Episode 170: Growth Equity Strategy with Generation IM's Lila Preston
Episode 170: Growth Equity Strategy with Generation IM's Lila Preston
Today's guest is Lila Preston, Head of the Growth Equity Strategy for Generation Investment Management. Lila walks me through Generation's investment ethos and we dive into a lively discussion about ESG investing, greenwashing, and the ethics of partnering with fossil fuel companies as we head towards a clean future.
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Maybe we should just take things from the top. And I say that as if it's spontaneous, but I say that same thing every time. So maybe I should work on that, but what's Generation Investment Management?
So Generation is a dedicated, sustainable investment firm. We were set up in 2004 by a group of founding partners and really from the beginning, the aim was to put sustainability at the core of an investment process. We did that because we thought it could deliver the very best performance for our clients. We manage money on behalf of large institutions, pension funds, endowments foundations, endowments, and universities. Ultimately, we believe a long-term horizon is required is best practice if you're taking that long-term view that you understand the holistic business quality management quality and ultimately builds very deep research underpinning companies that you back. So that's the backstop of Generation, fast forward to today it's still a boutique investment firm; we have just over 100 people. We focus on both listed equity, so public equity, and private equity. And I spend my time heading up the growth business, which is our private equity practice. We also have a long-term equity sleeve and what's uniting is obviously really kind of putting sustainability at the heart of what we do, it is kind of all that we've ever done, it is all that we will ever do. We don't have any separate investment strategies. We think that, again, this is best practice and are now in, yeah, year 17.
Given that clean energy or sustainability generally is every category and every sector and every function and every geography and many of these businesses have fundamentally different profiles. From an investment standpoint with that sustainability focus, what are the guardrails as you evaluate climate sectors?
We use a pretty concrete framework. I mean, again, everyone needs to have their process and their framework. For us at Generation, we have public and private. I'm talking about the private equity platform here, but it's not dissimilar in public. We actually have similar frameworks and rely on many of the parallel ways to assess businesses and management teams, but for us, it all starts with roadmaps.
So number one is researching first. That is the way that we develop a lot of our ideas. We call them roadmaps, they're deep analyses into pockets of the economy or pockets of the market where we recognize there's a shift taking place. Many times it's a shift towards more sustainable outcomes, whether it's an alternative protein and I understand you've you know, met Thomas in Nature's Fynd, or it's a shift towards more efficient built environment, electric mobility, all these shifts that are taking place, we call the coverage roadmaps. We've done probably 300 as a firm and 150 within the growth team. So that helps us understand the surround sound, sort of talking to the incumbents, talking to the upstart innovators, talking to the regulators, talking to the NGOs and the academic community that's a requirement for us to kind of start our work. So that's underpinned with real deep sector research.
Then as we lay down these roadmaps. So if you take a roadmap, that's looking at up-skilling and rescaling, you'll take a topic like that. You'll map all the players and you'll probably come up at the end a set of companies that you'd like to meet because you've started to qualify them.
You've looked at maybe their growth rate. You've understood the stage and maturity of the business. You're forming an opinion perhaps about the business model and you've gotten to meet the team. We get probably four to six, really highly qualified company pipeline opportunities off of each of our roadmaps. So we do 12 or 14 roadmaps a year. We probably get about 70 to 80 of our qualified pipeline companies that come off of that. And then we put time and attention towards getting under the hood to understand business quality BQ, which is another piece of our framework, and then management quality MQ. So those two pieces, plus the roadmap context. And then the final pieces, that system positive analysis, which is really embedded in all of those three, it's a determining that is if indeed this company will be able to drive a more sustainable future, how would we measure that over time?
On the growth team, we categorize our opportunity set in these three bubbles or three spheres, one being planetary health, one being people health, and the third is financial inclusion, and there are often overlaps in those spheres. We have many companies that might be not only driving planetary health but also people's health or planetary health and financial inclusion. We recognize that that kind of framing helps us to determine companies that as they grow will deliver measurable outcomes and ultimately hopefully impact over time to address climate broadening health outcomes and broadening economic and social inclusion.
What about in terms of the big strategic landscape, whether it's in terms of partnerships or whether it's in terms of coal investment, there seems to be a bunch of debate or different philosophies around, for example, whether it's okay to partner with the fossil fuel companies and under what scenarios or criteria, how do you think about that at generation?
The way that we invest means that we're focused on long-term sector transition businesses and quality management quality. It won't surprise you to hear that we don't have coverage in fossil companies and/or extractive industry companies because that long-term research horizon would tell us that perhaps they're less likely to be sustainable organizations. I'll speak just for the growth team in that when we think about backing sustainable solutions businesses, which is really what the fund is focused on. We're looking for disruptors and innovators so really the drivers of a shift. And therefore in most cases, they're beyond incumbent industries, they're actually may be developing the next wave of technology or a solution in the context of the food system. These are shifting to biological-based inputs away from maybe incumbent chemistries. They're moving to more circular business models, away from use and then dispose. They're moving towards a more distributed future of work where people can be more resilient and working from their location of choice as compared to a centralized command and control. They're delivering financial services in a way that is even leapfrogging some of the previous incumbent models and on and on.
I just think that there is so much opportunity in those shifts that it's not that we aren't aware of incumbent and legacy industry players and all of the work that we're doing on advocacy related to net-zero transition, but our day job and hours are limited. So we aren't spending them with big pockets of the market, such as the fossil players.
Lila, we've covered so much ground in this discussion, is there anything I didn't ask that I should have, or any parting words for listeners?
Yes, I do think if you take a step back and you say that this sustainable investment agenda if you think it's different or separate from mainstream investment, I think that's a real challenge. I think we've hit the end of like do no harm or business as usual investing. There's a really important moment to recognize that all investments, all companies have impact positive and negative. There is no investment that doesn't, and it is not all positive, it is not all good. There are puts and takes. I think the mental shift to all capital managers, capital owners, as well as individuals, just take that into your daily life. Recognize that there are consequences, positive and negative to all your actions and in finance, it is no exception. Therefore we have an enormous responsibility. It is not acceptable to just do no harm. We have to be shifting towards that system positive future as soon and as fast as possible. So that's the rallying cry. I think you have probably a little bit of an echo chamber here, so hopefully, it reaches new participants. So kind of asking folks to engage with the unsuspecting, perhaps skeptic, and try a conversation or two to open up their perspective.
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