Old Blue is investing in green.
Yale University’s influential $16.3 billion endowment has taken stakes in startup companies aimed at developing clean technologies, Chinese solar and wind turbine manufacturers and in timberland certified as sustainable.
In their most recent annual report [PDF], Yale’s investment managers write:
We are confident that the University stands to benefit enormously from the Endowment’s involvement in green ventures, both as an investor and as a stakeholder in the health of the environment.
Why would anyone other than Yale staff, students and alumni care? Because David Swenssen, the chief investment officer, his staff at the Yale Investments Office and the outside money managers they hire have earned a reputation for shrewd investing during the 25 years that Swensen (a 1980 Yale PH.D.) has been overseeing the endowment.
This report makes clear that Swensen is a believer in green investing, an arena that has a spotty track record at best. That’s significant.
So where is Yale putting its money? It’s hard to know, because the endowment doesn’t provide a full accounting of its investments or even a list of its outside money managers. While Swensen is best known for his pioneering approach to portfolio management (he’s the author of a book called Pioneering Portfolio Management), he also adds value by selecting and collaborating with outside managers and doesn’t want to share his best ideas. Still, there are some illustrative examples of Yale’s holdings in this 36-page report, which explores not just green investing but sustainability on campus and endowed support for environmental studies. (Yale’s renowened School of Forestry and Environmental Studies was founded in 1900 by Gifford Pinchot, the first chief of the U.S. Forest Service.)
As part of its venture capital portfolio, the report says, Yale has more than $100 million (as of June 30, 2009) invested in more than 70 clean tech startups. Two promising companies are highlighted: Silver Spring Networks, a Silicon Valley-based firm that enables development of the smart grid, and Mascoma, a cellulosic ethanol startup based in Lebanon, New Hampshire.
Noting that Yale has previously profited from venture investments in Google, YouTube and Facebook, the report says:
As awareness of global climate change impels governments, businesses, and consumers to rethink the way they use energy, the venture portfolio’s next crop of success stories may just spring from the cleantech space….
In the past year alone, Yale’s venture capital managers invested in over nine new cleantech companies. Yale has increased its exposure to the sector in the marketable, real assets, and leveraged buyout portfolios as well.
Swensen wouldn’t confirm this but it’s probable that Yale is investing in Silver Spring and Mascoma with venture capitalists Kleiner Perkins, the Silicon Valley firm that has long managed money for Yale. Silver Spring and Mascoma are both in Kleiner’s portfolio. (So is a disastrous oil and gas exploration company called Terralliance, which my friend Adam Lashinsky writes about in Fortune. Kleiner & Yale investments aren’t all green, needless to say.)
Here’s what the report says about Silver Spring Networks:
Despite its short operating history, Silver Spring has been able to win contracts with some of the biggest utilities in the country, including Florida Power & Light, Washington D.C.’s Pepco Holdings, and California’s PG&E, which expects to replace more than 5 million meters with Silver Spring’s smart meters by 2012.
Altogether, the company has partnered with utilities serving more than 20 percent of the U.S. population. Silver Spring technology is now deployed in over 1.5 million homes and businesses, and each week over 50,000 new endpoints are networked.
…With revenues of under $20 million in 2008, Silver Spring’s shipments exceeded $100 million during 2009 and it turned profitable during the fourth quarter of 2009. Demand from U.S. utilities has continued to be robust, providing Silver Spring with the prospect of doubling or tripling its revenues over each of the next several years.
Mascoma, founded by Dartmouth professors, has Ivy League ties. It’s one of dozens of companies seeking to use non-food inputs to make ethanol. It uses wood, straw, corn stover, switchgrass and paper pulp waste, which ordinarily costs $80 per ton to throw away but now can be turned into energy, the company says. The trouble is, breaking down cellulosic biomass and turning it into ethanol has, so far, been prohibitively costly. About Mascoma, the report says:
The market for this “green gold” is projected to expand tremendously and rapidly, growing to an international market valued at $10 billion by 2012, and Mascoma is poised to be a leader. The company has received equity financing and federal and state grant money totaling upward of $170 million. With engineering offices in the metro-Boston area, research and development offices and labs in Lebanon, New Hampshire, a demonstration plant in Rome, New York, and a factory about to open in Kinross, Michigan, Mascoma is geared to shape the biofuel landscape for years to come.
Yale’s endowment also holds shares in Suntech Power Holdings, the largest solar cell manufacturer in the world, and HT Blade, China’s largest turbine blade manufacturer. They are the creations of what the report calls “a new crop of emerging market entrepreneurs (who) are working to undo the connection between economic growth and environmental decay, while providing investors with handsome returns along the way.”
The report profiles Dr. Shi Zhengron, Suntech’s founder, while acknowledging that the solar PV industry faces tough problems in the short term because its output is projected to far exceed demand. But Shi is said to be relentlessly focused on improving the efficiency of Suntech’s panels:
Although government policies are still an important driver of solar industry growth, Shi is confident that the continued adoption of solar energy will be determined by private sector cost considerations. His goal for Suntech is to achieve grid parity (the point at which solar energy costs the same as energy from competing fossil fuels) by 2012, an ambitious objective by any stretch of the imagination. But why stop there? Shi predicts that in the near future, “solar will be cheaper than coal or gas.”
Finally, the report rhapsodizes about timber as an environmentally friendly fuel and building material. Yale owns about three million acres of timber land, roughly equivalent to the size of Connecticut, with nearly all of it certified through either the Forest Stewarship Council or the Sustainable Forestry Initiative. Yale is exploring the possibility of developing wind power on some ridgelines.
I’ve gone on at some length here in part because of my admiration for Swensen, who I’ve written about a couple of times for the Yale Alumni Magazine. (See Yale’s $8 Billion Man and David Swensen’s Guide to Sleeping Soundly.) He could have made a ton more money on Wall Street but has stayed in New Haven, in part, because of his dedication to Yale.
Swensen’s reputation as an investor remains strong even after he suffered a career-worst year in FY 2009, as investment returns of –24.6 percent produced a decline of $5.6 billion in the endowment’s value. Despite that, Yale’s endowment generated annual net investment returns of 11.8 percent during the last 10 years and 13.4 percent over the last 20 years, handily beating its benchmarks. Those are Buffett-like numbers.
Interestingly, in our conversations, David resisted the idea that institutional investors should screen their investment portfolios to avoid companies that do social or environmental harms. (At the time, Yale students were pressuring the administration to divest any holdings in companies doing business in Darfur, which the university agreed to do in 2006.) I came away with the sense that he doesn’t believe that a company’s desire to “do good” should come into play when picking stocks. As I recall, he was skeptical about the whole notion of social or environmental investing.
That makes his appetite for green investing even more noteworthy.