Full Consequence Investing with Hall Capital
This episode is part of our new Capital Series hosted by MCJ partner, Jason Jacobs. This series explores a diverse range of capital sources and the individuals who drive them. From family offices and institutional LPs to private equity, government funding, and more, we take a deep dive into the world of capital and its critical role in driving innovation and progress.
Mohammad Barkeshli is the Vice President of Full Consequence Investing at Hall Capital Partners. Hall Capital Partners has a singular focus on building and managing large investment portfolios. Their clients include families, endowments, and foundations with over $40 billion under management.
Mohammad focuses on the firm's impact investing efforts which they’ve coined Full Consequence Investing or FCI. He's responsible for research, identification, due diligence, and ongoing monitoring of investments across asset classes.
Jason and Mohammad have a great discussion in this episode about Hall Capital's strategic approach, where it fits in the climate tech and capital stack, the criteria they use when making investment decisions, what they're hearing from their clients now, and how that's evolved.
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Mohammad Barkeshli / Hall Capital
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Episode recorded on April 5, 2023.
In this episode, we cover:
[3:00] The benefits of increasing transparency across the capital stack and why Mohammad agreed to come on the show
[4:35] An overview of Hall Capital
[6:48] The firm’s approach known as Full Consequence Investing (FCI)
[8:25] The average asset class for its clients
[11:38] Hall Capital’s different investment vehicles
[16:26] How the firm’s investing teams are divided across asset classes
[21:00] Mohammad’s background
[22:25] Where FCI fits into Hall Capital’s story and brand
[28:06] FCI as a key diligence effort for the firm’s investment strategy
[29:38] What falls within FCI and how Hall Capital evaluates opportunities across categories
[34:00] The role of ESG across industries and investments
[36:00] Hall Capital’s process for working with clients who are interested in building a portfolio that’s geared toward climate solutions
[42:46] Balancing investments for profit, impact, and the public good
[46:23] Limitations and challenges with time horizons
[47:57] How Mohammad thinks about team and track record
[52:55] Concessionary impact investments
[1:00:57] Hall Capital’s involvement with philanthropic capital
[1:04:36] Areas Mohammad would like to improve for his clients and their investments
[1:06:51] Who Hall Capital would like to hear from and how people can help
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Jason Jacobs (00:00:00):
Today on My Climate Journey Capital Series, our guest is Mohammad Barkeshli, Vice President of Full Consequence Investing at Hall Capital Partners. Hall Capital Partners has a singular focus of building and managing large investment portfolios. Their clients are families, endowments, and foundations. In fact, they've got about 130 clients and over 40 billion under management. Now, Mohammad focuses on the firm's impact investing efforts, which they call Full Consequence Investing. He's responsible for research, identification, due diligence, and ongoing monitoring of investments across asset classes. We have a great discussion in this episode about Hall Capital's approach, where it fits in the climate tech capital stack, the criteria they use when they make investment decisions, what they're hearing from their families and clients now, and how that's evolved over time.
(00:00:58):
And also what Mohammad thinks some changes could be that could help accelerate progress and see more capital going into Full Consequence Investing in other areas of impact. But first.
Cody Simms (00:01:11):
I'm Cody Simms.
Yin Lu (00:01:12):
I'm Yin Lu.
Jason Jacobs (00:01:14):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu (00:01:20):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (00:01:25):
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 (00:01:38):
Okay, Mohammad Barkeshli, welcome to the show.
Mohammad Barkeshli (00:01:41):
Thank You for having me. Longtime listener, first time caller as they say.
Jason Jacobs (00:01:45):
Well, thanks for coming. And it's funny, obviously we've done hundreds of episodes on this pod, but the bulk of them have been, well, super wide range. But what we haven't done a lot of is LPs that are allocating capital to climate. And part of that is because LPs in general, it's kind of a black box. A lot of them aren't out there much talking about their work. And Hall Capital's a good example of a really important firm in the space that most of our listeners have probably never heard of. I'm really grateful that you're making the time to come on. Personally I have a ton of questions and a lot to learn, and I think there's a lot of others that are in my shoes as well. So you're doing us a great service and hopefully we can use service and enable more people to get to know the great work that you're doing as well.
Mohammad Barkeshli (00:02:41):
Great. I agree. I think more transparency from the LP community helps everyone downstream. So that's the idea.
Jason Jacobs (00:02:50):
Before we jump in, why don't you think more LPs are out talking publicly about what they do, and then conversely, why did you say yes to coming on this show?
Mohammad Barkeshli (00:03:01):
I don't know if I can speak for the whole LP community. I think from our seat as an outsourced chief investment office, our business is one that's really bought and not sold. You can't really sell people on the idea of a diversified multi-asset class portfolio if they don't want it. So we're not trying to, there's typically few marketing benefits to talking publicly. We're pretty engaged and involved with other LPs in our own community, and that's where we see most of our impact. When we're talking about climate related strategies or investment opportunities, it just hasn't been something where being public facing has been necessary.
(00:03:47):
But I think in this emerging space, as I mentioned, having more transparency about how LPs think and evaluate investment strategies and look at the underlying businesses that those strategies hold and invest in is probably just helpful for everybody. This is an ecosystem that's collaborative. And so part of the reason I said yes here was obviously really respect the work you all are doing on this journey, but also wanted to shed some light on some of our thinking for this community at large.
Jason Jacobs (00:04:21):
Awesome. Well, I'm glad you did. So for starters, maybe just talk a bit about Hall Capital, the firm, what you do, and of course your role within the firm as well, just so that we give some context to listeners.
Mohammad Barkeshli (00:04:35):
Sure. We're a $40 billion outsource chief investment office for high net worth families and some endowments and foundations. Katie Hall started this firm I think almost 30 years ago now with the backing of a handful of prominent San Francisco families, but it's now grown to over 100, 130 clients, and we're known for our customized investment strategies and innovative solutions that we design to help clients achieve financial goals. We don't have a one size fits all allocation or model portfolio, but we build customized multi-asset class portfolios for each of our clients or each pool of capital within each client relationship. It's really a comprehensive relationship that we have with our clients. We provide a range of advisory services, financial planning, tax planning, estate planning, but we don't really do any direct investing. We're typically investing our clients capital across funds as limited partners.
(00:05:40):
So for me it's a really great window seat into the investment management universe, where we evaluate, select, and ultimately allocate to managers with various strategies across fixed income, public equities, hedge funds, private credit, as well as private equity venture real estate. Really, you name it, we look at it and we allocate to it. So going back almost I think exactly 10 years ago when a next leg of impact investing was taking hold, and there was a lot of discussion about impact investing, if you recall, socially responsible investing, philanthropic investing, divestment campaigns, et cetera. I was an analyst back then, but we had a lot of frustration with the way people were using these terms because these things meant very different things to different people. And I remember being in meetings with either a client or investment manager where you've mentioned the word impact investing, and you get the question of, since what are you not interested in making money?
(00:06:43):
We had a lot of frustration with that, and we ended up devising our own terminology and methodology, which we call Full Consequence Investing. Not that the world needs more jargon in this space, but it was a way for us to talk about the effort to capture what people were trying to do or what the goals of ESG investing was, which was to really incorporate much more explicitly and holistically other factors into investment decision making processes. And we wanted to talk about that. And what we were saying by Full Consequence Investing, which internally we call FCI for short, was that if investors are really taking into account all of the consequences of a given investment, thinking deeply about sustainable use of capital, human capital, financial capital, physical capital, then you actually reach, quote unquote, the right answer from the ESG perspective regardless of what you call it.
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We have a spectrum as we look at a multi-asset class portfolio of investors where ESG factors or FCI factors are central to their investment thesis and what they're doing and where it's one of many factors more from a risk mitigation perspective. So that's what I focus full time on. And in terms of what that translates to, its investment opportunities across asset classes that have to do with climate change, that have to do with education access, healthcare and financial inclusion, affordable housing, all of the social environmental challenges that are longer term.
Jason Jacobs (00:08:22):
Got it. And when it comes to your client base, is there a minimum threshold of assets that it makes sense to work with a firm like Hall Capital? Because I tend to ask questions and choose for whatever reason, and this is probably just more of a general portfolio construction question, but at what size of assets does it make sense to go beyond the basics of just stocks and bonds? So alternative assets for example, is there a threshold below which you should have zero alternative assets unless it's a hobby versus an investment?
Mohammad Barkeshli (00:09:01):
Those two questions are probably more interrelated than they sound. And the second one is hard to answer. In terms of the size of our clients, for our business to make sense, and this relates to your second question. For us to be able to build a truly diversified multi-asset class portfolio, the size of capital should probably be above 100 million. So if you look at, we have about 130 clients across $40 billion. That gets you a sense for the average size of that client. Obviously we have some that are way larger and some that are maybe a little smaller than the average. But it relates to your second question in terms of where can you actually build a truly diversified portfolio? And we think that's at that level. And oh, by the way, different pools within our client relationships, if this is a grandchildren's trust, you might not have the size of assets to do alternatives. And that's okay.
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I would say a factor that goes into whether alternatives or private allocation, for example, is prudent for a given portfolio, has to do with how much a client or an individual within a client relationship needs in life expenses over a foreseeable future. And that usually dictates a cash and fixed income allocation, and that's usually a dollar amount, not a percentage. And that is a constraint around which we have to work. If we have X amount in cash and fixed income, how much liquidity trade-offs can we afford in this portfolio? How much do we want to go beyond that in alternative asset classes?
Jason Jacobs (00:10:58):
And given that the alternative asset landscape is, well, maybe it's even broader than alternative asset, there's so many different funky places to put capital. There's like-
Mohammad Barkeshli (00:11:11):
That's what makes my job interesting.
Jason Jacobs (00:11:14):
I wouldn't even know of even a little sliver of all the different places. If you look at the landscape of investment firms, do people generally have the same buckets for the same asset sizes or does it vary greatly across firms? And what are the key buckets for Hall? And I guess the asterisk is, you already said that everything's custom, but is it really custom? Is it custom within the same typical buckets or is it really custom where it's like all over the map?
Mohammad Barkeshli (00:11:48):
I don't think it's all over the map. The typical buckets that we're allocating to in terms of asset classes are fixed income, public equities, hedge funds, which could be credit oriented or credit and equity as well as private credit, which sometimes we call hybrid, as well as private equity, venture capital, private real estate, and things on the margin that might be crossovers between these asset classes. Within each asset class we tend to be quite concentrated in terms of the set of relationships with investment managers that we have. And so we're not keen on diligencing and approving an investment strategy that then ends up going in one small pool within our AUM. That's just not a good use of anyone's time and resources.
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And so maybe this is getting to your second question, but we tend to think about those asset classes and then think about the set of investment manager relationships that comprise our options within those asset classes. And then where it's really customized is the allocation of a client to each of those asset classes or among the option set of investment managers within each asset class.
Jason Jacobs (00:13:17):
I think what I'm hearing from you is that you take the diligence part of that process very seriously, and so to put the Hall Capital stamp on it or whatever the internal lingo that you use is a big deal and really means something. And since it takes a lot of work to do it, you don't want to do it unless you can put real capital to work across your client base. And then for each client, if they have their own relationship or their own fund or whatever, their brother-in-law started something, then maybe there's exceptions that maybe don't go through your process, but if it goes through your process, you want to utilize it broadly. And then it's the allocation that changes more than the fund, unless it's an extenuating circumstance that I just mentioned like there's some relationship or other reason why it doesn't make sense for that client. Is that right?
Mohammad Barkeshli (00:14:14):
That's correct. Our investment research function, which looks at the universe of investment managers and evaluates them, does diligence and selects who we want to partner with. That's pretty centralized, where you get a lot of customization, as you say, is in the allocations to those managers across the different asset class buckets. And we start with a place of we don't have to be everywhere or do anything. It's really a matter of when we're looking at opportunity, really thinking through the investment opportunity set, what is driving it, and then looking at thinking about whether we think that opportunity set is something that's available sustainably over time or if it's more of a trade for this year and next year. And then thinking through the people, the players involved, who's doing it well, what's the evidence of success that they're doing it well?
(00:15:12):
These are investment practices, investment discipline, track record history, all of the good stuff that you've heard about. But it's also about understanding the organization. So what makes an organization tick? How are people compensated? And that's really part of our judgment of the probability that a team might be successful executing on an investment opportunity. And we source these things everywhere and any way we can cast a pretty white net. But we're also, we have a reputation now going back 30 years, so we're pretty well known at this point and we get a lot of inbound. I don't know if I have the numbers for this last year, but for the year before, I think we received close to 1,000 sets of new materials from new funds excluding our existing relationships.
(00:16:08):
We get to really look at everything and then to your point, look at who we want to partner with, where do we want to make an incremental investment? And then our portfolio managers for a given client decide where they want to allocate from a given balance sheet.
Jason Jacobs (00:16:24):
Now you said that that investment research function is centralized. You also said that there's all these different types of vehicles from real estate to hedge funds to PE and venture capital and public equities, and I probably missed some. So are the members of that investment research team generalists that can evaluate all of these asset classes? Or do you have specific people assigned to specific asset classes that are experts in those areas? And since I ask questions in two's, I'm going to ask you the same thing about the full consequence side and your work and how that interrelate.
Mohammad Barkeshli (00:17:09):
We have I think a 20% investment research team. We divide that team or group across different asset class teams. So exactly to your point, we have a public equities team, a private equity and venture team, a real estate and real assets team, and what we call an absolute return and credit team, which covers fixed income to private credit to hedge funds. And then we have two smaller teams that are cross asset class and multidisciplinary. One is a group that does a lot of our macro work, so there's an oil price shock, there's a war in Ukraine, that's not a private equity issue, that's not a public equities issue, but it has implications for all of the above, so you need a cross disciplinary group to look at that and try to translate that. And the other one is Full Consequence Investing. That's my team.
(00:18:05):
So we are cross asset class multidisciplinary, and the idea behind that is not to say that all of this ESG work or climate related work should be siloed in this one corner and they take care of it and everyone else does business as usual. No, everyone in each asset class team is fluent in some of our diligence in Full Consequence Investing. But we think there's value in having someone who's bilingual in both financial investment diligence as well as impact and ESG diligence who can help teams compare opportunities across asset classes and compare best practices. When you're looking at a climate related private equity strategy versus a climate related private credit strategy, you want to be able to translate some of those learnings across asset classes. And that's what I help with and what our team helps with.
Jason Jacobs (00:19:02):
Now, this macro work and the FCI team, see, I already know the internal Hall lingo, but these teams, are they people that come out of the asset classes or what backgrounds would one want for the macro team and for the FCI team? And to be honest, I don't even have a guess. I'm really curious the answer.
Mohammad Barkeshli (00:19:24):
Yeah, no, it's a good question and different organizations do it differently. We are pretty committed to having this be integrated across all of our investment process. The idea that there will be a silo here doesn't sit well with us. So the head of our macro team, which we call cross asset research, is also the co-head of our public equities team. So there's synergies between those, and you can imagine why that might make sense given the liquidity and daily nature of both efforts. Lizzie Fisher Marshall who heads up my team is also the co-head of private equity and venture, and that is historically because a lot of the reps we get in terms of looking at opportunities that have to do with social or environmental opportunity sets come from early stage venture or private equity.
(00:20:24):
That's because those asset classes tend to have longer time horizons, which match the time horizons of these social and environmental challenges. They tend to have better control, more control over the businesses that they invest in with a more partnership approach that's inherently engagement focused. And so it just made sense to have that overlap. I worked in different parts of the organizations at Hall. I was actually part of the portfolio management group early on when I started, then switched over to our investment research. I worked on that macro team, the first iteration of it. And so got to know different asset classes throughout that. And then when I went off to get my MBA at Stanford and did some direct investing work, I worked in private credit myself at Community Investment Management with a focus on financial inclusion and impact.
(00:21:17):
And I worked on private infrastructure investing with mostly looking at transportation and water infrastructure. And I worked at a sovereign wealth fund looking at sustainability related businesses. I think having the right combination of people working on this that doesn't become this silo, we're only fluent in ESG speak and don't really speak other investment related topics could be harmful, and we're trying to avoid that.
Jason Jacobs (00:21:49):
Now, when you think about your existing client base and directionally where you aspire to go as a firm and you also think about how you want prospective clients to think about you and Hall, where does, I don't know whether to use the word impact or the proprietary impact word, but I'll say FCI, where does that fit into the Hall Capital story and brand?
Mohammad Barkeshli (00:22:28):
It's definitely part of our, we view it as part of our secret sauce. And everything we do, every investment that we approve has to have at least a table stakes amount of ESG integration. This is in line with our philosophy why we came up with the terminology of Full Consequence Investing. The idea is that if you're a long-term fundamental investor, let's say you're investing in industrials businesses in Europe, you're invested in a cement plant or a steel plant and you're not thinking about the risks coming from decarbonization and energy transition and the technology that's revolutionizing that space, you're probably just not a good investor. You can do that at least from a risk mitigation perspective and you know can also use that as a lens to identify opportunities.
(00:23:28):
The parallel I sometimes draw is with the Moniker technology investing, every investment job is also a technology investment job. If you're invested in any business and you're not thinking about at least the risks arising from competing technologies, you're just not doing your job that well. But you can also be a technology expert in the same way that you can be an environmental climate expert, and say, hey, I have some views about where this decarbonization trend is going. I have some views about the shape of the energy transition over the coming decades, and I can invest behind that, not just from a risk mitigation perspective, but as a way and as a lens to identify compelling opportunities. So in my end state, and as I think about Hall in the future, FCI is not something that you would even have to name. It just becomes part of good, long-term fundamental investing.
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And I think that's always been our philosophy. I think as there is wealth transition coming up over the next decades as a younger generation of asset owners come into their own and focus more on some of these risks as well as opportunities, this is going to become only more relevant despite the emerging culture wars around it. But I think we view it as fully integrated in how we invest and how a long-term investor should view their portfolio.
Jason Jacobs (00:24:58):
You mentioned that within Full Consequence, there are some different impact lanes. When you look at this portfolio of, what did you say? 130-
Mohammad Barkeshli (00:25:10):
Clients.
Jason Jacobs (00:25:10):
.... clients. Does FCI get involved in every one of them?Okay, so every one of them.
Mohammad Barkeshli (00:25:20):
If I find a compelling private infrastructure opportunity that's looking at infrastructure transactions that are related to the energy transition and decarbonization, I underwrite that as an investment opportunity. I kick the tires on making sure they're thoughtful on impact, thoughtful on climate assessment, environmental impact assessment, all of that. And it might be what we call FCI central, as in the FCI factors that are central to the management team's investment pieces. I underwrite that as an investment that is compelling on its own. And so we would allocate to that opportunity across all of our clients regardless of whether they have a climate passion or not. And so sizing might differ depending on that passion, back to the point of where customization matters.
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But it's rare where we make an investment that would be very relevant to our Full Consequence Investing work, but only allocate to it from a subset of our clients. There is definitely degrees. I want to be transparent about that, especially when you get to other, maybe climate is not a great example because it really is pervasive across every aspect of life. But when you look at education, for example, investments in education or affordable housing, that might be sized differently or go in certain portfolios where the asset owner has a more explicit focus on that type of work and opportunity.
Yin Lu (00:26:58):
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.
(00:27:32):
Many early stage investments have been made as well as ongoing events and programming, like monthly women and 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 (00:28:00):
So should I think of FCI as a category of products that you could offer to clients or is it a key diligence box, if you will, for any product that is offered to Hall Capital clients or is it both or either?
Mohammad Barkeshli (00:28:24):
It's definitely a key diligence effort across all of our diligence efforts, and it's one where we've identified that it would be helpful to have dedicated resources, because it overlaps with so many other things that aren't necessarily in the core toolkit of a financial diligence effort. And so we don't think about it as a separate product category. We don't really think about our work as products even. We're partners with our clients to try to solve their financial goals, and we think this is a key aspect of being and executing a successful investment strategy.
Jason Jacobs (00:29:13):
And if I wanted to double click on FCI and try to immerse myself and listeners in what it means to be FCI and the lens through which Hall Capital evaluates these investments from an FCI standpoint, can you take a stab at that? Just explaining what falls within FCI and how you evaluate these opportunities across categories?
Mohammad Barkeshli (00:29:52):
Yes. So as I mentioned, there's a spectrum when we think about these topics. There are investment strategies where let's say climate considerations and climate risk is one of many factors considered during the risk diligence of a given investment. And so let's say you are a private equity shop focused on financials and you invest in businesses that sell to banks or are related to the credit landscape and lending landscape, or you invest in insurance businesses. We make sure that your investment process as that investment team incorporates a thoughtful level of, call it ESG diligence, understanding what are the best practices when you look at a debt collecting business? How do you make sure that you're not running into some externality risk, you're not running into some regulatory risk, you're not running into governance risks?
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How do you make sure that if you're invested in a bank, that that bank is not in an outsized way financing emissions and might run into risks that arise from either regulatory or changing landscapes or the stranded assets of those businesses that have being financed? That's risk mitigation. And we help ask those questions and conduct that diligence. That's one end of the spectrum. And not that it's binary, it's really a continuum, but other end of the spectrum is, no, I invest in FinTech businesses, let's say keep with the financials. There's maybe a venture capital team that invests in FinTech businesses that are really designed to serve underserved low income communities or provide financial access to small businesses that are otherwise ill served by traditional banks. Or back to climate, I'm a venture capital group that invests in innovative carbon capture technologies, right? That's really my mandate. I look at mitigation, adaptation and removal if it's a broader mandate.
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But that's not risk mitigation, that's identification of investment opportunities through that lens that has to do with the same underlying toolkit, which relates to FCI. So double clicking on FCI to your question, it's really making sure that all of our investment managers, regardless of their mandates and investment strategies, are incorporating a thoughtful level of risk mitigation when it comes to climate considerations or social challenges, labor issues, regulatory risk, all of the above. But on the other end of the spectrum, managers that are really pursuing explicit impact, be it in the form of emissions reductions or in the form of better outcomes for healthcare and education, while at the same time pursuing financial returns.
Jason Jacobs (00:33:13):
I'm curious about the decision to go with this branded definition of impact. Does that imply that there are some distinct differences between the Hall Capital FCI approach and say traditional ESG?
Mohammad Barkeshli (00:33:34):
Well, one is under our control and we can define what we're talking about. And one is subject to the ether. We ran into that 10 years ago, and I think we're running into it again now with the, whatever you call it, ESG backlash, which by the way I think is to an extent healthy. But we wanted to be able to really name what the effort was and what people were trying to do when we're talking about ESG investing, which is again, to incorporate much more explicitly and holistically these other factors, externalities and social environmental challenges into the investment decision making process. And the ESG debate, call it FCI, call it ESG, call it responsible investing, whatever you call it, is intractable in the abstract, Jason. I've never been able to convince someone of the merits of ESG and FCI by just looking at a meta-analysis of performance over time for different strategies that identify themselves as one versus the other.
(00:34:41):
But it's really quite clear when you're looking at the investment decision level. If you're a car company today and you're looking at where does my market share growth come from? Like EVs are an obvious investment decision. That's not an ESG decision. And I don't care if it's an ESG decision or not. It's just a reality of that business decision. That's true across industrials, that's true across consumer businesses. If you're looking at supply chains and transparency there and the shifting preferences of consumers around all this, it's true in everything that touches climate. These are not necessarily from an economic perspective, good or bad decisions, they're just decisions that make sense. And when you have a holistic view and explicit view around incorporating these factors into your decision making, it just becomes obvious in the specific instance. And that's what we're trying to find and kick the tires on.
Jason Jacobs (00:35:48):
And given that climate in particular is a bit unique in that it's not really a vertical, it's an area of expertise, but it stretches across every vertical. And so given that if a client were to come to you and say, for example, maybe five years ago how I was feeling before I started on My Climate Journey or now MCJ for short, similar to FCI. I was feeling like, man, there's this drumbeat of bad news and the scientific community is foaming at the mouth and no one's listening. But I don't really understand the nature of the problem. I don't really understand the best ways to address it. I don't really understand what I can do to help. So if a client were to come to you and say, look, I want to invest with more of this lens in mind, but I don't understand it and I don't come in with specific opinions or knowledge, what guidance do you provide and how much of a point of view does Hall take given the amount of debate that occurs even from well reasoned experts on all sides of an issue?
Mohammad Barkeshli (00:37:03):
Let me think through how I can answer that in a specific. Let's say we want to invest around the theme of energy transition, which touches climate related investing across asset classes. We first look at, okay, how do we produce energy? How do we transmit energy? How do we meet our end users? Where is that energy demand coming from and what's the composition of it? And then what are the emissions that come out of those end uses? And so if you have a view, for example, as you mentioned, you're a client, you come in and you say, I want to make sure my investments are geared towards reducing emissions. It's one thing to say, hey, invest in this one fund that is doing decarbonization technology at the very early stage. It's another thing to look systemically and say, you have public equity exposure to energy producers or energy transmission businesses, let's make sure those investors that you're invested with have an engagement focus such that they're engaging the oil and gas producer to make sure they have some path towards transition.
(00:38:19):
Let's make sure if you're invested in real estate, that that's an end use and it has a lot of emissions. Let's make sure your private real estate managers are making sure that their buildings are upgrading up to the best standards for emissions reductions. And that's by the way, carbon emissions as well as waste, as well as water use, et cetera. Let's make sure that if you're invested in manufacturing businesses in other parts of your portfolio, that those investors are doing it with a thoughtful lens towards the risks that arise from decarbonization and from the technology boom happening in alternative ways of manufacturing things. And so it's really a holistic view. Our client portfolios reflect in a lot of ways the broader economy. We don't take, I might have mentioned this before, but we don't take a divestment approach.
(00:39:19):
Let's say, let's clean up your portfolio, make sure it doesn't have any emissions. You're not invested in any energy or any real estate that emits anything. But the real world out there, the economy at large hasn't changed. You just washed your hands in your portfolio. That's a legitimate approach, and I'm not against that. But I think a better approach, and one we're trying to do is really tackle that systemically across your portfolio. So you might own ExxonMobil, right? But you want to make sure you're engaging at the right activist level with the board of ExxonMobil so that they can come up with a transition path. People can argue, and our managers can have different views about the validity of those paths and those plans, but we think that engagement, that stewardship is part of the answer if you're trying to build a portfolio that's geared towards climate change. Does that help answer that question?
Jason Jacobs (00:40:19):
It does, and it's not an easy question to answer since there's so much nuance and also you, it's like, well, it depends if you're looking at this area or that area or this type or that or this type of family or that type.
Mohammad Barkeshli (00:40:33):
Well, the good news, Jason, is when we started doing this work 10 years ago, or even going back five or six years ago, if you wanted to build a multi-asset class portfolio that had a climate theme, it was really difficult. The available options that were compelling were mostly in early stage venture and technology, and then some maybe public equities that were not necessarily having impact in terms of real world outcomes, but they owned, let's say, renewables businesses versus fossil fuel businesses. But today, you have a lot more options across asset classes. There have been a lot of interesting investment groups, investment talent that have come together to tackle climate related opportunities across asset classes. So you have private credit strategies that are scaling out, you mentioned project finance early on that are scaling out residential solar, and we have exposure to that.
(00:41:37):
There are infrastructure investments that are very much related to this theme. There's public equities as I mentioned, public equity strategies that have a real engagement focus other than just owning the right things, but now let's own things and engage with them to improve them. There are opportunities across real estate, across really you name it, all of our asset class buckets, where you can have a credible and compelling portfolio that's really geared towards climate change and doesn't have, in our view at least, return trade-offs, but is well set up to take advantage of this humongous theme that we have over the next decades called decarbonization.
Jason Jacobs (00:42:27):
I'll share a bit of what I've observed, but I want to make sure before I ask you a question associated with it, that we calibrate and have observed the same thing. That there's some types of investments that are important from an impact standpoint, but look, if you're just looking at make money, there's better places to put that capital. And then there's some that it's like, that's going to print money, but is it really doing good for the world? And then there's this middle ground where you can find things that do good for the world while also not compromising our returns for that asset class. First of all, do you agree with what I just said?
Mohammad Barkeshli (00:43:13):
Yes. Yeah.
Jason Jacobs (00:43:14):
Okay. Yeah, so you do. So the question is, does FCI only comprise that middle bucket, or are there times where you would either recommend an investment as Hall Capital that maybe doesn't encompass FCI, but is going to generate attractive returns? Or the other way that might be more, and again, I'll throw out some buzzwords here, but be more catalytic or concessionary in nature where it's driving impact explicitly, maybe even at the expense of returns?
Mohammad Barkeshli (00:43:53):
Those are three great different questions.
Jason Jacobs (00:43:57):
Sorry.
Mohammad Barkeshli (00:43:57):
Let me take them all the way. I think most of my words-
Jason Jacobs (00:44:01):
You can tell I have something, I don't know if it's ADHD, some undiagnosed something.
Mohammad Barkeshli (00:44:06):
No, no, no, you're-
Jason Jacobs (00:44:08):
Imagine me sitting down to read a book cover to cover.
Mohammad Barkeshli (00:44:13):
I suffer from the same thing. But I think it's the bulk of our work in Full Consequence Investing is focused on the overlap that you mentioned. It's actually harder to find than you realize. A lot of people say that there is overlap in their strategy and you dig in and you understand that maybe not. And so the bulk of the work is identifying and building conviction around strategies that are really taking advantage of a financial opportunity set while also pursuing social or environmental impact. To the other points, maybe I'll get to the concessionary piece last. To the point of where there's a strategy that has a lot of return potential but doesn't necessarily have impact or impact is not applicable to the strategy, we obviously do a lot of that in our portfolios.
(00:45:13):
The key thing is making sure that at least from a risk mitigation perspective, those teams have the right processes in place to incorporate that lens into their risk management. And sometimes when you think about that and you talk to the team and they're like, this is a great financial opportunity, and you ask, well, what about this regulatory risk? Or what about this adverse impact on consumers or on the climate, that by the way, can translate into regulatory action. They're like deer and the headlight, then you have your answer. We try to make sure if we're invested in those types of strategies, that they are integrating that risk mitigation angle of what FCI does. But I think the other aspect of this that's very important is time horizon. A lot of these large social environmental challenges think about climate change.
(00:46:12):
The mechanism of that getting priced into, let's say security prices is long-term, because these are long-term challenges. And if you are let's say a private equity investor who's investing for the next 10, 15 years, there's alignment in terms of your time horizon and the time horizon through which these challenges and these risks show themselves and get priced. But if you're a hedge fund manager, for example, doing credit or distress arbitrage or shorter term where your average hold period for a given security or a given investment is six to nine months, the two degree world doesn't come into your horizon for the next six to nine months. So maybe it's not as important that you're looking at transition pathways when you're investing into an arbitrage opportunity. And that's okay. And there's a role for that type of strategy in every portfolio, or not in every portfolio, but in many portfolios.
(00:47:17):
And the bar might be a little bit different for things that have inherently shorter time horizons. But for most of what we do, we have a strong bias towards fundamental long-term type investors and investment strategies. And for most of that, these large social environmental challenges are material to pricing over the long term.
Jason Jacobs (00:47:42):
How do you think about team and track record? And I ask because I used to sell data storage infrastructure software and hardware, many moons ago, and there was a joke that no one ever got fired for buying IBM. At the same time an abstract could come along with a better product, one that is smaller, is faster, is more reliable, is cheaper, is more modular, is easier to scale, more flexible, whatever. But it's not from IBM. How do we know this company's even going to still be around in five years? And so if we base our whole infrastructure on it or a meaningful part of it, there's big risk. So how do you think about that as it relates to funds? The equivalent, I guess would be no one's ever gotten fired for buying Sequoia Fund 82.
(00:48:39):
What does that mean from an emerging manager standpoint that maybe has some novel ideas but not as much of a track record at least working on that strategy with that team?
Mohammad Barkeshli (00:48:51):
I think I mentioned earlier that our process and approach starts with the belief that we don't have to be anywhere and do anything, and we bring that to our work on emerging managers. I would say as it relates to climate related investments, for example, we recognize that that's an opportunity set that we have some level of conviction around. And there are few teams that have existing long track records. If you really filtered the universe of folks that could tackle the climate opportunity set, by folks that have had 10 years of track record, you would end up with a handful of names, handful of teams. And by the way, half of them might have terrible track records because they got caught up in climate take 1.0 earlier on, and that raises more flags than it helps build conviction. And so we recognize there are, as I mentioned earlier, there are really interesting groups of investors coming together around this theme, to take advantage of this opportunity set.
(00:49:59):
And then evidence of that is we have a lot of generalist managers, let's say in venture and private equity and public equities, that are now identifying decarbonization as a core theme for their thesis going forward over the next few years. These aren't climate experts, they just know that this is a compelling opportunity set. And so we have on the margin higher tolerance for new teams coming together maybe without shared track records around this theme. But we look at emerging teams in the same way across all of our asset classes and across all of our strategies. And so it's different when I was an investor at this other fund that maybe Hall Capital was already partnered with, and I'm spinning out to do something climate focused, because that was part of what we were doing at a generalist fund before and now I want to dedicate a whole strategy to it and build a team.
(00:51:02):
Or we are two different teams from two different funds that each have a track record, but we're coming together to build a dedicated strategy here, and that helps us kick the tires on, again, what is the proof of success for this team executing on this opportunity set? And often, this is maybe back to our size, it might not make sense for us to back the first time team around the given theme. One, because we don't have to be anywhere. Two, because that might not be scalable for a scale of capital. And three, because we don't think this opportunity set is going away. And that's part of why it's compelling. If I thought that the climate-
Jason Jacobs (00:51:44):
Compelling and scary as hell, but yes.
Mohammad Barkeshli (00:51:47):
Absolutely. But if I thought that the window of investing around decarbonization is closing by Q3 this year, then we should probably not invest in it at all. Right? And because I think the opportunity set is available and sustainable over a longer period of time, we can afford to wait until there is a little bit more evidence of success for a given team sometimes. That's not to say that we don't get over that threshold ever. We've done several things with first time teams, we've anchored funds around this climate theme, especially over the last couple of years. But those have been groups where we have had other ways of evaluating, again, the proof of success. I want to go back to the last thing you asked on the concessionary piece, unless...
Jason Jacobs (00:52:43):
Yeah, we didn't hit that. That'd be great. Thank you. Good catch.
Mohammad Barkeshli (00:52:49):
I'm very focused on concessionary impact investments, not doing harm out there in the market, by providing low cost of capital funding to an ecosystem that then gets rid of sustainably funded normal cost of capital, other businesses that compete with it. And then if this low cost of capital isn't sustained, you end up with an outcome that is worse than where you started. And a clear example of that is, this is not in the climate space, but in microfinance, across emerging economies you saw some of this, right? You saw a lot of low cost capital-
Jason Jacobs (00:53:33):
For whatever reason, I went to VCs subsidizing ride-sharing. It's not an impact analogy, but it's a bit dissimilar.
Mohammad Barkeshli (00:53:38):
It's not dissimilar. But let me stick to the microfinance because I don't want to make my friends upset. But in microfinance you had a low cost of capital lending happening in communities where maybe there was one bank that wasn't very active in lending, and the competition was really predatory otherwise. And you flooded that market with low cost concessionary capital and the bank packed up and left and any other available form of financing also packed up and left because they couldn't compete. And there was a downturn in the economy or whatever, the LPs dried up and there's surprise, no more microfinance money coming into that community. And now you've ended up with a community that has no access to financing rather than just bad access to financing or access to maybe predatory financing.
(00:54:37):
So we've been focused on this. So where we've landed is we would do things and we have done things that we would describe as impact first, but we don't do those things if we think it's just the same investment strategy as another with a lower cost of capital. We would only do it if there's some other trade off. For example, this is a nascent market where it's really hard to establish what the right expected risk adjusted return should be. Could be in, we did a set of transactions around climate that were focused on preventing forest fires in California. It was a really creative structured credit strategy, and no one's done it before, so it was really hard to figure out what the right expected risk return is. Or we've done a strategy where it's a mix of project finance and private equity and some other bells and whistles in that strategy. And again, no one had done it in this way and it was hard to figure out what the right risk adjusted return expectations should be.
(00:55:50):
We might do that as an impact first probably for clients that have an explicit focus on climate themes that wouldn't go into all of our portfolios or most prevalently there's a trade-off in terms of liquidity. So maybe you're not getting paid for your liquidity trade off, maybe you're not sure what this market should look like. And sometimes it's also there's a team that's experimenting with interesting ways of compensating themselves. So for example, we made an investment where the team was getting compensated, their carry entirely based on meeting a set of impact metrics. So there was no financial incentive for the team. It was purely based on whether they can reduce emissions by a certain amount through their investments. And so that's interesting. We wanted to support that.
(00:56:44):
We don't think that strategy is concessionary out there in the market. They're not giving money away at a lower cost than other players in the market. But we also, as I mentioned earlier, are really focused on organizations and what makes organizations tick and what drives people and how they're compensated. And this is one where they're not incentivized in the same way as other let's say private equity investors in terms of driving financial returns. So we categorized that as an impact first opportunity, and we put that in portfolios that again, had an explicit focus but wanted to be supportive of that experimentation with compensation structures.
Jason Jacobs (00:57:21):
Well, there's so many topics we haven't covered yet. There's no way we're going to get to all of them. There are a couple I want to make sure we hit before I let you go. One is in terms of what you're seeing out there in the market, so we're recording in early April of 2023, how much has the denominator effect factored in with your clients as it relates to their alternative asset investments generally? And then same question for alternative asset investments with more of an impact focus.
Mohammad Barkeshli (00:57:56):
So that's definitely a real dynamic. Maybe your audience might not be as familiar with how this works, but if you have a portfolio that comprises of liquid strategies and illiquid strategies, your liquid investments have gotten marked down on a daily basis over the course of last year. Your illiquid investments, let's say your venture capital, your private equity, your private real estate haven't gotten marked down, because typically in those strategies, the valuations are marked based on subsequent transactions. So let's say you are a VC investor, you invested in a startup at some valuation, you don't really change that mark typically unless you have other reason to believe it's now valued less or more. Usually it's geared towards or geared based off of a subsequent round that that startup has raised, which may be a down round or an up round.
(00:58:51):
And we know that the pace of fundraising and the pace of those transactions in private markets have slowed materially over the last year, and so there haven't been a lot of those subsequent transactions. So what you see if you're, again, an asset owner with that portfolio of liquids and illiquid, is that if you had an allocation that you thought was X percent to illiquid investments and Y percent to liquid, you now have an outsized allocation to illiquid just because of that dynamic. So out the gate, committing an incremental dollar to an illiquid investment today probably faces more obstacles than it did a couple years ago. We observe that and we act based on that, and we don't let that get in the way of us staying the course with our private investment program. The beauty of investing in private equity or venture, for example, is that you invest vintage after vintage and you look at it as a program, not individual investments.
(00:59:56):
And putting this denominator effect aside, when you look at the environment today in the markets, you might look at it and say, actually this is maybe quite an attractive opportunity set for say a VC investor or for a private equity investor or a real estate investor. And so we want to make sure we're committing capital and deploying capital through this environment. On the margin it might be a question of sizing and a question of the number of relationships. So it's a balance between not wanting to allocate a lot more illiquid dollars in a portfolio that is already facing liquidity challenges and making sure that we're still deploying capital through what could be a pretty attractive vintage for private investments.
Jason Jacobs (01:00:51):
My last question is more around philanthropic capital and how much you get involved with advising clients, if at all, in what to do with their philanthropic dollars, especially because I learned recently, and we've taken advantage of a bit the fact that you can use things like donor-advised funds or philanthropic capital to do private investing, whether it be in funds or in companies directly, and I wasn't aware of that. I feel like a lot of people that have this philanthropic capital aren't aware of that. I'm just curious how active you are in that area and how much you think about that, if at all.
Mohammad Barkeshli (01:01:32):
We manage a lot of investment portfolios for endowments and many foundations or family foundations. Most of our clients have very active philanthropic efforts on their own. We don't really advise on the grant making part of giving. We work with partners and we introduce our clients to partners who can devise some more thoughtful strategies around that. That's not a core capability that we have. We share our thoughts, and again, we tend to have comprehensive relationships with our clients, but where we probably add the most value there for example, is how much can you afford to give and what would that path look like over the next X number of years? On your question about, I would view the second part of the question on the donor-advised funds as a question around the sources of capital for impact investments.
(01:02:28):
And that's actually something that I and my team are actively exploring now, because we have to manage a lot of, again, philanthropic pools that have really compelling giving strategies on the grant making side, but might not be invested fully aligned with the giving strategy and the giving goals. And so we want to make sure that we have a way to do that and integrate that and respond to that need. We also manage assets for community foundations, which might have donor-advised funds underneath and might want to offer those underlying donors ways to put their investment capital to work that's aligned with what they're giving goals are. And so that's a lot of the work that's done in terms of back to FCI, that overlap of where you have environmental social impact as well as financial returns, but also part of what we were talking about our version of impact first, where you might take certain trade-offs if you really care about a given set of outcomes, you might on the margin have higher tolerance for liquidity or nascency of markets, et cetera.
(01:03:44):
But that's an open question. And I think there's also some bills in Congress around dictating what donor-advised funds may or may not be able to do. And so that's an area that we're watching closely. But on the grant side or grant making side, we don't actively advise our clients.
Jason Jacobs (01:04:04):
Ideally it would be a benefit to the world and to asset owners presumably to get more capital allocated in a full consequence way. What are the barriers that you see to more of that occurring? And if you could change anything that could unlock faster progress in that area that's maybe outside of the scope of your control, what would you change and how would you change it?
Mohammad Barkeshli (01:04:36):
The reason I'm doing what I'm doing, and the reason I came back to Hall Capital to do this work, was because when you look at long-term social and planetary challenges and you look at the scale and magnitude of that, and to think through the types of capital that could really tackle those challenges, that doesn't care about returns this quarter, next quarter, next two years, it's really not a lot of pools of capital. And when you look at the client base of Hall Capital, it's again, families with multi-generational investment horizons, endowments with perpetual investment horizons that are really well set up to take advantage of opportunities that come out of those challenges. And that's what makes me excited. And I think a barrier to that is more the onus is on me and the onus is on you, Jason, to prove that you could do this.
(01:05:31):
You could have impact, you could tackle those challenges and generate return and achieve the financial goals that these groups and this type of capital has. And so that's a little bit my life's work. If I had my drudges and could get rid of something in the world, would be this quarter over quarter short-termism, which really prevents us looking beyond. You saw some of that last year. Traditional energy ripped, and so therefore investing in renewables is a bad idea. Well, let's think through the next two decades. Let's think through 2050. If you're looking back at 2050, where would you like to be? Which side of this transition would you like to invest behind? That becomes more clear. So having that long-term horizon, which I think Hall Capital is pretty well set up to have our clients having that become more prevalent throughout the marketplace would really make a difference.
Jason Jacobs (01:06:37):
I love that. And the answer to this last question might be nobody, Jason, please leave me alone. But for anyone out there listening who's inspired by the work that you're doing, is there anyone that would be helpful for you to hear from? Or is there anything that we can do as MCJ or as MCJers that are tuning in, that could assist the work that you're doing and the work that you want to see done more broadly?
Mohammad Barkeshli (01:07:11):
I learned so much from your podcast and a lot of it is operators doing the actual groundwork of this climate transition or energy transition and decarbonization. I'm really excited about this series that you're exploring, talking to investors, both GPS and LPs, and that's helpful that it's more helpful for me to hear and learn about what other groups that are tackling this from an investment lens doing and how they're thinking about it. I think one area that may be on your radar, may not be on your radar, and I think maybe might become relevant in a few months as there's more developments there, is I would love to hear more from people who are underground doing the legwork of some of these big regulatory changes. So we have the IRA, everyone's excited about it.
(01:08:07):
A lot of the devil is in the detail, and a lot of that guidance is expected to come out shortly. It'll be a podcast episode I would really look forward to, to have someone really walk us through some of the different incentives that are captured in that and what the mechanism of that is in terms of flowing through to businesses and their unit economics, because that's relevant for your broader community that are doing, again, the groundwork from an operation perspective, but also really relevant to GPS who are building investment pieces around these themes and regulatory incentives. And it's also really relevant to me to be able to understand that landscape.
Jason Jacobs (01:08:51):
That's a great idea. We should definitely do that. And last question, Mohammad, is just anything I didn't ask that I should have or do you have any parting words for listeners?
Mohammad Barkeshli (01:09:02):
No, you asked quite a few things. This has been a really great conversation for me. And actually when we got disconnected for a bit, I was thinking, wow, when I go back to work after this, I'm going to be so much more energized now having explained it out loud. So thank you for that.
Jason Jacobs (01:09:22):
I feel the same. I don't want to overpromise, but I think you're going to inspire a lot of people with this episode as well. Both the mindset that you have as a firm, which is refreshing, but also your willingness to share it more openly, which so many aren't. Thanks for being brave and being an early adopter on this new series, and thanks for the work that you do as well. It's inspiring. Truly.
Mohammad Barkeshli (01:09:51):
Thank you for the work that you do. I've learned a lot from your work. Thank you, Jason.
Jason Jacobs (01:09:56):
Thanks again for joining us on My Climate Journey podcast.
Cody Simms (01:10:00):
At MCJ Collective we're all about power and collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (01:10:09):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter @mcjpod.
Yin Lu (01:10:22):
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Cody Simms (01:10:32):
Thanks and see you next episode.
