Flavie Gayet | Fund Manager Telos Climate Fund
Interview given to Maria Louisa Vafiadaki
Please introduce yourself and present an overview of Telos Impact and its activities.
I have been managing climate investments at Telos Impact since 2018, both in direct investing into climate start-ups and indirect investing through our fund-of-fund strategy dedicated to climate fund managers in Europe. Telos was born on the idea to accompany private investors on philanthropic actions as well as impact investing projects. Our vision is to bring impact and offer a full range of services for entrepreneurs, philanthropists or investors.
Our two main activities are venture philanthropy and impact investing. Within venture philanthropy, we structure family foundations and help on the governance. We offer our clients customized and bespoke support in their philanthropic activities, helping them channel their financial resources effectively toward resolving critical social and environmental challenges.
In the impact investing space, we have structured our activity alongside two main mandates. The first mandate is a direct investment one backed by a large Belgian family that has mandated us to manage their evergreen impact vehicle dedicated to environmental solutions.
Our second mandate is the Telos Climate Fund I, a €63m closed-end fund-of-fund structure with the mission to select a portfolio of 10 top-tier fund managers across Europe dedicated to climate solutions. More than 40 private investors have joined us in this project. With this vehicle, we are aiming to make climate investing more accessible to private investors. The idea is that the fund-of-fund can multiply the effect of a single commitment, by selecting fund managers that will themselves invest in 10 to 20 solutions each, totaling more than 200 solutions financed through our vehicle.
How would you describe the investment model of Telos Climate Fund ?
It is a traditional closed end fund-of-fund structure in private equity, fully dedicated to climate. We only select fund managers with strategies 100% dedicated to climate. We systematically benchmark all specialized fund managers across Europe, selecting those with a proven track record and expertise in the environmental sectors. They deploy the capital over the first 5 years, followed by five other years where they focus on exiting their positions. All revenues generated within the portfolio are directly distributed to our investors (or Limited Partners). The fund-of-fund team and operations are financed through annual management fees on committed capital, which decrease over the fund’s lifetime.
Why do you think family offices focus on climate investments, why has it become a trend ?
Entrepreneurs engage increasingly in the urgency that climate change creates. It is more than a short term trend. We see it as the opportunity of the century. Consumers ask for more sustainable products and services, the corporate world is going net zero and have more and more pressures to green their value chains. It is a structural transformation of our economies and industries that is needed, and innovations are needed to help in that transition. More and more public and private sector stakeholders recognize that this is where the new economies are going. Companies that embrace this change early will secure significant competitive advantages in the future.
Would you like to name some subsectors that Telos Climate Fund focuses on ?
We want to be active across the entire spectrum of environmental solutions, focusing on 7 key verticals: energy, buildings, transportation, industry, food and agriculture, and two emerging sectors – climate management (centered on the use of climate data) and carbon Technologies (encompassing carbon capture, storage and utilization).
How is performance measured and assessed in climate investing ?
In terms of financial performance, it is measured using financial standards of international private equity valuation methodologies. Fund managers value their portfolio every quarter. In venture capital, they often adopt a conservative approach by valuing the company at the price of the last round of financing despite the fact that the company may have increased in value in the meantime.
Regarding impact metrics on climate, this is another story ! The impact performance measurement and assessment are clearly the main challenge in the sector today. We see very diverse practices. Some fund managers are pioneering in the field and seek to identify sensible and science based methodologies, however there is no standard practice yet. In the future, we expect that the current European framework on sustainable finance (SFDR) will be more complete with referential index per sector in order to have comparison points to facilitate impact measurements. But for now, it is about collecting the data, consistently and of best quality in order to create something comparable. However, it is certain to evolve with some degree of standardization expected within the next 5 years.
Could you share some of your most successful investment stories where you met your objectives ?
In our own portfolio, it is too early to tell. However, among the fund managers we have invested in, there are several notable success stories. The first one is a German company developing wireless charging stations for electric vehicles. The company was acquired by Tesla just two years after the fund manager’s initial investment, achieving a 2 times multiple. At the time of the acquisition, the startup had generated 14 mill. euros in revenue, marking a significant success in driving innovation in the automotive industry and advancing electrification.
The second story is about a company developing a bottled drinking system designed to provide flavored drinks using just tap water. It’s a way to encourage people to rely on tap water, reducing the use of plastic bottles. That solution proved to be quite successful and was eventually sold to Pepsi at a 9 times multiple. The company generates 200 mill. euros in revenue.
A third case study is that of a Nordic dehumidification solution for industries. They found a way to have a huge positive impact on energy savings from the dehumidificators used by industrials to up to -70% of energy consumption compared to traditional equipment. The company now works with more and more industrials clients and generates 2 mill. euros in revenue.
Thus, the Telos Climate Fund features a variety of climate solutions in different locations, geography and across all sectors. We always focus on strong positive impacts and our four key indicators are: GHG emission reduction, energy savings, waste avoided, and water saved.
How do you ensure that your clients’ objectives are being met ?
We exclusively select fund managers whose strategies are 100% dedicated to climate and who are committed to the European SFDR Article 9 framework - the most ambitious category for environmental objectives. For us, it is essential that they set up robust environmental targets and implement a rigorous impact methodology.
This is why we also spend a lot of time to assess the internal processes and resources put in place by the fund managers to manage their impact and monitor them consistently over time.
Regarding the future, what trends or innovations do you see in climate investing ? How do you believe that the evolution of technology & AI will influence the direction and growth of the sector ?
All sectors are influenced by environmental innovations and this is very positive. What is missing is the maturity of some projects to fully convince investors on a broader scale. The goal is to build trust by showing more and more success stories to potential investors.
As far as technologies using AI are concerned, I believe they can be very positive for the climate since they will help to better measure, understand and anticipate certain environmental impacts and solutions that are today underestimated due to their complexity ; the best example being the way we apprehend our impact on biodiversity. The AI can help to understand those complex phenomena and find the appropriate response.
Which risks have you identified as primary and how do you work to mitigate them ?
For investors in general, the main risk associated with climate investing lies in its status as a nascent asset class, primarily involving young companies (start-ups / scale-ups) and the risks inherent in venture capital. My concern at the moment is that some financial failures which have been largely mediatized might discourage some investors. Yet, it is venture capital and it is risky, so one needs to be equipped (financially and operationally) to invest in new technologies, take those risks and diversify to mitigate those. This is the message we convey to investors. Partnering with Telos Impact, which has a deep understanding of climate tech and offers strong diversification through our fund-of-fund structure, provides an attractive way to mitigate the risks associated with climate investing.
Finally, why would someone choose Telos Impact for their investment management ?
Based in Brussels, we have been working in the industry since 2018. Thus, we already know most fund managers active for the Environment in Europe that we select objectively and in a structured and strict manner.
Out of the 300 identified investment managers in Europe, we will be selecting only 10 of them, being the best in their sectors. Our deep knowledge of the market and extensive review of the proven individual track of fund managers provides us credibility to choose the best teams.
It is truly a very exciting moment with the market accelerating in that field and, although this is our first fund-of-fund, I am sure we are going to develop further in climate investing and am very optimistic about the future !
Thank you.