Exploring New Growth Avenues in Private Equity
The private equity (PE) sector is actively seeking innovative avenues for expansion. A notable figure in this space is championing thematic investing as a dual pathway to achieve growth while also generating social and financial impacts. Reynir Indahl, the founder and managing partner of Summa Equity, has articulated that the Sweden-based PE firm employs a “theory of change” methodology to shape its impact investment strategy. This strategy zeroes in on two pivotal themes: resource efficiency and technology-driven transformation. By fostering collaboration among diverse stakeholders and making investments across various targeted themes, Summa Equity has successfully raised one of the largest impact funds in Europe. Indahl asserts, “We believe systemic investing will unlock more returns.” In a recent discussion with McKinsey’s Per Klevnäs and Peter Cooper, he elaborated on Summa Equity’s unique investment philosophy, the rationale behind decarbonization, and the broader industry’s slow adoption of thematic investing principles.
Origins of Summa Equity’s Investment Philosophy
Indahl shared that the inception of Summa Equity’s investment philosophy can be traced back to the 2008 financial crisis. He found himself questioning why such a significant downturn had gone unnoticed and became increasingly concerned about multiple crises that seemed to be converging, including environmental, social, and political issues. This realization, coupled with the acknowledgment that some of his past investments contributed to these crises, sparked a personal crisis. It led him to reflect on how he could contribute positively to the world, ultimately resulting in the creation of Summa Equity. Over the years, value creation strategies have evolved, previously disregarding the external challenges facing the world. Traditionally, PE firms focused on enhancing individual companies and their immediate value. However, the current landscape demands a broader perspective, recognizing that external challenges are now paramount. PE firms must shift from viewing companies in isolation to fostering collaborative approaches that span various industries and asset classes. By investing in multiple areas, PE firms can drive meaningful change and create substantial value, aligning with Summa Equity’s theory-of-change framework that directs their investment strategy.
Evaluating Investments Through a Thematic Lens
In terms of investment evaluation, Summa Equity emphasizes impact investing, guided by two primary themes: resource efficiency and tech-enabled transformation. The firm targets companies dedicated to improving environmental conditions, social equity, or digital governance. Notably, Summa Equity was one of the pioneering private equity firms to endorse the UN Sustainable Development Goals, aligning all goals with their investment themes. Their evaluation process revolves around a thematic analysis: identifying the problems being addressed, the company’s alignment with solutions, and methods for measuring improvements. Summa Equity invests considerable effort into forward-thinking modeling and hires in-house experts with real-world experience in their focal themes. This approach contrasts with traditional environmental, social, and governance (ESG) investing, which primarily assesses companies based on compliance with ESG criteria, such as sustainable materials usage or worker rights, rather than the actual impact generated, like material reuse or quality of life improvements. Essentially, while ESG investing focuses on inputs, impact investing concentrates on outputs.
Linking Investment Strategies to Decarbonization
Indahl elaborated on how their investment strategy is intricately connected to the broader mission of decarbonizing high-emission industries, often referred to as “brown to green” investing. For instance, the material and waste sectors contribute about 15 to 20 percent of Europe’s emissions. Innovative technology solutions could potentially reduce these emissions by 55 percent and enable Europe to achieve 80 percent self-sufficiency in material utilization by 2040, requiring an investment of approximately €230 billion—less than 0.1 percent of GDP annually. The projected value creation from this investment ranges between €1 trillion and €2 trillion, which aligns with the goals set by the Paris Agreement while simultaneously generating new employment opportunities. A systemic investing strategy is crucial in this context, as it necessitates the convergence of various elements. For example, technology firms must pioneer methods for sorting and recycling, while waste collectors need to achieve sufficient scale to capitalize on waste value. Additionally, customer-facing companies should establish long-term contracts for reused products, and regulators must facilitate this ecosystem through supportive policies. Thus, “brown-to-green” investing is essential, as it not only involves funding new green startups but also maximizing the potential of existing assets within traditional industries. To achieve net-zero emissions, a significant portion of the required reductions will stem from converting existing brown assets into green ones.
Challenges in Thematic Investing Adoption
Despite the potential of thematic investing, Indahl noted that widespread adoption has yet to materialize. Successfully implementing this strategy requires a deep understanding of interconnected industries, value chains, and the ongoing changes in both mindset and technology. Summa Equity has delved deeply into specific themes like circularity and aquaculture, establishing robust and scalable platforms. The pace of transformation often follows a pattern of stability punctuated by rapid change during disruptive moments. Timing is of the essence; being too early or too late can adversely affect investment returns. However, Summa Equity does not engage in speculative ventures; instead, they concentrate on mature businesses that can scale by integrating new technologies and adapting their business models. While the uncertainty surrounding green policies post-U.S. elections presents challenges, it does not alter their fundamental strategy. Their financial success has been rooted in investing consistently in viable, essential solutions that do not rely on subsidies or governmental support. Larger PE firms may find it challenging to pivot to a thematic approach due to their traditional structures, which are typically organized by sector and investment type. However, newer funds that are less entrenched have the potential to adopt this strategy. An increasing number of thematic investors are beginning to emerge in the market.
Benefits of Systemic Investing in Challenging Times
Indahl highlighted that Summa Equity has consistently delivered superior returns to its investors, demonstrating that companies spearheading transformation tend to perform well during challenging economic periods and command premiums over their competitors. He believes that systemic investing can unlock enhanced returns. By having a clear strategy for addressing specific problems, PE firms can direct investments across various asset classes, including venture capital, growth equity, buyouts, and infrastructure. This interconnectedness allows companies to collaborate more effectively, fostering growth, value enhancement, and improved returns. The systemic approach also facilitates greater cooperation between PE firms, corporate entities, and public-private partnerships, ultimately generating more lucrative investment opportunities. As investors, Summa Equity remains focused on what they find viable for investment over the next five years, independent of external market conditions. Although there may be unexpected positive developments if changes progress rapidly, their investment strategy remains conservative, ensuring they are prepared to capitalize on any favorable shifts that may arise.
