Leo de Bever on Commercializing Promising Technologies
In your blog comment on Bill Gates’ new book ‘How to Avoid a Climate Disaster,’ you raise some interesting issues around the difficulty of getting to net-zero GHGs by 2050. Short of quitting while we are behind, the only real option is nurturing as many promising technologies as possible and speeding up investment in their adoption. Having worked on that problem since leaving Alberta Investment Management Corporation, I have developed a great respect for entrepreneurs and their backers. As CEO, I had the latitude to fund good opportunities as I saw fit. Being on the other side of that negotiation and having to fight for every dime to commercialize a new technology has been both humbling and educational. When you analyze what slows down technology adoption, it is less about technical merit and return on investment than the ‘human element,’ i.e. finding and convincing the right people to work with you. Most new technologies come from small companies. They typically deal with big entities for regulation, permitting, product adoption, and financing. Big entities like to repeat whatever process made them successful. Novel approaches challenge that standard way of doing things. The social benefit of new technology may be great, but don’t expect applause if it upsets the status quo from an organizational or personal career perspective. For example, convincing someone to tell the boss that their approach is past its ‘best before’ date is a tough ask. Finding and educating all the right people in the right places takes time and money. That cost and delay can kill small companies. Trying to finance commercialization domestically at times seems pointless: Canada’s annual commercialization capital from all sources (including pension plans) is minimal. More often than not, companies end up being sold to foreign entities when they are about to be profitable. Why are Canadian pension plans, known for being innovative, absent from the commercialization space? A typical initial technology commercialization transaction is $20-$50 million, often deemed ‘too small to move the needle.’ Contrast this with l solar and wind projects that fit the typical infrastructure profile, i.e. large transactions and well-known return on risk characteristics. Ignoring commercialization investments because of their small initial size is a mistake. It undervalues the benefit of quickly repeating the same project in different locations with little need for incremental due diligence. If I could do AIMCo again, knowing what I learned, I would enter commercialization financing the same way we got into infrastructure at OTPP around 2000. Initially, partner with people you trust, and then build out internal capacity if that is more efficient. So, starting with a minimal appetite for commercialization, it will take too long to build significant Canadian capacity in this space through changes in investment philosophy alone. I see great merit in jumpstarting the process with a ‘limited time offer’ tax incentive to entice the broadest category of investors to explore this profitable area. Besides keeping more Canadian-developed technology at home, I also see it as an opportunity to import useful GHG reduction approaches developed elsewhere. To squarely home in the goal of raising more commercialization capital, a logical tax incentive would be a refundable tax credit, patterned after the 35% Scientific Research & Experimental Development (SRED) programme for venture capital. That makes the investment decision independent of current tax status or whether, as is the case with RSP and other pension proceeds, taxation happens in the future. Program cost could be easily controlled the way B.C. does with its Small Business Venture Capital Tax Credit programme through a quick and straightforward eligibility check. Even if we can accelerate the deployment of new technology still leaves formidable hurdles for achieving net-zero GHG by 2050. We need to re-engineer virtually every industry, which in turn requires far-reaching changes in supply chains. We cannot afford simplistic linear thinking about how this will all play out within Canada and globally. Call me an optimist for aiming for a challenging target, but 30 years of sackcloth and ashes are not an appealing alternative.
In the interest of full disclosure: I am on the board of Sustainable Development Technology Canada. Through Cachet Capital, I am raising capital for renewables and sustainable technology. I am also helping commercialize Canadian agricultural technologies that dramatically improve fertilizer efficiency and produce organic soil carbon from wood waste. I hope to see Nauticol Energy use Canadian natural gas to make low-GHG methanol in the near future.
Let me first thank Leo de Bever for taking the time to write this comment and share his wise insights with my readers.
Leo touches on a few important points:
- First, technology adoption is less about technical merit and return on investment than the ‘human element,’ i.e. finding and convincing the right people to work with you. "Most new technologies come from small companies. They typically deal with big entities for regulation, permitting, product adoption, and financing."
- Second, Canada’s annual commercialization capital from all sources (including pension plans) is minimal so trying to finance commercialization domestically seems pointless.
- He sees great merit in jumpstarting the process with a ‘limited time offer’ tax incentive to entice the broadest category of investors to explore this profitable area. " To squarely home in the goal of raising more commercialization capital, a logical tax incentive would be a refundable tax credit, patterned after the 35% Scientific Research & Experimental Development (SRED) programme for venture capital."
I happen to agree with him on the first point, there is a certain amount of "institutional inertia" when it comes to financing and commercializing new technologies.
Money is cheap, there are plenty of opportunities but the problem, and he alludes to this, is you have to devote enormous amount of time and energy to an activity that hardly moves the needle, at least not for large public pensions.
But I also need to be careful here as there are initiatives at all of Canada's large pensions to invest indirectly (through funds) or directly in promising emerging technologies.
For example, Ontario Teachers' Pension Plan where Leo used to work before joining AIMCo has the Teachers' Innovation Platform (TIP) headed by Olivia Steedman:
TIP seeks equity investments both directly and indirectly through:
Directs and co-investments: We are continuously looking for attractive opportunities to invest directly in private companies with like-minded partners. We seek companies that value Ontario Teachers’ long-term investment horizon and approach to value creation where we can actively support management throughout our investment period. Along with financial support, we provide access to Ontario Teachers’ strong global networks, and advice and guidance to help grow the businesses we invest in. We look for well-managed companies with high-potential brands and compelling growth prospects. We can act as a direct equity investor, or partner with our established, industry-leading fund partners as a co-investor.
Funds: Ontario Teachers' has strategic investments with many of the world's leading growth equity and venture capital firms. We value the opportunities to share information, co-invest and work in other ways with our fund partners, including the pursuit of opportunities in markets we can't easily access directly. We are members of the Institutional Limited Partners Association (ILPA), and endorse the ILPA Private Equity Principles which we believe form the basis of an effective private equity partnership: Alignment of Interest, Governance and Transparency.
Strategic Partnerships and Platforms: Ontario Teachers’ has a track record of forming strategic relationships with a variety of corporate partners who are aligned with us on uncovering unique and valuable investment opportunities. TIP is building on this by forming long-term partnerships with leading technology companies. We are flexible in how we invest with partners and employ a large range of structures such as joint-ventures, platform companies, investment vehicles and funds.
In my recent discussions with OTPP's CIO, Ziad Hindo, he emphasized that achieving net zero emissions by 2050 will necessarily require investing in emerging technologies.
Bill Gates effectively said the same thing, you can't just divest from fossil fuels (he did but he doesn't believe others should) and you really need to invest in emerging technologies to tackle climate change over the long run.
We saw this recently with the catastrophic failure of the Texas power grid. Data showed that wind power was the culprit of the Texas grid collapse. Nat gas also failed to provide the needed power.
Discussing this with a friend of mine who is an engineer/ MBA who actually worked on power grids in North America and elsewhere in the world, he shared this with me:
Wind power is extremely expensive on a per KW/h basis. So the turbines are made cheaply (not winterized) to justify their use by the authorities.
No power grid is able to support more than 20% intermittent renewables like wind and solar and be 100% dependable (not hydro).
Most utilities have pushed the limits to 30% intermittent. Some extremely stupid utilities (who listen to the politicians and environmentalists more than engineers) have pushed it even further.
So when your wind turbine fleet goes down and your firm power generation (ie carbon based) kicks up to make up the shortfall, you get an extremely unstable grid. Then, if it goes out of phase, the grid is down and out for a week.
I have been saying this for years but now that you have a concrete example of a major screw-up, everyone is trying to distort the truth.
This has nothing to do with being anti-environment. It has to do with politics, combined with dumb environmentalism, and a utility that isn’t willing to stand up to its political masters.
Politicians and environmentalists love renewable energy, "let's go renewables!", renewable energy jobs, etc., but when you talk to engineers who actually work on power grids, none of them want to go more than 20% renewable (max 30%) precisely to avoid a Texas-style disaster.
What else? Those of you who blame Texas' deregulated utility system and the fact that they are not part of the national grid are missing the bigger picture.
As my friend stated privately to me: "If Texas was part of the national grid, you would have had catastrophic power failures in neighboring states. A few years back, Michigan's power grid collapsed and it hit large parts of Ontario too. People talk politics, not science and facts and it's sad because they really don't know what they are talking about."
Just like me and Bil Gates, my friend thinks the only way we are really going to make a material difference in tackling climate change is by investing more in nuclear power plants.
"Of course, pensions don't want to touch them (except OMERS) and they prefer the headlines of wind and solar farms which are heavily subsidized but unless you invest in nuclear power, climate change will only get worse."
He's absolutely right and like I said, he's an engineer who knows power grids inside out, worked on major projects in Canada and around the world.
Come to think of it, Canada's large pensions should band together, hire him to work on major nuclear power plants in this country on their behalf, create an independent subsidiary like CDPQ Infra and have him manage this project (if I gave you his credentials and where he worked, you'd understand but he assures me that he’s not looking for a new gig and is happy where he is).
There's too much dithering in Canada. We talk A LOT about growth and growth equity, ESG and tackling climate change, but when it comes to actions, we aren't doing much, eh?
I think this is what frustrates Leo de Bever and many others.
Lastly, Geoffrey Briant, EVP of Corporate Development at Cachet Capital, sent me his thoughts:
After Leo de Bever’s reply as a comment on last Monday’s Pension Pulse blog post on Bill Gate’s appearance on 60 Minutes, I’d like to comment and explain the proposed refundable investment tax credit with a bit more tax granularity.
As the Executive Chairman of the Cachet Capital group of companies - including Cachet Global Sustainability Inc. - and as a Director of SDTC, Leo de Bever speaks with considerable authority with the proposal to incentivize Canada’s pension funds (and others) to invest in the equity of a company and earn a 35% refundable investment tax credit for investments in financing the commercialization of sustainable developments technologies companies (ie. “commercialization” is what Gordon Power of the Nobel Sustainability Fund calls growth capital PE investing in recently turned EBITDA positive companies or in companies on the verge of being EBITDA positive). For non-taxable entities like pension funds, “refundable” means a cash payment from the Federal government equal to 35% of the equity investment to be paid to the investing pension fund as cash since it does not have any taxes payable to reduce by earning an investment tax credit but it has the investment capital needed to invest in the funding gap that exists in Canada - the post-venture capital, growth capital PE investment phase of investment in “commercializations”.
For the pension fund investor, the effect is a significant enhancement to the IRR on the investment and the minimization, or even the elimination of, the dreaded J curve typically associated with growth capital PE investments during the first 4-5 years of a growth capital PE fund when the investment capital and management fees going out the door result in a negative impact on the value of the units in that Fund. Too often, the J curve can be the excuse for inaction by an institutional investor.
Furthermore, with portfolio managers at Canada’s pension funds working with a 4-year rolling performance bonus in mind, they might be personally disinclined to invest in growth capital PE equity investments that would otherwise have a negative impact on that bonus. Wouldn’t you be? The introduction of a 35% refundable investment tax credit can minimize or eliminate the affect on the J curve in the calculation of bonuses based on 4-year performance and enable the financing of commercializations of sustainable developments technologies companies involved with renewable energy generation, transportation, buildings, manufacturing and agriculture - exactly what Bill Gate’s prescribed and exactly what is needed if Canada hopes to attain its 2050 goal of net-zero emissions.
A proposal for an SD Refundable ITC - a “Sustainable Development Refundable ITC” -is not a new type of programme. This proposal is a variant on tax legislation that already exists in Canada - the SRED programme and - to prevent the threat of contributing to runaway deficits - the BC Small Business Venture Capital Tax Credit programme. The BC tax credit programme allows the mechanism to be “throttled” with an annual budget allocation for the tax expenditures cost.
It can be used to promote the financing of sustainable development technologies already in Canada and prevent them from being exported from Canada - and lost to Canada - with a commercialization financing readily available in the U.S., for example.
At Cachet, we are working with a fertilizer company with a product that increases crop yields by 35% while reducing GHGs by 40%. That’s the type of technological innovation Bill Gates was referring to in optimistically suggesting we find technological solutions to reduce GHGs and contribute to striving to attain Net-Zero emissions by our 2050 goal.
A SD Refundable ITC can even be used to incentivize the import of sustainable developments technology to Canada. For example, at Cachet we could use it for a combination of an investment by Investissement Quebec + Fondaction + CDPQ + Hydro Quebec to finance a $250M thin-film solar panel manufacturing plant on the old oil refinery site in East Montreal that Fondaction owns. A U.S. company based in Toledo, Ohio - the centre of expertise in the U.S. for thin-film solar panels - has the technology - which the U.S. DoE just endorsed with a grant - for a product called “See Through Windows”. Although I always thought all windows were “see through”, this is a window for high rises that you can see through from inside the building but it’s a solar panel from outside the building. In the best case scenario, not only do they power the building but they generate excess power to contribute to the grid.
Why might they want a plant in Quebec and why can we import the Sustainable Development technology to Canada by tech transfer? Two reasons. First, the biggest input for thin-film solar panels is electricity. The cost of it in Toledo is US$0.17/KWh; in Quebec it’s CND$0.07/KWh. Second, the two rare earth minerals required for thin-film solar panel manufacturing are mined in Quebec.
Refundable Investment Tax Credits
The Scientific Research & Experimental Development Tax Credit (SRED) program provides that a Canadian-controlled private corporation (CCPC) can earn an investment tax credit (ITC) of 35% up to the first $3M of qualified expenditures for SR&ED carried out in Canada and 20% on any excess amount. Other Canadian corporations.
As a refundable investment tax credit, if the business claiming the ITC makes no profit and is non-taxable as a result, the refund is paid as cash. That is, it can be refundable in cash if the “taxpayer” claiming the ITC does not need it to reduce its current taxes otherwise payable.
The Sustainable Finance solution in this case, therefore, is to provide for the payment of the 35% cash refund to investors that are Eligible Investors and Qualified Institutional Investors that have invested in an Eligible Business Corporation either:
- Directly: i.e., pension funds, endowments & foundations
- Indirectly: through a “Registered Growth Capital PE fund
In that case, the after-tax cost of an investment for Qualified Institutional Investors is $0.65 per $1.00 of investment which is the gross amount of the investment ($1.00) LESS; the amount of the SD Refundable ITC available thereon ($0.35).
This tax incentive for Qualified Institutional Investors may be known as the 35% Sustainable Finance Investment Tax Credit or “SFITC” or the “SD Refundable ITC”. The Legislative Model:
The B.C. Small Business Venture Capital Program offers tax credits to investors (individuals or corporations) to encourage them to make equity capital investments in B.C.-based small businesses.
The B.C. government recognizes that creating new small businesses and expanding existing ones contributes to a healthy economy. This program gives small business continuous access to early stage venture capital to help them develop and expand.
B.C. investors receive a 30% tax credit on their investment in a venture capital corporation (VCC) or an eligible business corporation (EBC).
Individuals are also able to contribute their eligible investment to an SD RSP to further reduce the after-tax cost of their investment.
The following legislation applies to the B.C. small business venture capital tax credit:
- Income Tax Act (B.C.) Section 21
- Small Business Venture Capital Act • Small Business Venture Capital Regulation
- Bill 5 – Budget Measures Implementation Act, 2019 The Spring Budget is the Federal Government’s opportunity to provide for such creative tax incentive solutions to incentivize Canada’s pension funds to invest in sustainable development technologies (as stated in Recommendation #2 of the Final Report of the Expert Panel on Sustainable Finance released June 14, 2019). It isn’t unprecedented and can be structured with a mechanism to prevent runaway deficits.
Let’s hope officials in the Department of Finance - including Michael Sabia as Canada’s new Deputy Minister of Finance - read the Pension Pulse blog!
Like Bill Gates, I’m an optimist. I think we can rise to the occasion and Canada’s pension funds will see what Leo de Bever and Michael Sabia have long implored of their pension fund colleagues - and now Mark Carney advocates - which is that there are investment opportunities to climate change - not just risks.
As an optimist, I think we can achieve our goal in Canada of net-zero emissions by 2050 and we at Cachet are doing our best to contribute to that goal for the sake of Canada, the world, our children and our grandchildren.
I thank Geoff for sharing his insights and I'm not sure if Michael Sabia still reads my blog but I know he used to religiously when at the helm at the Caisse (nowadays, he has monumental challenges to address as Deputy Finance Minister, God help him!!).
Anyway, there's a lot of food for thought here, once again I'd like to thank Leo de Bever for his comment and Geoff Briant for his extensive comment following up on Leo's comment.
Below, more than three million homes and businesses in Texas lost power for over a week. Microsoft co-founder Bill Gates joined "Squawk Box" to weigh in on the energy crisis stating nuclear has be part of the equation and the new generation of nuclear solves the economics, making it more affordable, and revolutionizes the safety.
He also discusses divesting from fossil fuels stating even though he divested from fossil fuels he's not claiming everyone should divest, he's pushing more to invest in new areas, particularly in the hard categories of industrials where more innovation is needed.
Lastly, Lockheed Martin, the American advanced technologies consortium, recently obtained a patent on a revolutionary design for a Compact Fusion Reactor (CFR), a mobile device that can be mounted on trucks as well as aircrafts and ships. You can read more about this here and watch the clip below on how nuclear power may be making a comeback as researchers develop reactors that are smaller than ever before. Just remember, in order to address climate change, the world needs more nuclear power.