Partners Capital’s Stan Miranda: Energy transition is a megatrend bigger than digitalisation

Stan Miranda, founder and chairman of Partners Capital, tells us why he believes energy transition will happen but “opportunities for investors have to be very carefully picked through”.

Stan Miranda tells Impact Investor he originally founded Partners Capital in 2001 because he felt it was difficult for high-net-worth individuals to overcome private banking’s conflicts of interest. “These were some of the biggest brains in the investment world and they were being short-changed.”

Over time, Partners Capital has evolved to manage institutional investments. The University of Oxford’s Rhodes Trust was one of their first institutional clients and today they look after dozens of educational institutional endowments globally.

The model they follow is discretionary investment management of entire portfolios, under which the firm undertakes asset allocation and then selects managers on the client’s behalf. However, their process is different to what investment consultants do.

Miranda says: “We tend to hire people who are themselves asset managers from high quality companies such as Bain Capital. Whereas investment consultants tend to be hands off, we are very much hands on. We do a lot of co-investing with managers and most of our managers are closed to outsiders.”

Impact measurement

Partners are not afraid to lead managers in the right direction. “When it comes to impact measurement, we’re very much about educating the managers…drawing most heavily on Harvard Business School’s Impact Weighted Accounting Initiative.” Miranda admits this emphasis is driven in large part by Sir Ronald Cohen who has been a long-time strategic shareholder in the firm.

Partners keenly monitors asset managers in areas such as diversity and energy transition. “We tend not to advise clients to have a specific dedicated allocation to impact investment however many of our clients do just that, such as one endowment in the healthcare field which has a specific allocation aiming to incubate venture capital films in the healthcare sector.”

Their main priority at the moment is “to allocate capital to managers who are particularly effective in seeing the investment opportunities in energy transition and really know what they’re doing”.

Energy transition

Miranda describes energy transition as a “megatrend much bigger than digitalisation”. He cites numbers produced by McKinsey which suggest just how huge the opportunity is – $9 trillion of incremental investment per year in energy transition, the equivalent to 10% of global GDP.

“We very much believe we have an obligation to our clients to exploit this opportunity. It is very shocking to me that so many investment companies devote insufficient time and certainly insufficient capital to this space.”

In April, Miranda published its Global Energy Transition Investment Framework. “A lot of consultants and energy industry associations have published good work on the pathway to the energy transition but far too often this gives an overly optimistic outlook on what needs to happen rather than as to what is most likely to happen.”

For Miranda, the full energy transition is most obviously blocked by the many uncertainties that surround renewables.

In particular, “the land requirements, the transmission infrastructure build-out required, and the raw materials dependencies”. Wind and solar are also seasonal. “Without a long duration electricity storage solution, wind and solar penetration will be limited. This is where green hydrogen comes in. But that is far from proven.”

Miranda doesn’t believe in the exclusion of fossil fuels, as “they can do the most to alter the carbon footprint of the corporate world and, as shareholders, we can better add to that momentum”.

According to him, the correct pricing of carbon and widespread carbon taxation are key to the energy transition. “I believe every individual and every company should be taxed on the carbon they emit at an appropriate market price representing the cost of carbon capture and sequestration.”

Improvements in carbon pricing are in train but the diverse set of energy trading systems around the world need to be consolidated across regions and the taxation net needs to be comprehensive across all businesses.

Portfolio

In terms of the most attractive investment opportunities, Partners see these as less in the infrastructure space – areas like renewables, charging stations for electric vehicles, grid batteries – than in the selling of services and components that are most critical to that infrastructure. They also look for proven but early technological investments sponsored by specialist venture capital managers.

In recent years, they have invested in over 30 different companies helping to drive the energy transition around the world. One example is Gidara, a Dutch company which builds commercial scale bio-energy plants which take municipal solid waste and converts this into bio-methanol. Speaking of this Miranda says “the risk and return for proving commercial scalability of a proven technology is a good example of the sort of investments we will continue to make”.

Another example of Partners’ focus on early-stage technology investment comes from its relationship with California-based Fall Line Capital, a specialist in the ‘agfood’ tech investment arena. A recent investment is in Benson Hill. “One of its leading products is Truvail high protein soy flour for plant-based protein alternatives to meat and dairy products.”

The future

“I’m optimistic on energy transition – it will happen, Miranda affirms. “But I think the opportunities for investors have to be very carefully picked through. There will be a very high failure rate.”

Miranda just hosted a gathering of leading experts in the field. “What became clear to me is that the pathway that McKinsey and others have so carefully sketched out is not going to happen in the way they say. Too many of the investment opportunities will fall by the wayside.”

For investors, this means there is the awkward temptation to spread their bets. Some of these investments will succeed, some will fail.

That is very much not Miranda’s approach to investment. “I wouldn’t want to have a scatter gun approach to the opportunities where the fan of outcomes is very wide, including the prospect of seeing a repeat of the Cleantech 1.0.”