In this letter, we share what we have learnt from investing in the world we want.
When fundraising for Fund I, we had to explain to investors how aligning our investments with the UN Sustainable Development Goals (SDGs) would create higher returns. To date, the portfolio of companies advancing the SDGs in Summa Equity Fund I has performed strongly.
25th of February 2019 we closed our Fund II at SEK 6.5 billion, three years after inception of the firm.
However, this time, the fundraising was different.
Investors were eager to commit. The investment community has started to understand that externalities and returns are increasingly correlated. It is necessary to have a successful and future-proof business. This makes us optimistic!
Today, the world is at a tipping point.
Several challenges are unfolding simultaneously, after decades of build-up:
- Climate change is leading to extreme weather volatility. The latest IPCC report highlights the future risks we are exposed to and the need for immediate actions. The World Economic Forum Global Risk Report, launched in January 2019, lists extreme weather events and failure of climate change mitigation and adaptation as two of the top three risks in terms of likelihood and impact
- Inequality and social uprising increase, impacting the workforce and marketplace
- Technology disrupts industries, affecting people and their jobs
- We have damaged the biosphere over the past decades, with significant loss of biodiversity
- Our democratic bodies, both in Europe and the US, are becoming increasingly polarized. This is creating uncertainty and difficulties in effectively addressing these issues
- Growth is stagnating. Countries, banks and companies have had elevated debt levels since the Global Financial Crisis 2007-2008, increasing economic risk.
In this uncertain world, we do however have some certainties that bring business opportunities:
- Population is increasing from 7 to 10 billion by 2050. This rapid growth strains our natural resources, but creates growth in recycling and agri-tech industries
- We live longer, bringing growth in the healthcare- and infrastructure sectors
- People are moving because of unrest and urbanisation. This creates investment opportunities in education, security, public services, real estate, and infrastructure
- We need to reduce CO2 emissions, improve energy efficiency and promote renewable energy consumption. This is making energy efficient technologies, energy infrastructure solutions and smart cities attractive investment opportunities.
Our biggest challenges are our biggest investment opportunities.
At Summa Equity, we take a thematic megatrend approach to investing, and focus on:
- Resource Efficiency, including recycling, energy efficiency, agri-tech and circular economy
- Changing Demographics, including healthcare, education, and security services
- Tech-enabled Businesses, including companies digitising processes and thereby for example increasing efficiency in the value chain, providing more transparency and improved compliance.
We invest to solve the global challenges. We also invest carefully to provide superior returns. Most investors traditionally saw these two goals as incompatible. That is no longer the case.
What got us here will not get us there.
All companies fulfil a valuable role for their customers. If they don’t, our market system puts them out of business. Businesses create both positive and negative externalities. In many industries, there is a high correlation between positive outcomes for society and business success. Take for instance a healthcare company that must make its customers healthier to succeed. It will create positive externalities. However, oil and gas companies, for example, have historically created negative externalities.
Until recently, most investors have been largely agnostic about these externalities. Now we are beginning to see a significant change. There is an increasing correlation between positive outcomes for society and business success. And a higher awareness of the correlation between negative outcomes and the lack of how future-proof the business is. Unless investors and owners understand and incorporate this, the risk-reward ratio will drastically worsen. Investors need to start accounting for negative externalities and business leaders need to innovate for positive externalities.
We had the ability to respond. So, we took responsibility.
Summa Equity was amongst the first Private Equity firms to commit to the SDGs and to align our investment and value creation strategy with this framework. The 17 SDGs should be used as the world’s business plan. They also provide an excellent framework for assessing risks and opportunities.
We believe that companies that develop the best solutions to the challenges society faces will outperform, attract capital and the best people. Investing in these companies will create higher returns and it will contribute to the positive change we need.
In Private Equity, investment focus has moved from financial engineering in the 1980s, to operational improvement in the 1990s, to strategic improvement and institution building in the 2000s. Now we are in the 4th generation of Private Equity development, where purpose, stakeholders, and externalities are fundamental to value creation and future proofing the portfolio. There are amazing business opportunities in solving the challenges we face.
We expect to take a long-term perspective on our investments and sell to buyers who do the same. We do not deal in short-termism. Our exit options and exit valuations are affected by the outlook of ten or more years, which includes assessing how future-proof the company is. Given that we are only a few years away from knowing which of the climate change scenarios we are on, we will also evaluate the risk and impact of these on our investments.
Professor George Serafeim is one of our advisors. His research at Harvard Business School shows that purpose-driven companies exhibit higher levels of motivation and better performance. We all want to be part of the solution rather than the problem.
It encourages us to see that other investors are following a similar approach to Summa Equity. The investment opportunity is big and attractive, driven by the increasing and urgent need for solutions. So, while it is now making strong economic sense, we also need to accelerate this to avoid that the challenges become a major risk, rather than an attractive opportunity.
Chair, Summa Equity
+46 705 41 33 60
Managing Partner, Summa Equity
+47 90 69 11 13