April 8, 2025 • 37 mins
On this CHATS segment of the "Financial Perspectives" podcast, William Reynolds hosts a dynamic conversation with Josh Hile - CEO of Citizen Mint - as they explore how impact investing in private markets is transforming the investment landscape by delivering competitive financial returns while addressing critical global challenges.
The traditional investment paradigm has long separated profit-seeking activities from philanthropic endeavors—but that's changing rapidly. Josh explains how younger investors are rejecting this binary approach, instead seeking investments that generate returns while creating positive outcomes for society and the environment. This shift coincides with extraordinary market opportunities in sectors addressing urgent needs like renewable energy infrastructure, affordable housing, and innovative private equity structures.
We dive deep into the compelling risk-return profiles of impact investments that challenge common misconceptions. Renewable infrastructure investments typically deliver 12-14% returns with half the volatility of public markets. Affordable housing can achieve 15% IRRs with remarkably stable tenancy and recession-resistant characteristics. These aren't concessionary investments—they're powerful portfolio diversifiers that happen to create meaningful positive change.
The conversation explores how artificial intelligence is dramatically reshaping energy demands, creating unprecedented opportunities in sustainable infrastructure. By 2030, US data centers alone will become the sixth-largest energy consumer globally, driving massive capital deployment toward renewable energy solutions.
Whether you're an experienced investor or just beginning to explore how your portfolio can reflect your values, this episode provides actionable insights into an investment approach that refuses to compromise between purpose and profit. Listen now to discover how private market impact investments could transform your portfolio while helping address society's most pressing challenges.
If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.
This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.
The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Lindsey Helman (00:05):
Hello and welcome to this month's chat
segment of the FinancialPerspectives podcast.
Our chats episodes featuredynamic conversations between
industry experts from some ofour recent and most popular
webinar recordings.
This month you'll hear fromJosh Hile and William Reynolds
as they discuss impact investingin private markets and William
(00:30):
Reynolds as they discuss impactinvesting in private markets.
William Reynolds, CFA (00:33):
Good afternoon everyone, and thank
you for tuning in today to ourwebinar titled Impact
Investments in Private Markets.
Before we dive in, I'd like toquickly just introduce myself.
My name is William Reynolds andI'm an investment associate at
Fire Capital Management, as wellas a member of CFA Society, san
Francisco and volunteer memberof our Young Leaders Council.
In my role with Fire Capital, Iassist in managing client
portfolios and supporting theinvestment team in making
informed decisions by evaluatingand presenting updates on
(00:54):
investments, market trends andindustries.
I also play a key role inmaintaining client relationships
and developing investmentstrategies that align with
clients' financial and impact-related goals.
N ow.
I'd like to introduce ouresteemed speaker today, Josh
Hile.
Josh Hile is the CEO, cio andco-founder of the private market
investment platform,citizenmint.
Josh has spent the last 10years managing and consulting
(01:16):
ultra-high net worth individuals, as well as pensions and 401k
plans of Fortune 100 companies.
Prior to co-foundingCitizenMint, josh was the
Director of Investment Strategyand Research at Laird Norton
Weatherby, a $16 billion RIA,where he was instrumental in
developing and maintaining andimproving impact and sustainable
investing capabilities for bothpublic and private markets.
He was further responsible forworldwide sourcing, ongoing due
(01:38):
diligence and monitoring of allequity asset managers, as well
as real estate, private equity,private debt and venture capital
opportunities, and prior tothis, josh worked at Russell
Investments, performing duediligence on fund managers for
Russell's mutual fund andconsulting divisions.
Mr Hile has a BA in businessadministration and an MBA from
the University of Washington'sFoster School of Business, and,
in addition to that, josh isboth a CFA charterholder and
(02:01):
certified public accountant.
Josh, thank you so much forjoining us today, and I'm
personally thrilled to discusstoday's topic of impact
investments in private markets.
Thank you so much.
So excited to be here Awesome.
Well, before we dive into theparticulars of today's subject,
I think it'd be helpful if weset the stage for the audience,
and by that I think it'd behelpful if we differentiated to
what the differences are betweentraditional sustainable and
(02:31):
impact related investments froma high level.
Josh Hile, CFA, CPA (02:32):
Yeah, definitely so.
In traditional investments,you're going to focus on
maximizing financial returns oninvestments, with little concern
of the negative externalitiesof those investments.
So that's the number one, you'rejust trying to get as high of
returns as possible.
It doesn't matter what you'redoing and you just don't care.
In the second, which would belike sustainable buckets, you're
investing in companies thatreduce risk and increase value
(02:53):
through thoughtful considerationof all stakeholders, so you're
incorporating employees, you'reincorporating customers, local
communities, shareholders, whilelimiting the negative
externalities on society and theenvironment.
And you can think of this ineven like you're treating your
employees well, you're doingwell within your communities,
which helps your brand image,which is something that's not
(03:16):
necessarily measured on thebalance sheet, but it is
something incredibly importantto a business over time.
And then the third category orbucket is impact investing, and
these are investmentopportunities, which are often
in the private markets, thatseek to solve an environmental
or social challenge while alsotrying to maximize financial
returns.
And some people might think ofimpacted investing as
(03:41):
philanthropy.
It doesn't need to be and it'ssupposed to be totally separate,
because you're really stilltrying to maximize those
financial returns within thatmarketplace.
William Reynolds, CFA (03:49):
Yeah, and I think that's a great overview
and I guess let's dive a littledeeper into this.
So the, particularly as itrelates to impact investing,
where you said, there doesn'tnecessarily need to be the
philanthropic arm to it.
There's also the you could say,market return rate sort of
investments.
What would the differences inphilosophies and objectives be
for these different types ofinvestments as it relates to
(04:10):
that?
Josh Hile, CFA, CPA (04:11):
Yeah, and I think you know, with the
objectives on impact investingand I'll make sure I'm actually
going to share my screen just toshow you a little bit what this
can look like, you a little bitwhat this can look like.
So, oops, one second, there wego, so you can kind of see the
(04:31):
broad based and like sustainableinvesting can kind of be
encompassed in that SRI, esgbased, thematics ESG.
That can kind of go across thatsustainable investing universe.
But the different philosophiesand processes really on the
impact investing side, you'rereally mostly going to look at
that in private markets.
Traditional investing can be inequities bonds but also private
(04:52):
markets within that, but takinga broad based approach of like,
hey, we can go invest insomething that might be
detrimental to the environment,might be detrimental to society,
but we are just trying to getthe highest returns for our
potential investors.
So I think that's one of thedifferences in the philosophy
base, whereas impact investingcomes from it of like well,
(05:15):
first of all, it has to be agreat return investment for us
to get involved.
So you start kind of at thesame place where in traditional
investing, in sustainable,normal investing and impact
investing, you're like we stillwant to maximize returns.
But then you kind of divedeeper into like for impact
investing.
Is this actually having apositive impact on society?
(05:35):
After you have that first levelof diligence on like, is this
also just a good investment toget into?
William Reynolds, CFA (05:41):
Perfect, and how would you say that the
demand for these forms ofinvestments have grown over the
past two decades?
Josh Hile, CFA, CPA (05:47):
It's been rather significant in the demand
side of things, as people havethought about or even understood
what their underlyinginvestments are actually doing,
and so you know we like I'llshow you kind of a demand chart
but it's actually one of thefastest growing segments in
financial markets.
If you just think about howmuch money is going into this.
(06:07):
A lot of this does have to dowith kind of this transition of
energy and because there is somuch money moving into the
infrastructure market where weneed to find replacements for
energy or other parts ofinfrastructure, but also it's
also related to just like thebiggest issues we're facing out
there need a lot of capital,whether it's in climate change,
(06:31):
specifically energy, whetherit's in education, healthcare,
affordable housing.
So it has been a place wherepeople have been looking to put
more capital because theopportunity set is so massive,
and whenever there's a massiveopportunity set, all investors
start paying attention to that.
William Reynolds, CFA (06:48):
And before we dive into a little bit
more about the asset classes,which you've already kind of
alluded to there.
But in terms of generationally,I would say that the problems
that were faced by the oldergenerations may not be the same
problems that the youngergenerations may be more so
valuing and or focusing on atthe moment.
How have you seen clients andfinancial advisors representing
(07:10):
their clients approach you andCitizen Mint as it relates to
value alignment with theirinvestments?
Josh Hile, CFA, CPA (07:17):
Yeah, I think one of the big things is
younger generations are muchmore attuned to essentially
thinking about how theirinvestments are going to impact
society From a taking a stepback.
So I was at a large wealthmanager.
Most baby boomer clients thinkof their money in two buckets.
They think of their profitgeneration, they and then they
(07:38):
have their other side, which istheir philanthropy.
They don't like to intermixthose and they don't care if
they're against each other.
So you could be like, hey, Ireally care about this issue and
even if that issue is somethingthey're essentially creating
negative externalities for intheir profit-making center, it's
like, well, I'll just put moneyinto my philanthropy center to
(07:59):
offset that, whereas futuregenerations, or essentially
millennials, are essentiallysaying, well, actually I want
those two to interconnect and Iwant to do good at the same time
as my investments are doinggood and not have these negative
externalities and have to putmoney more money into
philanthropy to offset mynegative externality.
So just a big mindset shift andI think I would just I'll pull
(08:22):
up, you know, kind of a couplethings here just because I think
they're important.
You know, this youngerdemographic are really looking
at their investments and saying,okay, well, I want more
alternatives in my portfolio, Iwant more sustainable things in
my portfolio, so like that'swhat I want to have.
Also, what we've seen is thewealthier the person is at
(08:43):
wealth management firms.
In a lot of cases, some of thebiggest or largest clients at
certain wealth management firmsare actually some of the most
impact oriented, and so we'veseen wealth managers either lose
clients because they don't haveenough impact or capabilities
within that marketplace or, inthe case of other wealth
managers, have really builttheir business on the back of
(09:05):
having this capability whetherit's Laird.
Norton Weatherby, whether it'sAltititaman, whether it's Jordan
Park, some of these big wealthmanagers within the space that
are highly well respected, thathave these big impact
sustainability capabilities andthey've been able to grow their
business quite significantlybecause of those capabilities
internally.
William Reynolds, CFA (09:24):
Yeah, and I could personally say that at
Fire Capital Management we alsoadopt a similar philosophy and
we hear it as well from a lot ofour younger clients
particularly, and, yeah, theyjust like to see you know
additional value be made fromtheir returns, so that's really
helpful.
Thank you, I guess let's goback a little bit.
(09:46):
So you already alluded to someof the particular asset classes
that you see where there's a lotof opportunity within impact
investing, particularly as itrelates to private markets.
But can you dive a littlefurther or opine as to what you
predominantly see in terms ofunderwriting and ongoing
pipeline investmentopportunities with Citizen Mint
(10:07):
and in your past?
Yeah, that's evolved over time.
Josh Hile, CFA, CPA (10:10):
Yeah, definitely.
I mean in the past you know itwas or it see what it seemed
like is it was mostly focused on, maybe, the VC universe.
There was a lot of differentopportunities within education
or healthcare or other placeswhere it's like, oh, this new
technology is going to transformthis specific part of the
marketplace, and that's stillthe case.
(10:30):
I mean, there's a ton of VCfirms that are impact oriented
and are looking at thosespecific big opportunity sets
and saying, okay, we can have abig impact here through
technology.
That said, there's other partsof the marketplace, which is
where we really focus.
Our focus hasn't been on the VCuniverse.
Our focus has more been on moreeven real assets a lot of real
(10:51):
estate, infrastructure, privatedebt backed by real assets but
we see those things as justmassive opportunity sets, and
we're not the only ones.
I mean Blackstone, kkr, carlyle, apollo.
Every one of them is jumpinginto similar spaces where
they're saying, okay, well, weshould be looking at energy from
(11:11):
a renewable infrastructurestandpoint and we should be
putting capital work.
Blackstone's likely going to bethe biggest provider of
affordable housing in the USjust because it's such a massive
issue.
It's a bipartisan issue whereit's like we all know that we
need more affordable housing,whether you're on the East Coast
, west Coast or in between, andso this is going to be a place
that is going to be investableand you look back on it Also,
(11:35):
the returns have been verystrong within that area of the
marketplace and people justhaven't really spent a lot of
time looking at it.
But Blackstone obviously has,and when you're hitting like 15%
IRRs for these like affordablehousing projects that have
almost no downside, that's apretty good place, like where I
want to be playing too.
(11:55):
So from a perspective of us, wehave really spent a lot of our
time in infrastructure, inrenewable infrastructure,
affordable housing, and thenprivate debt backed by some kind
of real asset.
William Reynolds, CFA (12:08):
Yeah, and I think, going back to your
note earlier about philanthropicversus market rate impact
related returns, one particularinvestment that we've helped
with clients is essentiallybelow market rate loans provided
to organizations that alignwith client value.
So I think to your point aboutjust the availability of
opportunities has grown and moreopportunities for value
(12:30):
alignment within a clientportfolio, which is helpful for
wealth managers looking to growout that sleeve.
Josh Hile, CFA, CPA (12:36):
Exactly, yeah, exactly.
William Reynolds, CFA (12:38):
Yeah, that's great.
And then I guess let's dive alittle deeper into the actual
due diligence process.
So you have a great wealth ofexperience in due diligence in
various assets asset classes,impact, traditional and
sustainable due diligenceprocess for an impact related
(13:03):
investment, where there is aclear societal or environmental
goal to be achieved outside offinancial return, differs from
that of a traditional investment.
Josh Hile, CFA, CPA (13:08):
Yeah, and I mean, I think it really starts
roughly at the same place.
You have a thesis for themarketplace where you're saying,
okay, what are what looks likeit's going to be an interesting
opportunity based on the dataset I have in front of me and
what is out in the world.
And you're saying, okay,there's essentially five or six
investable asset classes andwhich ones look to be the most
(13:32):
prominently placed to have a bigimpact or have a big compelling
financial return.
And then from there, you know,reviewing what the actual like
part of the marketplace that'sinvestable, and then is that a
compelling risk rewardopportunity?
So, that even takes away likethe impact side of it where we
are going down the same place of.
(13:53):
Can we maximize financialreturns here for unit of risk?
And when we say yes then we goto.
Is this having a positiveimpact on the world?
And then from there.
That's like what are the actualinvestable opportunities beyond
that and are theseopportunities actually impactful
?
Or are they greenwashing, whereit's not actually having the
(14:14):
impact you would expect it tohave, or it's actually having a
lot of negative externalities.
It might have one positiveimpact but it has tons of
negative externalitiessurrounded about it.
But there is that kind of likebeyond that from just separating
traditional and impact is likemaking sure that those things
that they say they're doing,they're doing.
So.
Just to give you an example, inthe case of affordable housing,
(14:35):
is this actually have an impacton like new units built?
Is this actually have an impacton like new units built?
Are these actual people who areliving there being impacted
positively from where they werepreviously?
(14:57):
So you can review that through,like we the fact you can do
tenant surveys to say, okay, howfar did you drive before?
How far do you drive now toyour workplace?
How has this impacted yourhappiness?
How much more discretionaryincome do you have Because this
is closer to your work, so youdon't have to spend as much on
transportation or it's cheaperthan the previous place you were
living at.
All those things that willfactor into that tenant's
(15:21):
happiness and like the impactyou're having with that actual
investment.
William Reynolds, CFA (15:24):
I think that's a great dovetail into
reporting requirements, which isprobably a question for many of
the audience on the call,particularly as it relates to
private markets because, beingthe nature that it is, it's a
little bit more opaque and it'snot as transparent as the public
markets or companies.
So you already alluded tosurveying, but what would be
(15:48):
other processes or what are thecurrent reporting requirements
within private markets, if thereare any?
Josh Hile, CFA, CPA (15:54):
Yeah, I mean there's no required
reporting requirementsrequirements.
There's some big systems outthere that larger foundational
investors have required whenthey're doing more institutional
investments, like impactmanagement project or IMP, as
well as IRIS or GERS or SASB,but most of them have some
relation to three key elements.
(16:16):
So materiality, so does theinvestment create material
change?
And positive change.
Measurability can the impactactually be measured?
And then intentionality, so isthe investment intentionally
made to create positive orsocial environmental impact?
Because there's a lot of VCinvestors out there and I'm sure
(16:39):
San Francisco love you ifthere's any VCs on the call, but
they'll be like well, vc is themost impactful part of the
marketplace because we create somany positive jobs that are
high paying jobs and it's likewell, is that actually
intentional in the process tocreate positive impact?
Is this actually bringingpeople out of poverty?
Or is this actually a techworker moving from Amazon to
(17:00):
this other job?
And does that actually createlike meaningful, like upward,
like impact, but so there's alot of different systems.
That said, there's a lot ofways to measure it and people
can measure it in however theywant.
But that is not too dissimilarfrom what you can do in public
markets and the way you can, youknow, increase your ratings
(17:22):
from a sustainabilityperspective by changing the way
or your methodology for creatingit, as long as you have
somebody sign off on that whichmost people will.
that's why exxon is rated one ofthe highest, like um,
sustainability companies, um,even though it's like well, are
they just hiring more people andhaving more consultants say
that they're self-sustainable,or are they actually having?
(17:44):
Are they being positive for theworld or not?
So there's again.
Upfront, though, what we try todo on our side of things is
work with the manager to sayhere are the things we would
like to report on, here are thethings we require of you to
report on on a quarterly basis,and here's like kind of like the
discussion on methodology ofhow we would like you to measure
(18:04):
that.
And then we work from there likereporting that back to our
individual investors knowingthat you know nothing's going to
be perfect and there's errorsand estimates, but we're trying
to do the best we can and, aslong as it's directionally
correct, we feel that we canfeel good about the impact of
that specific opportunity.
William Reynolds, CFA (18:24):
I think that also dovetails nicely into
a follow-up question on ongoingmonitoring as it relates to
private investments.
So I guess for the audience,particularly within private
markets, a lot of theseinvestments are illiquid in
nature.
So being able to exit aposition if something were to
change, such as style drift orwhat have you, then it's not as
(18:47):
easily said or it's not as easyas said and done.
And so I guess in that regard,particularly with impact related
goals, how does the ongoingmonitor process look like from
your perspective when you'rereporting on these
impact-related objectives?
It?
Josh Hile, CFA, CPA (19:05):
just depends and I'll probably say
that a hundred more timesbecause it's so different based
on the investment.
In some cases it's relativelyeasy.
When you're essentiallycreating energy from solar or
wind, it's tons of carbonemitted.
It's a pretty normal metricwithin the industry.
But then we put it into thingsthat people kind of actually
understand, because nobody knowswhat one ton of carbon abated
(19:27):
actually means.
But when you say you took 100cars off the freeway for a year
by one ton, you know being takenout.
Or you took like 50 trips fromLondon to LA out of the network
by like similar carbon metrics.
But those are pretty easy tounderstand and they're also
(19:48):
easier to measure compared tolike maybe affordable housing or
a healthcare or an educationinvestment where you might have
to do some more metrics around,like who you're actually serving
, because in affordable housingcase it depends on the level of
affordable housing, because youcould be doing actual low income
(20:10):
housing or you could be doingsome level between which would
be like between 50 to 100% ofAMI, and AMIs can range
dramatically by the region youlive in.
In the Seattle region where I'mbased, you know, ami is 120,000
.
And so you might be like, eventhough you're focusing on retail
workers, teachers, nurses,others who can't usually live
(20:33):
near their workplace becauseit's so expensive, those people
are still not making what you'dconsider as like low salaries
when you're making 70 to $80,000a year.
But it's like within thatenvironment.
It's still hard to live on someof those salaries.
So we try to measure it indifferent ways.
I think from you usually don'thave because we're not investing
(20:55):
in companies or businesses.
You don't have the same styledrift that you might have with
an individual company, wherethey're changing their whole
focus or they're pivoting orthey might like get rid of their
sustainability programs at anyone point in time.
That just doesn't really happenwith, like, affordable housing
or a solar project, even abattery project or whatever it
might be within thatinfrastructure space.
(21:17):
So you just don't, we just don'tsee it as often, unless you're
doing it with companies, oh, andthat makes sense too from that
perspective, I guess, lookingforward so.
William Reynolds, CFA (21:31):
AI has been the craze of you know the
news the markets over the pastfive to 10 years really, and its
evolution even more recentlythan that, has been on a J curve
.
With AI, there is an energyconsumption requirement through
data centers and I imagine, interms of asset allocation for
the investment opportunitiesgoing forward, infrastructure
(21:53):
around that is going to be huge.
I guess.
Can you speak more about thatfrom what you're hearing on your
clients and financial advisorsas to how they want to allocate
towards that?
you know, future world thatwe're heading towards.
Josh Hile, CFA, CPA (22:06):
Yeah, definitely, and I'm going to
bring up my presentation againto show you a little stats
around that because I think it'ssuch an interesting topic.
So AI is going to berevolutionary, I mean obviously,
um, it's already starting tolike roll into many of the
things like we do on a dailybasis, um, but like it's going
(22:29):
to impact the energy landscapemassively, it's also going to
impact the renewableinfrastructure landscape
massively, like it's actually.
Renewable infrastructure isgoing to be huge and renewable
infrastructure investments aregoing to be a huge beneficiary
actually actually of AI becauseyou have all these big tech
companies looking to have somelevel of sustainability.
I mean, they've all essentiallysaid 2030, carbon neutral around
(22:52):
that time period, and they'removing as fast as they can
towards that and they're puttinga lot of dollars behind it.
They're putting a lot of dollarsbehind it.
So all of them have these 50 to100% energy teams that are
constantly trying to figure outhow to just get new energy and
they're trying to get it fromrenewable sources in most cases,
because that's where most ofthe new energy is coming from.
So they're putting a lot ofcapital behind it.
(23:14):
But, like, ai is a whole notherlevel step above that of how
much energy you need.
So you need four times theamount of energy to power a
normal data center and MarkZuckerberg came out and just
said energy, not compute, willbe the number one bottleneck for
AI and you already see this.
I mean data centers areessentially trying to upgrade to
NVIDIA chips and the utilitiesare essentially saying no, you
(23:35):
can't.
So that is the number oneinvestable part of investing in
a data center center is can itactually upgrade or can it?
when you build that data center,will it have enough power so
that it's attractive to acorporate purchaser to be, able
to like be, willing to put thechips there, and so it's a
massive problem that we'redealing with right now.
(23:55):
You saw Microsoft turn on an oldnuclear plant.
You see Amazon signing nucleardeals as well.
I mean, amazon's deal with XEnergy essentially is like 10
years out, so it doesn't evenhave any impact on the current
necessity or needs of thatcompany.
But you even see, like in 2030,just alone, us data centers
(24:16):
will be the sixth largest userof energy in the world.
So I mean you're, you're infront of South Korea, brazil,
canada, germany, france, just byour US data centers and how
much energy we're going to need.
That's crazy.
And on top of that, like youeven see like just how fast the
power demands are increasing,and this goes like our power
demands were pretty set for along period of time, and then
(24:39):
you had EV come on, you haveonshore manufacturing, which is
only likely to increase underthe Trump administration and the
tariff that's likely to go intoplace, and so you're going to
see more and more businesses tryto produce domestically.
I mean it's been a big shiftover the last five years already
, because we knew we needed todo that.
But it's going to go up evenfurther and people don't realize
(25:01):
how much energy manufacturingtakes.
But on top of that you have AI.
So these are just the powerdemand forecasts on this top
chart that show how much itneeds to increase or how much
it's increased.
That estimate from 2021 to 2024.
It's been significant.
So, all that said is you neednew energy, you want it from a
(25:23):
sustainable source, and thesecompanies are demanding it from
a sustainable source.
So, this is going to be a hugeopportunity to renewable
infrastructure developers andthe investors that we invest
with.
William Reynolds, CFA (25:34):
Yeah, and I think that's all you
highlighted all very well.
Clearly there's a lot ofsecular tailwinds ahead for
impact related investments,where investors are able to
achieve more with theirfinancial resources than just
returns, as there's just a clearneed on the demand side from an
energy perspective In terms ofadditional high level positives
(26:00):
that impact investing can bringto a portfolio.
Can you just opine to some ofthat as well?
Josh Hile, CFA, CPA (26:05):
Yeah, and I think one of the biggest is
most investors, I think, need tounderstand there is a lot of
diversification benefits forthis overall asset class.
I mean, I guess, asset sector,not asset class.
But these investments say,let's call it infrastructure for
(26:27):
one thing, so renewableinfrastructure, it has half the
volatility of US stock market.
It has less than half thevolatility of private equity,
while producing, you know,roughly around 12, 14% type of
returns, net returns toinvestors based on current
Inflation Reduction Act.
Net returns to investors basedon current inflation reduction
(26:49):
act like tax incentives as wellas just the demand for the
underlying opportunities.
On top of that, it can be taxadvantage.
If you look at affordablehousing similar case, where it's
like super low risk, especiallyin the lower income housing
areas, it's like those tenantsusually stay there for 10 years
at a time, compared to 18 monthsfor a normal market rate tenant
(27:11):
.
They can increase rents evenduring recessionary periods
based on subsidies provided bythe government and other places.
They're hitting roughly 15% netIRRs to investors and they have
incredibly low risk compared to, like, a market rate apartment.
So I think there's a lot ofdiversification you can get
(27:33):
within these specific assetclasses.
Even you know, one of theopportunities that we saw was in
private equity, you know youcan do an ESOP private equity
fund and you areusing small business
administration loans at muchlower rates than the private
direct lenders are providing, to, say, the big private equity
(27:54):
companies like Vistria andBlackstone.
So you're getting like 6% debtrates and you're buying these
companies at seven times EBITDA,compared to nine to 10 that
private equity is usually buyingat, because the founder or the
seller actually gets significanttax benefits by selling their
business into an ESOP.
So lower purchase price onacquisition.
(28:17):
You get lower interest rates onyour debt, which creates a
better return outcome ultimatelyfor investors and lower risk
actually, because when you'rebuying into an ESOP there's
warrants attached to it as wellas debt.
So you're kind of in thisin-between risk position between
mezzanine debt opportunity andthe private equity opportunity.
(28:38):
So you usually have lower riskthan a private equity
opportunity.
So I think suffice to saythere's a lot of opportunities
where you can reduce your risk,diversify your portfolio, but
most investors have not beenable to see that through the
noise of what's been going onthere politically sovereign
wealth funds.
William Reynolds, CFA (28:55):
They're typically first movers,
especially in the private space,on some of these more
sustainable strategies.
As it relates to the allocationof your investors that you
(29:17):
particularly manage and seewithin private markets impact
investments, would you say it'spredominantly corporations, or
are you starting to see theultra high net worth come into
the fold more so?
Josh Hile, CFA, CPA (29:29):
Yeah, I think it's mostly.
I mean for us.
We do work with somefoundations who have been trying
to increase their allocationsto this to align with their
missions of the foundation,where it's essentially it's like
well, hey, if we can getinvestments that are similar
rate returns to what we need tomaintain our foundation
(29:50):
indefinitely and it more alignswith our mission of our
foundation, then we should bedoing that and I think there's
more and more foundations thatare looking to do that within
their portfolios.
From a corporation perspective,it goes the same way, but, that
said, we're mostly dealing withultra high net worth individuals
on our platform and wealthmanagers and their clients who
(30:11):
want to?
Align their values.
In a lot of cases, though.
I mean, we work with a lot ofwealth management firms who are
just excited about the returns,and probably about 70% of the
wealth managers we work with.
A lot of them don't care aboutimpact or their clients, but the
returns are so compelling andthe risk is much lower than in
(30:32):
other places in the market todiversify client portfolios here
that it just makes a lot ofsense for them, and so that's, I
think, where we can still havea positive impact on our end.
But then they're gettingdiversification and hitting
their clients' financial goals,which is a win-win for everybody
.
William Reynolds, CFA (30:49):
Oh, that's really interesting.
We got a question in from theaudience here.
So, josh, I'm curious if maybeyou have an outlook on this.
But, given a federal policyparticularly going forward, how
much do you think that willimpact energy generation in the
US and its mix between renewable, traditional or nuclear, and or
(31:13):
do you see this being more ofan economic decision?
Josh Hile, CFA, CPA (31:16):
Yeah, I.
So this is a that's a softballto what you really want to ask,
which is is Trump going to takeout the Inflation Reduction Act,
which should be the realquestion, and so what I think?
I mean, we've opined on thiswith a lot of experts within the
field and it's likely going tobe more a scalpel approach or a
(31:36):
rebranding approach compared toan actual full repeal.
First of all, it's really hardto repeal that big of an act.
Secondly, it's and I don't havethe chart like in front of me,
but I'll probably follow up onit but it's essentially
benefited mostly red states.
I mean the Inflation ReductionAct has been the biggest boon
for red states and oil companiesbecause they are actually huge
(31:58):
renewable energy providers aswell.
So of the 200, and I have thischart but of the 225 billion
spent and this was severalmonths ago $190 billion had gone
to red states.
So Texas is the biggestrenewable energy provider in the
US by far, by far, way biggerthan California and the future
projects are way bigger thanCalifornia.
Texas relies on 35% to 45% ofits grid on solar wind energy.
(32:23):
You can look it up on ERCot andsee their daily mix and most of
the production of new jobs.
So for solar, for EVmanufacturing, for onshoring of
like, like.
Actually the solar arrays isgoing on in Ohio, north Carolina
(32:44):
, on batteries, north Carolina,alabama, louisiana and Texas.
So, those are all red states,based on most recent data.
So is Trump going to destroyjobs?
Probably not.
He's probably not going to tryto destroy jobs, especially in
Texas.
Doesn't really want to messwith Texas.
On top of that, elon being partof the new administration in not
(33:06):
a formal role, but we know he'sthere, so it's likely that he
wants those things to stay inplace because they're hugely
beneficiary to the profitabilityof Texas.
I mean, people forget thatTesla is one of the biggest
battery producers in the worldand so on top of that they have
a residential solar and on topof that they get massive tax
credits through selling EVs cars.
(33:30):
So you would really like ifthey took out a lot of those
incentives.
Tesla is probably down 30%,maybe 40%.
So I just don't see ithappening and most, even like
Republicans don't like who areexperts on this topic don't see
it happening even likeRepublicans, don't, like who are
experts on this topic.
Don't see it happening.
I think it's also going to bean economic decision, to your
(33:51):
point.
Because, essentially, youalready have oil at $70 a barrel
.
Natural gas is super cheap.
It's unprofitable to drill fornew natural gas because people
will be like natural gas, isn'twe should?
just drill more, and it's likewell it's unprofitable, so why
would you drill for?
And it's's like if you drill aton more oil and you're going to
drop it to 50, then it becomesunprofitable for oil companies.
So it's like we're not going todo that.
William Reynolds, CFA (34:12):
So it is an economic decision.
Josh Hile, CFA, CPA (34:13):
At the end of the day.
Now, nuclear is still 10 yearsout.
At the very earliest, it isgoing to be part of the solution
and they're going to work toadd it in.
But there's, it takes a longtime to put nuclear in place,
even like small modular, becausepeople don't want nuclear near
their homes.
Even though it's mostly safethey don't.
William Reynolds, CFA (34:31):
They just don't want it near their homes
yeah, no, and I think that was agreat um.
Just to overview on the overallbroader implications of, uh,
what federal policy has to takeinto account as it relates to
future energy generation.
So, yeah, great points.
Well, I do believe that answersall of our questions that we
(34:53):
have for the call, and we'renearing the end here.
But, josh, if there's anythingelse you just may want to add
prior to you know logging offhere, I'll leave the floor to
you right now.
Josh Hile, CFA, CPA (35:03):
No, I think we'll follow up with some
resources that you can look at.
You can look at citizenmancom,where we have a ton of white
papers on different parts of themarketplace and try to dive
deep into each one of those.
We also put up a lot of blogsaround things like new
administrations coming in, wherewe try to provide expert
(35:23):
opinions on what individuals aresaying about it and what part
of the markets are investable,what parts aren't.
That you can look at and happyto answer any additional
questions.
William Reynolds, CFA (35:33):
Awesome.
Well, thank you so much, josh,for your time today, and thank
you everyone that's listening inand I'd like to you know.
Wish you all a great rest ofyour day, Thank you.
Lindsey Helman (35:47):
Thank you for listening to this month's chat
segment.
Chats is a monthly segmentfeaturing audio from our
recently recorded webinarsairing on the second Tuesday of
the month.
To view the video recording ofthis episode and discover
additional society webinars,visit the CFA Society San
Francisco YouTube channel.
Join us next time for ourregularly scheduled Financial
(36:08):
Perspectives podcast episodeairing on the last Tuesday of
the month, and make sure to sendin a message to the show using
a link at the top of eachepisode description or by
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Thank you for being a dedicatedlistener.
(36:29):
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(36:49):
To learn more about CFA SocietySan Francisco, visit our
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org or connect with us onLinkedIn.
Hello and welcome to this month's chat
segment of the FinancialPerspectives podcast.
Our chats episodes featuredynamic conversations between
industry experts from some ofour recent and most popular
webinar recordings.
This month you'll hear fromJosh Hile and William Reynolds
as they discuss impact investingin private markets and William
(00:30):
Reynolds as they discuss impactinvesting in private markets.
William Reynolds, CFA (00:33):
Good afternoon everyone, and thank
you for tuning in today to ourwebinar titled Impact
Investments in Private Markets.
Before we dive in, I'd like toquickly just introduce myself.
My name is William Reynolds andI'm an investment associate at
Fire Capital Management, as wellas a member of CFA Society, san
Francisco and volunteer memberof our Young Leaders Council.
In my role with Fire Capital, Iassist in managing client
portfolios and supporting theinvestment team in making
informed decisions by evaluatingand presenting updates on
(00:54):
investments, market trends andindustries.
I also play a key role inmaintaining client relationships
and developing investmentstrategies that align with
clients' financial and impact-related goals.
N ow.
I'd like to introduce ouresteemed speaker today, Josh
Hile.
Josh Hile is the CEO, cio andco-founder of the private market
investment platform,citizenmint.
Josh has spent the last 10years managing and consulting
(01:16):
ultra-high net worth individuals, as well as pensions and 401k
plans of Fortune 100 companies.
Prior to co-foundingCitizenMint, josh was the
Director of Investment Strategyand Research at Laird Norton
Weatherby, a $16 billion RIA,where he was instrumental in
developing and maintaining andimproving impact and sustainable
investing capabilities for bothpublic and private markets.
He was further responsible forworldwide sourcing, ongoing due
(01:38):
diligence and monitoring of allequity asset managers, as well
as real estate, private equity,private debt and venture capital
opportunities, and prior tothis, josh worked at Russell
Investments, performing duediligence on fund managers for
Russell's mutual fund andconsulting divisions.
Mr Hile has a BA in businessadministration and an MBA from
the University of Washington'sFoster School of Business, and,
in addition to that, josh isboth a CFA charterholder and
(02:01):
certified public accountant.
Josh, thank you so much forjoining us today, and I'm
personally thrilled to discusstoday's topic of impact
investments in private markets.
Thank you so much.
So excited to be here Awesome.
Well, before we dive into theparticulars of today's subject,
I think it'd be helpful if weset the stage for the audience,
and by that I think it'd behelpful if we differentiated to
what the differences are betweentraditional sustainable and
(02:31):
impact related investments froma high level.
Josh Hile, CFA, CPA (02:32):
Yeah, definitely so.
In traditional investments,you're going to focus on
maximizing financial returns oninvestments, with little concern
of the negative externalitiesof those investments.
So that's the number one, you'rejust trying to get as high of
returns as possible.
It doesn't matter what you'redoing and you just don't care.
In the second, which would belike sustainable buckets, you're
investing in companies thatreduce risk and increase value
(02:53):
through thoughtful considerationof all stakeholders, so you're
incorporating employees, you'reincorporating customers, local
communities, shareholders, whilelimiting the negative
externalities on society and theenvironment.
And you can think of this ineven like you're treating your
employees well, you're doingwell within your communities,
which helps your brand image,which is something that's not
(03:16):
necessarily measured on thebalance sheet, but it is
something incredibly importantto a business over time.
And then the third category orbucket is impact investing, and
these are investmentopportunities, which are often
in the private markets, thatseek to solve an environmental
or social challenge while alsotrying to maximize financial
returns.
And some people might think ofimpacted investing as
(03:41):
philanthropy.
It doesn't need to be and it'ssupposed to be totally separate,
because you're really stilltrying to maximize those
financial returns within thatmarketplace.
William Reynolds, CFA (03:49):
Yeah, and I think that's a great overview
and I guess let's dive a littledeeper into this.
So the, particularly as itrelates to impact investing,
where you said, there doesn'tnecessarily need to be the
philanthropic arm to it.
There's also the you could say,market return rate sort of
investments.
What would the differences inphilosophies and objectives be
for these different types ofinvestments as it relates to
(04:10):
that?
Josh Hile, CFA, CPA (04:11):
Yeah, and I think you know, with the
objectives on impact investingand I'll make sure I'm actually
going to share my screen just toshow you a little bit what this
can look like, you a little bitwhat this can look like.
So, oops, one second, there wego, so you can kind of see the
(04:31):
broad based and like sustainableinvesting can kind of be
encompassed in that SRI, esgbased, thematics ESG.
That can kind of go across thatsustainable investing universe.
But the different philosophiesand processes really on the
impact investing side, you'rereally mostly going to look at
that in private markets.
Traditional investing can be inequities bonds but also private
(04:52):
markets within that, but takinga broad based approach of like,
hey, we can go invest insomething that might be
detrimental to the environment,might be detrimental to society,
but we are just trying to getthe highest returns for our
potential investors.
So I think that's one of thedifferences in the philosophy
base, whereas impact investingcomes from it of like well,
(05:15):
first of all, it has to be agreat return investment for us
to get involved.
So you start kind of at thesame place where in traditional
investing, in sustainable,normal investing and impact
investing, you're like we stillwant to maximize returns.
But then you kind of divedeeper into like for impact
investing.
Is this actually having apositive impact on society?
(05:35):
After you have that first levelof diligence on like, is this
also just a good investment toget into?
William Reynolds, CFA (05:41):
Perfect, and how would you say that the
demand for these forms ofinvestments have grown over the
past two decades?
Josh Hile, CFA, CPA (05:47):
It's been rather significant in the demand
side of things, as people havethought about or even understood
what their underlyinginvestments are actually doing,
and so you know we like I'llshow you kind of a demand chart
but it's actually one of thefastest growing segments in
financial markets.
If you just think about howmuch money is going into this.
(06:07):
A lot of this does have to dowith kind of this transition of
energy and because there is somuch money moving into the
infrastructure market where weneed to find replacements for
energy or other parts ofinfrastructure, but also it's
also related to just like thebiggest issues we're facing out
there need a lot of capital,whether it's in climate change,
(06:31):
specifically energy, whetherit's in education, healthcare,
affordable housing.
So it has been a place wherepeople have been looking to put
more capital because theopportunity set is so massive,
and whenever there's a massiveopportunity set, all investors
start paying attention to that.
William Reynolds, CFA (06:48):
And before we dive into a little bit
more about the asset classes,which you've already kind of
alluded to there.
But in terms of generationally,I would say that the problems
that were faced by the oldergenerations may not be the same
problems that the youngergenerations may be more so
valuing and or focusing on atthe moment.
How have you seen clients andfinancial advisors representing
(07:10):
their clients approach you andCitizen Mint as it relates to
value alignment with theirinvestments?
Josh Hile, CFA, CPA (07:17):
Yeah, I think one of the big things is
younger generations are muchmore attuned to essentially
thinking about how theirinvestments are going to impact
society From a taking a stepback.
So I was at a large wealthmanager.
Most baby boomer clients thinkof their money in two buckets.
They think of their profitgeneration, they and then they
(07:38):
have their other side, which istheir philanthropy.
They don't like to intermixthose and they don't care if
they're against each other.
So you could be like, hey, Ireally care about this issue and
even if that issue is somethingthey're essentially creating
negative externalities for intheir profit-making center, it's
like, well, I'll just put moneyinto my philanthropy center to
(07:59):
offset that, whereas futuregenerations, or essentially
millennials, are essentiallysaying, well, actually I want
those two to interconnect and Iwant to do good at the same time
as my investments are doinggood and not have these negative
externalities and have to putmoney more money into
philanthropy to offset mynegative externality.
So just a big mindset shift andI think I would just I'll pull
(08:22):
up, you know, kind of a couplethings here just because I think
they're important.
You know, this youngerdemographic are really looking
at their investments and saying,okay, well, I want more
alternatives in my portfolio, Iwant more sustainable things in
my portfolio, so like that'swhat I want to have.
Also, what we've seen is thewealthier the person is at
(08:43):
wealth management firms.
In a lot of cases, some of thebiggest or largest clients at
certain wealth management firmsare actually some of the most
impact oriented, and so we'veseen wealth managers either lose
clients because they don't haveenough impact or capabilities
within that marketplace or, inthe case of other wealth
managers, have really builttheir business on the back of
(09:05):
having this capability whetherit's Laird.
Norton Weatherby, whether it'sAltititaman, whether it's Jordan
Park, some of these big wealthmanagers within the space that
are highly well respected, thathave these big impact
sustainability capabilities andthey've been able to grow their
business quite significantlybecause of those capabilities
internally.
William Reynolds, CFA (09:24):
Yeah, and I could personally say that at
Fire Capital Management we alsoadopt a similar philosophy and
we hear it as well from a lot ofour younger clients
particularly, and, yeah, theyjust like to see you know
additional value be made fromtheir returns, so that's really
helpful.
Thank you, I guess let's goback a little bit.
(09:46):
So you already alluded to someof the particular asset classes
that you see where there's a lotof opportunity within impact
investing, particularly as itrelates to private markets.
But can you dive a littlefurther or opine as to what you
predominantly see in terms ofunderwriting and ongoing
pipeline investmentopportunities with Citizen Mint
(10:07):
and in your past?
Yeah, that's evolved over time.
Josh Hile, CFA, CPA (10:10):
Yeah, definitely.
I mean in the past you know itwas or it see what it seemed
like is it was mostly focused on, maybe, the VC universe.
There was a lot of differentopportunities within education
or healthcare or other placeswhere it's like, oh, this new
technology is going to transformthis specific part of the
marketplace, and that's stillthe case.
(10:30):
I mean, there's a ton of VCfirms that are impact oriented
and are looking at thosespecific big opportunity sets
and saying, okay, we can have abig impact here through
technology.
That said, there's other partsof the marketplace, which is
where we really focus.
Our focus hasn't been on the VCuniverse.
Our focus has more been on moreeven real assets a lot of real
(10:51):
estate, infrastructure, privatedebt backed by real assets but
we see those things as justmassive opportunity sets, and
we're not the only ones.
I mean Blackstone, kkr, carlyle, apollo.
Every one of them is jumpinginto similar spaces where
they're saying, okay, well, weshould be looking at energy from
(11:11):
a renewable infrastructurestandpoint and we should be
putting capital work.
Blackstone's likely going to bethe biggest provider of
affordable housing in the USjust because it's such a massive
issue.
It's a bipartisan issue whereit's like we all know that we
need more affordable housing,whether you're on the East Coast
, west Coast or in between, andso this is going to be a place
that is going to be investableand you look back on it Also,
(11:35):
the returns have been verystrong within that area of the
marketplace and people justhaven't really spent a lot of
time looking at it.
But Blackstone obviously has,and when you're hitting like 15%
IRRs for these like affordablehousing projects that have
almost no downside, that's apretty good place, like where I
want to be playing too.
(11:55):
So from a perspective of us, wehave really spent a lot of our
time in infrastructure, inrenewable infrastructure,
affordable housing, and thenprivate debt backed by some kind
of real asset.
William Reynolds, CFA (12:08):
Yeah, and I think, going back to your
note earlier about philanthropicversus market rate impact
related returns, one particularinvestment that we've helped
with clients is essentiallybelow market rate loans provided
to organizations that alignwith client value.
So I think to your point aboutjust the availability of
opportunities has grown and moreopportunities for value
(12:30):
alignment within a clientportfolio, which is helpful for
wealth managers looking to growout that sleeve.
Josh Hile, CFA, CPA (12:36):
Exactly, yeah, exactly.
William Reynolds, CFA (12:38):
Yeah, that's great.
And then I guess let's dive alittle deeper into the actual
due diligence process.
So you have a great wealth ofexperience in due diligence in
various assets asset classes,impact, traditional and
sustainable due diligenceprocess for an impact related
(13:03):
investment, where there is aclear societal or environmental
goal to be achieved outside offinancial return, differs from
that of a traditional investment.
Josh Hile, CFA, CPA (13:08):
Yeah, and I mean, I think it really starts
roughly at the same place.
You have a thesis for themarketplace where you're saying,
okay, what are what looks likeit's going to be an interesting
opportunity based on the dataset I have in front of me and
what is out in the world.
And you're saying, okay,there's essentially five or six
investable asset classes andwhich ones look to be the most
(13:32):
prominently placed to have a bigimpact or have a big compelling
financial return.
And then from there, you know,reviewing what the actual like
part of the marketplace that'sinvestable, and then is that a
compelling risk rewardopportunity?
So, that even takes away likethe impact side of it where we
are going down the same place of.
(13:53):
Can we maximize financialreturns here for unit of risk?
And when we say yes then we goto.
Is this having a positiveimpact on the world?
And then from there.
That's like what are the actualinvestable opportunities beyond
that and are theseopportunities actually impactful
?
Or are they greenwashing, whereit's not actually having the
(14:14):
impact you would expect it tohave, or it's actually having a
lot of negative externalities.
It might have one positiveimpact but it has tons of
negative externalitiessurrounded about it.
But there is that kind of likebeyond that from just separating
traditional and impact is likemaking sure that those things
that they say they're doing,they're doing.
So.
Just to give you an example, inthe case of affordable housing,
(14:35):
is this actually have an impacton like new units built?
Is this actually have an impacton like new units built?
Are these actual people who areliving there being impacted
positively from where they werepreviously?
(14:57):
So you can review that through,like we the fact you can do
tenant surveys to say, okay, howfar did you drive before?
How far do you drive now toyour workplace?
How has this impacted yourhappiness?
How much more discretionaryincome do you have Because this
is closer to your work, so youdon't have to spend as much on
transportation or it's cheaperthan the previous place you were
living at.
All those things that willfactor into that tenant's
(15:21):
happiness and like the impactyou're having with that actual
investment.
William Reynolds, CFA (15:24):
I think that's a great dovetail into
reporting requirements, which isprobably a question for many of
the audience on the call,particularly as it relates to
private markets because, beingthe nature that it is, it's a
little bit more opaque and it'snot as transparent as the public
markets or companies.
So you already alluded tosurveying, but what would be
(15:48):
other processes or what are thecurrent reporting requirements
within private markets, if thereare any?
Josh Hile, CFA, CPA (15:54):
Yeah, I mean there's no required
reporting requirementsrequirements.
There's some big systems outthere that larger foundational
investors have required whenthey're doing more institutional
investments, like impactmanagement project or IMP, as
well as IRIS or GERS or SASB,but most of them have some
relation to three key elements.
(16:16):
So materiality, so does theinvestment create material
change?
And positive change.
Measurability can the impactactually be measured?
And then intentionality, so isthe investment intentionally
made to create positive orsocial environmental impact?
Because there's a lot of VCinvestors out there and I'm sure
(16:39):
San Francisco love you ifthere's any VCs on the call, but
they'll be like well, vc is themost impactful part of the
marketplace because we create somany positive jobs that are
high paying jobs and it's likewell, is that actually
intentional in the process tocreate positive impact?
Is this actually bringingpeople out of poverty?
Or is this actually a techworker moving from Amazon to
(17:00):
this other job?
And does that actually createlike meaningful, like upward,
like impact, but so there's alot of different systems.
That said, there's a lot ofways to measure it and people
can measure it in however theywant.
But that is not too dissimilarfrom what you can do in public
markets and the way you can, youknow, increase your ratings
(17:22):
from a sustainabilityperspective by changing the way
or your methodology for creatingit, as long as you have
somebody sign off on that whichmost people will.
that's why exxon is rated one ofthe highest, like um,
sustainability companies, um,even though it's like well, are
they just hiring more people andhaving more consultants say
that they're self-sustainable,or are they actually having?
(17:44):
Are they being positive for theworld or not?
So there's again.
Upfront, though, what we try todo on our side of things is
work with the manager to sayhere are the things we would
like to report on, here are thethings we require of you to
report on on a quarterly basis,and here's like kind of like the
discussion on methodology ofhow we would like you to measure
(18:04):
that.
And then we work from there likereporting that back to our
individual investors knowingthat you know nothing's going to
be perfect and there's errorsand estimates, but we're trying
to do the best we can and, aslong as it's directionally
correct, we feel that we canfeel good about the impact of
that specific opportunity.
William Reynolds, CFA (18:24):
I think that also dovetails nicely into
a follow-up question on ongoingmonitoring as it relates to
private investments.
So I guess for the audience,particularly within private
markets, a lot of theseinvestments are illiquid in
nature.
So being able to exit aposition if something were to
change, such as style drift orwhat have you, then it's not as
(18:47):
easily said or it's not as easyas said and done.
And so I guess in that regard,particularly with impact related
goals, how does the ongoingmonitor process look like from
your perspective when you'rereporting on these
impact-related objectives?
It?
Josh Hile, CFA, CPA (19:05):
just depends and I'll probably say
that a hundred more timesbecause it's so different based
on the investment.
In some cases it's relativelyeasy.
When you're essentiallycreating energy from solar or
wind, it's tons of carbonemitted.
It's a pretty normal metricwithin the industry.
But then we put it into thingsthat people kind of actually
understand, because nobody knowswhat one ton of carbon abated
(19:27):
actually means.
But when you say you took 100cars off the freeway for a year
by one ton, you know being takenout.
Or you took like 50 trips fromLondon to LA out of the network
by like similar carbon metrics.
But those are pretty easy tounderstand and they're also
(19:48):
easier to measure compared tolike maybe affordable housing or
a healthcare or an educationinvestment where you might have
to do some more metrics around,like who you're actually serving
, because in affordable housingcase it depends on the level of
affordable housing, because youcould be doing actual low income
(20:10):
housing or you could be doingsome level between which would
be like between 50 to 100% ofAMI, and AMIs can range
dramatically by the region youlive in.
In the Seattle region where I'mbased, you know, ami is 120,000
.
And so you might be like, eventhough you're focusing on retail
workers, teachers, nurses,others who can't usually live
(20:33):
near their workplace becauseit's so expensive, those people
are still not making what you'dconsider as like low salaries
when you're making 70 to $80,000a year.
But it's like within thatenvironment.
It's still hard to live on someof those salaries.
So we try to measure it indifferent ways.
I think from you usually don'thave because we're not investing
(20:55):
in companies or businesses.
You don't have the same styledrift that you might have with
an individual company, wherethey're changing their whole
focus or they're pivoting orthey might like get rid of their
sustainability programs at anyone point in time.
That just doesn't really happenwith, like, affordable housing
or a solar project, even abattery project or whatever it
might be within thatinfrastructure space.
(21:17):
So you just don't, we just don'tsee it as often, unless you're
doing it with companies, oh, andthat makes sense too from that
perspective, I guess, lookingforward so.
William Reynolds, CFA (21:31):
AI has been the craze of you know the
news the markets over the pastfive to 10 years really, and its
evolution even more recentlythan that, has been on a J curve
.
With AI, there is an energyconsumption requirement through
data centers and I imagine, interms of asset allocation for
the investment opportunitiesgoing forward, infrastructure
(21:53):
around that is going to be huge.
I guess.
Can you speak more about thatfrom what you're hearing on your
clients and financial advisorsas to how they want to allocate
towards that?
you know, future world thatwe're heading towards.
Josh Hile, CFA, CPA (22:06):
Yeah, definitely, and I'm going to
bring up my presentation againto show you a little stats
around that because I think it'ssuch an interesting topic.
So AI is going to berevolutionary, I mean obviously,
um, it's already starting tolike roll into many of the
things like we do on a dailybasis, um, but like it's going
(22:29):
to impact the energy landscapemassively, it's also going to
impact the renewableinfrastructure landscape
massively, like it's actually.
Renewable infrastructure isgoing to be huge and renewable
infrastructure investments aregoing to be a huge beneficiary
actually actually of AI becauseyou have all these big tech
companies looking to have somelevel of sustainability.
I mean, they've all essentiallysaid 2030, carbon neutral around
(22:52):
that time period, and they'removing as fast as they can
towards that and they're puttinga lot of dollars behind it.
They're putting a lot of dollarsbehind it.
So all of them have these 50 to100% energy teams that are
constantly trying to figure outhow to just get new energy and
they're trying to get it fromrenewable sources in most cases,
because that's where most ofthe new energy is coming from.
So they're putting a lot ofcapital behind it.
(23:14):
But, like, ai is a whole notherlevel step above that of how
much energy you need.
So you need four times theamount of energy to power a
normal data center and MarkZuckerberg came out and just
said energy, not compute, willbe the number one bottleneck for
AI and you already see this.
I mean data centers areessentially trying to upgrade to
NVIDIA chips and the utilitiesare essentially saying no, you
(23:35):
can't.
So that is the number oneinvestable part of investing in
a data center center is can itactually upgrade or can it?
when you build that data center,will it have enough power so
that it's attractive to acorporate purchaser to be, able
to like be, willing to put thechips there, and so it's a
massive problem that we'redealing with right now.
(23:55):
You saw Microsoft turn on an oldnuclear plant.
You see Amazon signing nucleardeals as well.
I mean, amazon's deal with XEnergy essentially is like 10
years out, so it doesn't evenhave any impact on the current
necessity or needs of thatcompany.
But you even see, like in 2030,just alone, us data centers
(24:16):
will be the sixth largest userof energy in the world.
So I mean you're, you're infront of South Korea, brazil,
canada, germany, france, just byour US data centers and how
much energy we're going to need.
That's crazy.
And on top of that, like youeven see like just how fast the
power demands are increasing,and this goes like our power
demands were pretty set for along period of time, and then
(24:39):
you had EV come on, you haveonshore manufacturing, which is
only likely to increase underthe Trump administration and the
tariff that's likely to go intoplace, and so you're going to
see more and more businesses tryto produce domestically.
I mean it's been a big shiftover the last five years already
, because we knew we needed todo that.
But it's going to go up evenfurther and people don't realize
(25:01):
how much energy manufacturingtakes.
But on top of that you have AI.
So these are just the powerdemand forecasts on this top
chart that show how much itneeds to increase or how much
it's increased.
That estimate from 2021 to 2024.
It's been significant.
So, all that said is you neednew energy, you want it from a
(25:23):
sustainable source, and thesecompanies are demanding it from
a sustainable source.
So, this is going to be a hugeopportunity to renewable
infrastructure developers andthe investors that we invest
with.
William Reynolds, CFA (25:34):
Yeah, and I think that's all you
highlighted all very well.
Clearly there's a lot ofsecular tailwinds ahead for
impact related investments,where investors are able to
achieve more with theirfinancial resources than just
returns, as there's just a clearneed on the demand side from an
energy perspective In terms ofadditional high level positives
(26:00):
that impact investing can bringto a portfolio.
Can you just opine to some ofthat as well?
Josh Hile, CFA, CPA (26:05):
Yeah, and I think one of the biggest is
most investors, I think, need tounderstand there is a lot of
diversification benefits forthis overall asset class.
I mean, I guess, asset sector,not asset class.
But these investments say,let's call it infrastructure for
(26:27):
one thing, so renewableinfrastructure, it has half the
volatility of US stock market.
It has less than half thevolatility of private equity,
while producing, you know,roughly around 12, 14% type of
returns, net returns toinvestors based on current
Inflation Reduction Act.
Net returns to investors basedon current inflation reduction
(26:49):
act like tax incentives as wellas just the demand for the
underlying opportunities.
On top of that, it can be taxadvantage.
If you look at affordablehousing similar case, where it's
like super low risk, especiallyin the lower income housing
areas, it's like those tenantsusually stay there for 10 years
at a time, compared to 18 monthsfor a normal market rate tenant
(27:11):
.
They can increase rents evenduring recessionary periods
based on subsidies provided bythe government and other places.
They're hitting roughly 15% netIRRs to investors and they have
incredibly low risk compared to, like, a market rate apartment.
So I think there's a lot ofdiversification you can get
(27:33):
within these specific assetclasses.
Even you know, one of theopportunities that we saw was in
private equity, you know youcan do an ESOP private equity
fund and you areusing small business
administration loans at muchlower rates than the private
direct lenders are providing, to, say, the big private equity
(27:54):
companies like Vistria andBlackstone.
So you're getting like 6% debtrates and you're buying these
companies at seven times EBITDA,compared to nine to 10 that
private equity is usually buyingat, because the founder or the
seller actually gets significanttax benefits by selling their
business into an ESOP.
So lower purchase price onacquisition.
(28:17):
You get lower interest rates onyour debt, which creates a
better return outcome ultimatelyfor investors and lower risk
actually, because when you'rebuying into an ESOP there's
warrants attached to it as wellas debt.
So you're kind of in thisin-between risk position between
mezzanine debt opportunity andthe private equity opportunity.
(28:38):
So you usually have lower riskthan a private equity
opportunity.
So I think suffice to saythere's a lot of opportunities
where you can reduce your risk,diversify your portfolio, but
most investors have not beenable to see that through the
noise of what's been going onthere politically sovereign
wealth funds.
William Reynolds, CFA (28:55):
They're typically first movers,
especially in the private space,on some of these more
sustainable strategies.
As it relates to the allocationof your investors that you
(29:17):
particularly manage and seewithin private markets impact
investments, would you say it'spredominantly corporations, or
are you starting to see theultra high net worth come into
the fold more so?
Josh Hile, CFA, CPA (29:29):
Yeah, I think it's mostly.
I mean for us.
We do work with somefoundations who have been trying
to increase their allocationsto this to align with their
missions of the foundation,where it's essentially it's like
well, hey, if we can getinvestments that are similar
rate returns to what we need tomaintain our foundation
(29:50):
indefinitely and it more alignswith our mission of our
foundation, then we should bedoing that and I think there's
more and more foundations thatare looking to do that within
their portfolios.
From a corporation perspective,it goes the same way, but, that
said, we're mostly dealing withultra high net worth individuals
on our platform and wealthmanagers and their clients who
(30:11):
want to?
Align their values.
In a lot of cases, though.
I mean, we work with a lot ofwealth management firms who are
just excited about the returns,and probably about 70% of the
wealth managers we work with.
A lot of them don't care aboutimpact or their clients, but the
returns are so compelling andthe risk is much lower than in
(30:32):
other places in the market todiversify client portfolios here
that it just makes a lot ofsense for them, and so that's, I
think, where we can still havea positive impact on our end.
But then they're gettingdiversification and hitting
their clients' financial goals,which is a win-win for everybody
.
William Reynolds, CFA (30:49):
Oh, that's really interesting.
We got a question in from theaudience here.
So, josh, I'm curious if maybeyou have an outlook on this.
But, given a federal policyparticularly going forward, how
much do you think that willimpact energy generation in the
US and its mix between renewable, traditional or nuclear, and or
(31:13):
do you see this being more ofan economic decision?
Josh Hile, CFA, CPA (31:16):
Yeah, I.
So this is a that's a softballto what you really want to ask,
which is is Trump going to takeout the Inflation Reduction Act,
which should be the realquestion, and so what I think?
I mean, we've opined on thiswith a lot of experts within the
field and it's likely going tobe more a scalpel approach or a
(31:36):
rebranding approach compared toan actual full repeal.
First of all, it's really hardto repeal that big of an act.
Secondly, it's and I don't havethe chart like in front of me,
but I'll probably follow up onit but it's essentially
benefited mostly red states.
I mean the Inflation ReductionAct has been the biggest boon
for red states and oil companiesbecause they are actually huge
(31:58):
renewable energy providers aswell.
So of the 200, and I have thischart but of the 225 billion
spent and this was severalmonths ago $190 billion had gone
to red states.
So Texas is the biggestrenewable energy provider in the
US by far, by far, way biggerthan California and the future
projects are way bigger thanCalifornia.
Texas relies on 35% to 45% ofits grid on solar wind energy.
(32:23):
You can look it up on ERCot andsee their daily mix and most of
the production of new jobs.
So for solar, for EVmanufacturing, for onshoring of
like, like.
Actually the solar arrays isgoing on in Ohio, north Carolina
(32:44):
, on batteries, north Carolina,alabama, louisiana and Texas.
So, those are all red states,based on most recent data.
So is Trump going to destroyjobs?
Probably not.
He's probably not going to tryto destroy jobs, especially in
Texas.
Doesn't really want to messwith Texas.
On top of that, elon being partof the new administration in not
(33:06):
a formal role, but we know he'sthere, so it's likely that he
wants those things to stay inplace because they're hugely
beneficiary to the profitabilityof Texas.
I mean, people forget thatTesla is one of the biggest
battery producers in the worldand so on top of that they have
a residential solar and on topof that they get massive tax
credits through selling EVs cars.
(33:30):
So you would really like ifthey took out a lot of those
incentives.
Tesla is probably down 30%,maybe 40%.
So I just don't see ithappening and most, even like
Republicans don't like who areexperts on this topic don't see
it happening even likeRepublicans, don't, like who are
experts on this topic.
Don't see it happening.
I think it's also going to bean economic decision, to your
(33:51):
point.
Because, essentially, youalready have oil at $70 a barrel
.
Natural gas is super cheap.
It's unprofitable to drill fornew natural gas because people
will be like natural gas, isn'twe should?
just drill more, and it's likewell it's unprofitable, so why
would you drill for?
And it's's like if you drill aton more oil and you're going to
drop it to 50, then it becomesunprofitable for oil companies.
So it's like we're not going todo that.
William Reynolds, CFA (34:12):
So it is an economic decision.
Josh Hile, CFA, CPA (34:13):
At the end of the day.
Now, nuclear is still 10 yearsout.
At the very earliest, it isgoing to be part of the solution
and they're going to work toadd it in.
But there's, it takes a longtime to put nuclear in place,
even like small modular, becausepeople don't want nuclear near
their homes.
Even though it's mostly safethey don't.
William Reynolds, CFA (34:31):
They just don't want it near their homes
yeah, no, and I think that was agreat um.
Just to overview on the overallbroader implications of, uh,
what federal policy has to takeinto account as it relates to
future energy generation.
So, yeah, great points.
Well, I do believe that answersall of our questions that we
(34:53):
have for the call, and we'renearing the end here.
But, josh, if there's anythingelse you just may want to add
prior to you know logging offhere, I'll leave the floor to
you right now.
Josh Hile, CFA, CPA (35:03):
No, I think we'll follow up with some
resources that you can look at.
You can look at citizenmancom,where we have a ton of white
papers on different parts of themarketplace and try to dive
deep into each one of those.
We also put up a lot of blogsaround things like new
administrations coming in, wherewe try to provide expert
(35:23):
opinions on what individuals aresaying about it and what part
of the markets are investable,what parts aren't.
That you can look at and happyto answer any additional
questions.
William Reynolds, CFA (35:33):
Awesome.
Well, thank you so much, josh,for your time today, and thank
you everyone that's listening inand I'd like to you know.
Wish you all a great rest ofyour day, Thank you.
Lindsey Helman (35:47):
Thank you for listening to this month's chat
segment.
Chats is a monthly segmentfeaturing audio from our
recently recorded webinarsairing on the second Tuesday of
the month.
To view the video recording ofthis episode and discover
additional society webinars,visit the CFA Society San
Francisco YouTube channel.
Join us next time for ourregularly scheduled Financial
(36:08):
Perspectives podcast episodeairing on the last Tuesday of
the month, and make sure to sendin a message to the show using
a link at the top of eachepisode description or by
emailing podcast@cfa-sf.
org We'd love to hear what youthink of our new chat segment or
any suggestions on futuretopics you'd like us to cover.
Thank you for being a dedicatedlistener.
(36:29):
This podcast is produced by CFASociety San Francisco, a
not-for-profit professionalassociation providing
professional learning and careerresources to over 13,000
investment industryprofessionals worldwide.
(36:49):
To learn more about CFA SocietySan Francisco, visit our
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