon and how is that going to play out?
(39:21):
Are there going to be really funky term sheets happening? Are there going to be down rounds and funky convertibles? I think that is what I'm worried about, seeing a little bit of it, what's to come is still unclear. What I am excited about are some other groups that were very disciplined and waited or are lucky and their fundraising just ended and they're sitting on nice dry powder and I think the next kind of 12 to 18 months of a vintage, it's going to be very good in terms of some of these funds, mainly in the A to series D on the climate tech side because they're going to be a little bit more disciplined.
(39:59):
They might get really attractive investments of great companies at a solid valuation. Now I do think the deal flow will be slower. We're not going to see the number of deals that are being done by a fund every year in the eight to 12, in some cases. We're going to see fewer. You're going to see two to four done a year depending on that fund size, and that's okay. So as long as we manage our own expectations and the same on behalf of our clients. So I think there's still quite a bit of excitement in climate venture capital, Jason, and a lot of great things to come.
Nick Flores (40:34):
I'll just second that and simply say just high level qualitatively, having just attended a variety of climate week events in not only New York but Chicago, the caliber of people coming into our space, the level of intellect and rigor, so above and beyond just the amount of capital, it's really the human capital, the momentum that is clearly building in the sense of urgency that so many of these groups and people and investors are working with. That's what I'm most excited about. Yes, to Mark's point and spoken like a true risk manager, Mark, starting out with what you're worried about first, but I think it's a good thing. Obviously we never want to have too much hype or FOMO driving deals because that's when you get extraordinary valuations and maybe a mispricing, but I am encouraged by the amount of attention that this space is getting. I mean look no further than MCJ and the amount of listeners that you all have is proof positive of the fact that people care about this and to me that's a good thing.
Jason Jacobs (41:35):
You mentioned before, deep tech and how that's an area that you're now considering. What is driving you to consider looking at deep tech? Why now and where are you in the evaluation process? How are you thinking about it?
Mark Berryman (41:50):
Nick, I'll go first. I think when a lot of the great groups that were on fund three today or fund four were being launched in 2015, that was kind of an era where we saw a lot of new really good climate venture capital funds being formed, really smart people who had experience, many of them lived, died and survived the clean tech 1.0 period in 2008 to 2010. There were a lot of lessons learned there. One was a lot of mistakes in deep tech and you also saw people investing things that weren't venture but more like investing in real assets with a venture pocket. As a result, you saw less deep tech funds being launched earlier on, in that 2016 or at least we did more things on light tech, soft tech, a lot of software, and I think given all of the momentum with the Inflation Reduction Act and with all of the movement and mobility energy transition and industrials to be much cleaner, you are going to need deep tech.
(42:55):
There are experts out there who have realized that and you're now seeing more funds being launched over the last few years with very smart bull venture capitalists, engineers, scientists who are investing in some of the most disruptive opportunities available, and I do believe you're going to see more of a mix with those or even more funds, and I'm sure you're aware of them that are really deep tech and there's some excitement there. Of course, there's a lot of risk as well. They require more CapEx and if the more failures there, you lose more money. All the things you guys know very, very well, but it is an important slice of that pizza going forward for a much cleaner future when we think about all the various industries that we're involved in, and I think Nick has this one client that he is kind of hit on where I think being catalytic and supporting some of these disruptive technologies in climate technology are going to be things that we will be looking at in this kind of next, I would say phase.
Nick Flores (43:53):
Yep, Mark hit that nail on the head. I was just going to say there's more appetite Jason, right? Clients now recognize that we can do this especially in climate across the board and they're just pushing us to be a little bit more risk tolerant and just a little bit more broad and deep. So not just looking at the tried and true, which is great, many of those opportunities are now almost kind of considered conventional and so there's appetite and they're pushing us to go farther.
Jason Jacobs (44:21):
One thing that is talked about a lot these days in climate tech circles is I still don't know if it's called FOAK or FOAK because I hear people pronounce it different ways, but first of a kind when you have proven things out at the bench level and it's time to build the first plant and how to fund it, and there's kind of this gap that you hear a lot about between equity and debt because it's too expensive to use equity and too risky for debt. How are you thinking about that area? How are you thinking about project finance in general and is that a place where Caprock and your clients are playing and or will play directionally?
Mark Berryman (45:00):
Nick, I'll take this one first. We haven't done on the impact side early, early stage venture debt funds in climate tech, I think we still see most of that capital being seed venture capital and over the last 12 months we brought on more seed climate tech funds than we've had in the past, specifically to invest in these FOAC first of a kind technologies. So I think we're pretty darn happy with the groups that we have to invest in those. The problem there often is the entrepreneur's dilemma of dilution and therefore wanting to take venture debt as opposed to diluting themselves with VC capital. But to date, we haven't done a kind of early seed stage venture debt fund. I think we're mainly backing the seed VC, so we think we can help them get to that next level.
(45:51):
In terms of project finance, absolutely this fits in our real assets category and we continue to bring on really great groups that focus in on that area, either through equity or debt. We have a group that backs storage developers, solar and storage developers and wind developers through debt. These are mainly later stage, so not that FOAC area, but the debt is just very critical for where they are in terms of their growth and therefore we've backed this one group for now seven years, that really focuses on debt for climate development and mainly energy.
Nick Flores (46:30):
Just the level of sophistication across our space knowing that there are groups like Prime Coalition who have identified the need here and have a pretty deep bench of foundations who are willing to put up that sort of either first loss capital or risk tolerant capital to then catalyze other more mainstream or finance first firms. I think is testament to the point I was making earlier around that just the energy and momentum that's going into this space and recognizing where the capital markets maybe are ill-equipped right now to service these FOAC opportunities. But knowing full well that groups like ours are more than happy to come along and continue to support their growth.
Mark Berryman (47:10):
It has been a few years, but I would think where I see more of this early stage venture debt playing out, I see it more in emerging markets where you have a lot of DFI capital, doing really innovative debt funds for early stage social enterprise and emerging markets, many of which are our climate. I just don't see it as much in the US.
Jason Jacobs (47:31):
I know we're starting to run up on time, so one of the last questions I'll try to sneak in here is when you look at the makeup of the LP basis of the managers that you have been backing in climate, how has that makeup been evolving over time? How would you like to see it evolve directionally and what are the barriers that are holding it back?
Mark Berryman (47:53):
Nick probably has a better perspective. My only thing is I'll say is it's just going to be normal. These LPs are going to have climate investments in their portfolio across all these asset classes that we had on, why? Because it's probably one of the smartest investment opportunities right now in the foreseeable future, and by not having it, they're missing out on opportunities.
Nick Flores (48:17):
I would double down on that point by revisiting the point that I made earlier that of our 300 or so clients, 80% hold an impact investment. We've said it before Mark and I even got to Caprock, our firm has always believed that impact investing will just one day be investing. We think that these are smart investments and I think as more managers to your point come on board and also similarly recognize the urgency and importance and opportunity in this space, it makes our jobs in some ways that much easier because now we have multiple funds from which to choose, and at the same time we know we're going to continue to get some of those more niche ones for the clients who have some really interesting and personalized areas of interest.
Jason Jacobs (49:04):
When you think about the climate tech capital stack, are there types of opportunities that you wish were coming across your desk that you have not been seeing as much of?
Mark Berryman (49:14):
Nick, you go first because you get all the client demands and you're always yelling at us to find something or what have we got coming up on this one?
Nick Flores (49:21):
Since we're coming up on time, I'll just be positive and say that Mark and his team are finding opportunities more and more that keep our clients happy. I alluded to this earlier. I think the one tension for us is going to be to continue to keep those clients happy that are expecting more impact first opportunities. I think they're really intriguing and really interesting, but there's a reason why we allocate the way that we do. I think, Jason, you would agree, we're going to need the capital markets to scale these solutions. That doesn't mean we can't layer in or feather in some opportunities that are maybe a little bit more impact forward. I think the level of sophistication in those opportunities, Prime Coalition, Zola Ventures, maybe not withstanding, still just isn't quite there yet. So as more of those things come to market, I think it'll be fun to look at them. But in the meantime, I think the growth of our space, put it this way, I don't think there's a single Caprock client who's sitting there wishing we were going deeper in any particular vertical or sub-vertical.
Mark Berryman (50:24):
The only thing I would add is, again, we have this great roster now in the climate venture capital space from sea to late stage. We also like to be sticky with our partners who are delivering on their targets and returns and are great communicators. So you'll often see us wanting to back them again while always leaving the door open for innovations or various itches that need to be scratched. If it's a very specific impact theme within climate, our eye is always open for those that we think makes sense for our clients. I think the broader universe could use more top tier pure climate, real assets, opportunities in general. There's a great group out there and various impact themes across the sub-asset classes, natural resources and forestry and the like and energy and transportation. I do believe we could always benefit for more in those various areas.
Jason Jacobs (51:20):
So I'll just ask each of you to wrap up two questions. One is for any listeners out there that are inspired by your work, who do you want to hear from, if anybody? Then two, just any parting words. So Nick, why don't you go first?
Nick Flores (51:31):
One of the reasons I joined Caprock was because of its longstanding commitment to field building. The reason I bring that up is because we have four years, had a number of conversations with a number and wide range of investors who just wanted to understand what this impact investing space was all about. So for those that want to continue to learn, we're always happy to hear from them and help however we can. I think we now have resoundingly demonstrated that one [inaudible 00:52:01] not accept a financial return sacrifice in order to invest with impact intentionality. So for those who want to learn more about how we're doing it, not saying we've figured it all out and we're the only answer or advisor in town, but we certainly have, as people have hopefully learned on this podcast some perspective and a fair amount of experience. We're always happy to talk to investors who want to learn more and perhaps even execute on some of these ideas.
Jason Jacobs (52:27):
Thanks, Nick. What about you, Mark?
Mark Berryman (52:29):
I learn all the time because our fund manager partners are experts in their domain. I am not in any of their domains and I'm always humbled by how much we can continue to learn and share that knowledge with our clients because there's still so much that I'm learning every day, particularly when it comes to climate investing, and that excites me that the ability to continue to learn to then synthesize that and share it with our clients.
Jason Jacobs (52:57):
Awesome. Well, thanks so much for coming on the show guys, and thanks for all the work that you do.
Nick Flores (53:01):
Thanks, Jason.
Mark Berryman (53:01):
Thank you, Jason.
Jason Jacobs (53:03):
Thanks again for joining us on My Climate Journey podcast.
Cody Simms (53:07):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (53:17):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. If you have a guest suggestion, let us know that via Twitter at MCJpod.
Yin lu (53:30):
For weekly climate op-eds, jobs, community events, and investment announcements from our MCJ venture funds. Be sure to subscribe to our newsletter on our website.
Cody Simms (53:39):
Thanks and see you next episode.
