What/How Series (5 of 6): Direct Investments
I got to know Clay five years ago. He and his wife Susan helped me to locate and recover a boat that had broken its mooring and traveled two miles to run aground on a ledge during a powerful storm. We talked about ocean farming: growing shellfish and sea vegetables – e.g., oysters and dulse. When I explained how we suspended our gear on long-lines, Clay reacted strongly: “I wouldn’t support anyone putting fences where I fish for lobsters – sounds like a bad idea!”
We explained how we are developing the tools to invest in publicly traded stocks and bonds in the previous blog post. In this post we will consider how we are developing the tools to invest in private, illiquid investments. Clients transitioning from ESG investing to TILT’s multi-capital investment process with their liquid (public market) assets are developing an understanding of the “trade-off” between maximizing risk adjusted returns and generating non-financial returns. This knowledge is critical to understanding our investment process in illiquid asset classes: the philosophy and principles are identical!
In direct, private structures, we can forge alignments with the leadership (management) of enterprises that are generating and consuming capital within the communities where they operate. We can develop shared goals and measures that align to a community’s – reflective of our multi-stakeholder framework. We cluster these specific metrics within the same framework that we developed for public market investing: using the Sustainable Development Goals to disaggregate the Financial, Human, Environmental and Civic Capitals. We have scope in these direct investments to refine the factors to reflect the unique community and client goal set and we maintain a consistent investment process across all asset classes – publicly listed securities, direct private investments and grants (for grant making foundations). This holistic approach enables us to provide integrated reporting across multiple capitals across all asset classes.
Let’s explore how TILT approaches a specific private investment through a hypothetical client intention. The starting point is to develop a clear understanding of our client’s purpose: defined in terms of return goals and constraints. In our example, the client has a real (adjusted for inflation) 4% financial return goal and a long-term time horizon – defined as ten years plus. The non-financial return goals include regenerating the fisheries in the Gulf of Maine with an emphasis on ecological recovery. Concurrently, this client seeks (in alignment with community goals) to improve wellbeing for people living in a region called Downeast Maine (Washington Co.and Hancock Co.) The TILT team, seeking to establish trusted partners and robust baseline measures for the communities’ capital surpluses and deficits, performs a capital scan of the community across all four capitals: Financial, Human, Environmental and Civic. We strive to create political capital (trust) with leaders (people who can “speak” for the community) who might serve as “agency partners” (providing critical feedback). These leaders are critical to help us define the priorities and their sequence, so that our investment actions align to the community’s goals.
The Maine fishery is a large and complex structure, dominated by the lobster fishery. Lobster landings have averaged more than 75% of the total economic value of Maine’s fishery. The ecological health of the Gulf of Maine is as complicated as the social and political dimensions of this system. The social and ecological economies are very different as you travel from Southern Maine (Kittery to Portland) through to Mid-coast (Damriscotta to Mount Desert Island) to the small towns in Downeast Maine. Our analysis of people and place includes interviewing marine scientists, bankers, economic development leaders, town managers, and the fishing families (lobstermen-women), clammers, and wormers) who make their living from the sea.
At a high level, a capital scan reveals some interesting insights. Financial capital is depressed with both low income and low levels of savings. Human capital too is depleted – health, education and wealth formation indicators are depressed - reflective of enormous underinvestment. Environmental capital stocks (within the Gulf of Maine) are generally mixed: carbon saturation is creating higher levels of acidification, pollution levels are low, and biodiversity is low. Civic capital stocks are declining, under pressure from out-migration, an aging demographic and poor physical and social infrastructure. Our challenge then is to develop a shared understanding with the community leaders on how to regenerate the capitals that are in deficit – agreeing on measures and developing a shared understanding of timing.
TILT works with its client to develop investment strategies that collaborate with other initiatives in order to leverage the power of integrated capital investments that combine political, financial and social capital. We seek the wisdom of social investors (philanthropists and business leaders) who have knowledge and experience from working in the region. This deep listening is required to re-establish an equilibrium condition and it takes time and patience – e.g., “Finding Balance at the Speed of Trust” .
Through the interviews and meetings, we saw a pattern and an investment thesis emerged: small scale ocean farming. Fishermen are fiercely independent entrepreneurs with deep domain knowledge of the coastal waters, boat handling skills and the capital equipment (small boats) to operate. Bivalves and sea vegetables are powerful partners in ecological restoration. Building a shared economy that links to existing marine science expertise (e.g., Downeast Institute) and supply chains to market demand offers enormous promise. With these design elements we will prototype various parts of an emergent ocean farming cluster. Investment in shared fixed capital assets, modular storage and handling facilities, and cooperative ownership structures will regenerate many of the capitals that are in deficit. By inviting town managers, clamming committee members, and local banking leaders into the conversation we can build a series of integrated investments that can transform a community.
“I got together with Clay this past weekend, he wanted to point out an attractive site for testing our locally raised oysters (warmer waters support faster growth rates). He’s an active partner in the business today and Susan runs the books. I wonder if the Trump sign in his front yard will get in the way of our shared vision.”