Virgin green fund branches out in test of collaborative approach

By Chris Hughes, Investment Banking Correspondent
Published: June 29 2008 18:02

When Sir Richard Branson said he would invest $3bn (£1.5bn) in the alternative energy sector in September 2006, many people dismissed the gesture as another publicity stunt by the Virgin Group founder.
But Virgin has put its first $220m to work and has raised another $100m from co-investors who recognise that Sir Richard’s interest in the industry is as much about making money as it is boosting Virgin’s profile.
Virgin’s green ambitions mark a new departure for the transport, health and media empire. Its enterprises are usually premised on attacking an underserved consumer market in a way that enhances the Virgin brand. By contrast, the Virgin Green Fund, the group’s primary vehicle for alternative energy investment, is a financial business and has no consumer angle. VGF also seems to be a testing ground for a more collaborative and institutionalised approach to Virgin’s activities, with a greater emphasis on bringing in outside investors.
In modest offices tucked away in London’s theatreland, Shai Weiss, one of VGF’s three managing partners, says Virgin is a good home for a private equity business specialising in alternative energy, not least because the sector’s many entrepreneurs say they identify with Sir Richard. “They consider we’ve been given a stamp of approval as people who understand their business model. One of the core skills of the Virgin group has been company building,” he says. “And Virgin Group itself is very relevant for the energy sector when you look at the aviation, the trains, even the media – all these companies are large consumers of energy, so having access to companies that are undergoing change themselves is an interesting dimension for our portfolio companies.”
This access to Virgin companies, he stresses, is at arm’s length and “not part of the contract”.
Mr Weiss is a former Morgan Stanley banker who later worked at NTL, the cable group. Following NTL’s merger with Virgin Mobile in 2006, Sir Richard invited him to get involved in Virgin’s alternative energy ambitions. Mr Weiss recruited two other managing partners from TPG Capital, the US buy-out giant, and VGF now has 15 staff based in London and San Francisco.
The team used seed funding from Virgin to start investing last summer. Last week, it emerged that VGF has also raised capital from the fund management arm of Australia’s Macquarie Bank and from PCG, in which Calpers, the US pension fund, is an investor.
“We are managing the Virgin Group’s money and they are obviously doing this for financial returns but we are also managing other world-class institutional investors’ capital,” says Evan Lovell, another of VGF’s managing partners.
“So, just like Virgin is looking for returns, the other investors who have put their money with us can put their money anywhere and are doing it for financial returns.”
VGF is aiming to treble the client’s money in three to five years. Most investments will deploy leverage but the companies are unlikely to have more than 50 per cent of their capital structure in debt.
The investment themes include both new sources of energy and “resource efficiency” companies developing ways of minimising energy use. Mr Lovell says the area represents a sweet spot between venture capital, which involves taking a risk on technology, and investing in more intensive and longer-term infrastructure companies.
VGF finalised its eighth investment last week and its portfolio now includes solar, lighting and materials science groups, and even a Caribbean desalination business. Virgin owns a non-controlling stake in the VGF management company but Mr Weiss insists the firm is independent of its founding investor.
“We’re roughly half the size we want to be,” he says, adding that he expects the portfolio to increase to about 20 to 25 companies. He also cautions that there is still a bubble feel to some parts of the alternative energy sector.
“But we are long-term capital. We are paid to wait for the right opportunity to come our way,” he says.
Copyright The Financial Times Limited 2008