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A closer look at Generation’s long-hold strategy

The firm just closed its second 'long-term equity' investment, pumping $600m into Octopus Energy.

Tom Hodges, Generation Investment Management

This week, Generation Investment Management inked the second deal for its “long-term equity” strategy a private equity platform that invests with a time horizon of between eight and 15 years per deal.

The firm pumped $600 million into Octopus Energy, a company that spans technology, renewable energy generation and energy retail, in a deal that gives Octopus a post-investment valuation of $4.6 billion. Generation will have a stake of up to 13 percent in the business, according to the official announcement.

Generation was among the early movers in sustainable investing, having been founded in 2004 as a “pure play sustainable investment manager”. It has four separate strategies: two in public equities and two in private markets. The two private markets strategies comprise growth equity and long-term equity.

The long-term platform was established in 2018 “with the idea of scaling up the concept of sustainable investing in private markets”, Tom Hodges, partner at Generation, told New Private Markets. 

“We want to back sustainability champions that can compound growth at attractive returns over eight to 15 years and we will be flexible”

Tom Hodges

Whereas sustainable private markets investing had previously focused more on smaller, earlier-stage business, Generation wanted to back “later-stage, more established companies at scale”, said Hodges. This means equity investments of between $500 million and $1.5 billion per deal.

The establishment in 2018 of a long-duration private equity strategy put Generation on the same page as some of the large mainstream private equity shops. Long-dated funds have raised close to $50 billion in total since 2016, with Blackstone, KKR, Carlyle Group and CVC Capital Partners among firms that have gathered capital for the strategy.

The time horizon is particularly important for Generation, said Hodges. “We think that long-term thinking is one of the defining features of sustainability; when thinking of the appropriate time horizons, you have to factor in externalities.”

Generation’s other PE strategy growth equity has a hold period of between four and eight years.

Generation has taken a minority stake in Octopus, but the team “does not seek to define itself by ownership percentages”, according to Hodges. Instead, it is alignment with management, other shareholders, customers “and everyone though the value chain” which is the deciding factor. “This is where we draw our operational boundaries,” Hodges said.

On Octopus, he adds that “we collectively feel this is the most mission-aligned management team we could ever hope to partner with”.

Hodges declined to discuss the funding arrangements for the long-term equity strategy and whether there are any plans to raise a dedicated fund. “It’s a flexible base of capital with underlying institutional relationships. I’d prefer to leave it at that,” he said.

Octopus joins financial services business FNZ in the long-term equity portfolio. Generation acquired FNZ alongside Canadian pension fund CDPQ in 2018 in what the pension described as “the first investment by CDPQ-Generation, the unique, sustainable equity partnership announced today by CDPQ and Generation”. At the start of 2020, Singapore’s Temasek invested an unspecified amount into the business alongside Generation and CDPQ.

The aim of the long-term platform is to build a “very small number” of investments in a concentrated portfolio, Hodges said. The funding structure of the platform means the team is not under pressure to deploy capital. “That goes hand in hand with us wanting to have a really focused, dedicated approach to what we think are the absolute best businesses in their respective industries…that can be catalysts for rapid acceleration of change.”

In terms of exits or other liquidity events, Hodges said Generation does “not need to build in the bells and whistles that ensure absolute certainty around liquidity events” because they are backing founder-entrepreneurs with significant equity stakes themselves. “We want to back sustainability champions that can compound growth at attractive returns over eight to 15 years and we will be flexible.”

As for what attractive returns look like, Generation declines to comment.