Independent Thinking^®

Q&A with WAVE Equity Partners

Editor’s Note: Evercore Wealth Management supplements its core investment capabilities with carefully selected outside funds across the range of the firm’s asset classes. Here we interview Mark Robinson, Partner and Managing Director of WAVE Equity Partners. Wave is a Boston-based private equity firm that invests in early stage and rapidly growing companies in the clean energy, food, waste, and water sectors.
 
Q: Your target sectors – clean energy, food, waste, and water – are of growing interest to corporations, as well as investors. Why do you think this is, and what is your outlook for these industries?
 
A: These sectors are characterized by massive scale and global opportunity for corporations, as well as rising consumer demand for sustainability. Satisfying basic – and growing – human demand for energy, food, water, and transportation without wrecking the environment or fiscal budgets requires a complete revamp of these industries. We need to produce superior, smarter, sustainable, recyclable products that consume fewer natural resources.
 
Corporations have made enormous gains in human capital productivity through the adoption of information and telecommunications technologies. However, tech productivity cycles are flattening out. Companies are now refocusing their attention on the productivity of their physical assets around the world, seeking efficiency gains through innovative materials, manufacturing processes, and closed-loop consumption.
 
Simply stated, superior solutions in these sectors have the potential to become immediate multibillion-dollar markets in every major geography.
 
Q: Please describe your investment focus. How do you identify companies in which to invest, and how long do you expect to remain invested?
 
A: We believe the best risk-adjusted returns in these sectors are found at the early growth equity phase for industrial-enabled technology companies with superior, patent-protected solutions that are already generating commercial revenue. This investment space is severely underserved as neither venture capital funds, which prefer software technologies, nor private equity firms, which look for later-stage businesses, are investing in these young but highly promising companies. There is a real funding gap for young, fast-growing hardtech companies – the ones producing physical goods – in the sectors of clean energy, food, waste, and water.
 
Finding the right company (ascertaining that the business is unique, profitable, and is scalable) takes discipline and requires plenty of legwork, as most of our companies are not located in the traditional innovation hubs of Silicon Valley, Boston or New York. To date, half the companies that we have invested in come from our professional networks; we discover 25% at conferences and other events; and 25% have found us, as our brand and reputation are becoming better known.
 
When we do come across an opportunity, we want that company’s customers to tell us what we need to know: What is the higher value proposition they perceive; where on their income statement and/or balance sheet does it save them money; and, importantly, do they intend to buy a lot more? Once we see the demand pull, then we assess the sustained competitive advantage well past our three- to five-year holding period: Is the intellectual property robust and well protected; can it be leapfrogged or circumvented; and does the technology offer a platform to multiple geographic and/or product markets? Finally, can the company scale to meet the opportunity?
 
Q: How about government support – or lack of support –for specific sectors or industries? How do subsidies weigh in your decision making?
 
A: We do not invest in businesses that depend on government support or subsidies. While there is rising support for clean energy, especially in Europe and Asia, we are concerned about unintended negative consequences from government policies. Easy flow of capital can induce sloppy behavior, and political uncertainties can lead to timing risks.
 
Q: Will that change if and when you assume more international exposure?
 
A: While all of our portfolio companies are U.S. based, two have international operations, and the others are likely to soon expand internationally. Their international opportunities do not rely on direct government support or subsidies, but they do benefit from government policies that have catalyzed specific industries, such as the electric vehicle sector in China.
 
Q: What is your goal for the fund? How big do you see it becoming?
 
A: We are barely scratching the surface with the current fund, which is targeted to be $150 million, roughly double our prior fund. The current fund will invest in six companies over its three-year investment period.
 
We see many more attractive deals. In addition, there could also be interesting plays in project capital and international finance. But we are taking one small step at a time as we learn and evolve. To construct a portfolio of 15-20 companies would require a fund three times larger than our current fund.
 
Q: To date, there hasn’t been much private equity investment in this sector, at least compared with venture capital. Why do you think that is?
 
A: While there is early stage venture capital willing to take technology, product, and market development risk, we prefer managing just the execution risk at the early growth stage. The nearly $1 trillion of later-stage growth and acquisition private equity is focused on larger companies that can take $50 million or hundreds of millions of dollars, while the companies we target only need $25 million or often far less at the time of our initial investment. That is just too small for larger private equity investors.
 
The second reason is strategy. Most private equity firms make money through restructuring (financial, process or management), not by empowering next-generation technological breakthroughs. Understanding innovation requires different training and approach. More firms will be attracted when industrial tech companies have achieved exciting public exits.
 
Q: How will you compete as this investment sector becomes increasingly crowded?
 
A: We have had little to no competition to date in investing in companies that meet our criteria. Of the eight investments we have made, the shortest due diligence period has been six months, and in only one case did a company receive a competing term sheet. This remains an inefficient market, which is unfortunate for the entrepreneurs in this space, who deserve better access to capital.
 
Q: Please briefly describe your structure and team.
 
A: WAVE Equity Partners LLC is the management company to WAVE Equity and is raising WAVE Equity Fund II following the same strategy as our first fund, WEF I. Before founding WAVE, four of the six partners had invested together in 30 technology companies, exiting 27. In addition, the team had collectively led over 100 equity rounds and more than 20 project financings.
 
Another notable aspect of the team is that all of us have worked in energy and industrial sectors prior to our investment careers. We have designed products, operated manufacturing facilities, mined minerals and oil, and developed large-scale facilities – taking up roles across diverse product cycles and industries. This knowledge of industrial and energy markets is critical to our success. When we see a new product, we have the ability to place it in the right context, and to assess the risk and scale of its customer adoption.
 
For further information about WAVE and other funds on the Evercore Wealth Management investment platform, please contact Stephanie Hackett at [email protected].