12 interviews of Christmas: David Casale, Turquoise Investments

Happy Christmas to all our readers. To celebrate the start of 2020 we present 12 interviews previously only available to our subscribers.

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Innovation in energy has fallen to a tenth of what it was a decade ago, Turquoise’s David Casale tells Janet Wood. But that still means a healthy pipeline of new ideas to pursue. New Power Report spoke to him for the December 2019 issue

DC Headshot - Turquoise 3 crop Ten years ago David Casale was finishing a seven-year stint as co-founder of supplier Utilita. But he says he “handed back his badge”.

On today’s fleet of suppliers, he says: “I think they are all very vulnerable. Last time I added it up it was £3 billion of turnover and £2 million of net profit. It’s not really a very sustainable industry.” Most importantly, he saw the business model as a “sham” Promises to provide green power are ‘greenwash’, he says, and so are ‘green bonds’ and ‘green equities’. – their role is now simply billing customers. He thinks making promises to supply ‘non fossil fuel’ is a much clearer approach, not just for customers but for investors. “It is a much better way of getting what you want. You don’t have to interpret it,” he says, unlike customers having to interrogate the word ‘green’.

Casale is optimistic that technology can solve climate problems and for the past seven years he has been putting his industry knowledge to use at Turquoise, raising capital, advising on transactions and assessing potential new energy investments.

Turquoise’s investment area is pre-profit, pre-revenue new technologies. Casale says: “We are pretty unique. There are not many merchant banks or venture capitalists left who are prepared to work on those high capital-cost projects, with revenues so far down the line they are hardly visible, and profits an order of magnitude beyond that. You need a special kind of investor.”

He says the number of such investors has dwindled from a peak after the 2009 climate summit, when “McKinsey said we will need every technology to the max if we want to stand any chance of decarbonising. At that stage, there were a lot of high-net-worth individuals – and investors of all flavours – who threw money at anyone who came in and said they had a clean technology.”

And there were many more ideas to throw money at. The market was “overstimulated”, he says. “There was a lot of rubbish making its way to our door,” most of it over-valued and not ready to be offered to an investor. He adds: “It has taken those fledgling businesses a long time to understand how to realistically value their companies and understand how much cash they will need to go through the development process. Many were inexpert and a few were snake-oil sellers.”

He says the marine sector “encapsulates everything about over enthusiasm, about government and investors getting it wrong, with some very weak delivery without understanding some of the challenges they had to face”.

That chimes with SuperGen chief Deborah Greaves’s comments in an October interview with New Power about the need to take investment through all the steps from prototype to wave tank etc, including wave tanks including that hosted by the University of Plymouth, wheer Greaves is a Professor.

What now?

Now we have moved on from that overstimulated phase. Casale says the number of proposals he sees is a tenth of what it would have been in 2009, although there remains a healthy stream of innovations.

I ask what the components are of a successful project. To knock on Turquoise’s door now you need more than an idea. “We want to see a working prototype – although we often go to sheds,” Casale says.

“Normally you need a lead investor,” he adds – in some cases that has been Turquoise, in others it has been East Anglia’s Low Carbon Innovation Fund, which Turquoise manages. Add to that perhaps strategic investors and “you need all of those to come together”, he says.

“When they can justify why they need £5 million… and have some words that explain how they can get to point B,” he will take a look, he says, adding: “We often have to explain what [Point B] is…

“One of the first things we do is look at the financial model. But you can only put in what you know, not what you don’t know. We must have looked at hundreds, possibly thousands, of company projections. None of them have ever been right.” About half of the ideas Turquoise invests in will not reach point B.

But the company is in it for the long term. “We are big fans of patient capital and we don’t see too many quick turnarounds,” Casale says. Funds and investors typically talk about horizons of three to five years for returns, but for Turquoise five years is a minimum and “that’s good work … we have investments that have been there for 12 or 15 years. In this sector it is harder to get technology to work, it’s harder to get the capital to keep it alive, it’s harder to get customers to adopt it and to get them to pay for it.”

Casale says that typically, at the next stage, “you make a profit because someone is interested in buying you”. That would be a trade sale to a strategic player in the relevant sector, he explains, rather than taking off as a standalone company.

How many investors are there who can take the risks that Casale describes? Investors are quite wary after seeing bubbles like wave and tidal and storage or fuel cells, he says, but “our database is over 1,000 investors, who have had sensible adult conversations about getting their chequebook out”.

I ask whether that is, in effect, crowdfunding and Casale says that is a complementary approach. Turquoise is in conversation with crowdfunder Abundance, for example, and has taken projects from the latter’s portfolio. “We are trying to find a way of working with them – their model is changing and maybe at some point in time we should find a way of combining,” Casale says. Abundance comes in at a later stage with lower risks, he notes. “We have seen crowdfunding coming in to some of our clients in big numbers. It’s a good way of bumping up grant funding from friends and family – one of our clients got about £3 million.” But he is wary. “I have yet to see much research on what investors are getting out of it,” he says.

Casale’s ‘big ask’ from government is a patient capital obligation

What is the flavour of the month? Casale says: “The storage bubble is still with us.” But he says many of those innovations are not coming from the power sector but, for example, from are chemists. “So they need to up their game in understanding the role they play in managing the grid”.

Digital is the next big thing and Casale is joining a new digital team at Turquoise alongside his current portfolio. He is excited, he says, because “there will be digital companies out there that have stuff that they don’t realise is really useful in the energy world. They have heard of National Grid and that’s it – they don’t even know what doors to knock on.”

 

The role of government – patient capital

Given what Casale has said about overstimulating some industries in the past, how can government best add impetus to private investment?

I ask about Enterprise Investment Scheme (EIS) funding, intended to make investment in high-risk early stage projects more attractive by offering it as tax relief. It was pulled from electricity generating projects because it was being used to support low-risk projects – some with guaranteed returns. But Casale says: “We still have that. It’s an important part of our industry,” for early projects. Venture capital funds are also there, but “they are not really early stage”, says Casale. “They like to see revenues and profits. They can consume a lot of time, only to say, ‘come back when it is profitable’,” although a project with revenue may spark their interest.

Casale’s ‘big ask’ from government is a patient capital obligation on all investments. He explains: “It would take equity in companies that are not as slow as fusion – some are just falling away because they need too much capital. It’s not because the technology doesn’t work.

“The UK would invest patient capital in long term growth. It has to be long-term equity investment – always matched [with private funds]. Returns would be on the order of 15 years.”

Casale puts the minimum investment needed at £200 million, and he says it may not invest every year. But he admits that needs cross-party support because it would not see returns for more than a decade. That would be the next step, he says, and more effective than the Green Investment Bank, which “ended up just doing what the world was doing anyway”.

It remains to be seen whether the incoming government will pick up the suggestion.

 

New Power Report subscription includes:

  • Weekly email Update
  • Monthly New Power Report – analysis and insight
  • Access to our online Database  - search and sort data on 2500 UK power assets 

For more details and to join our next free trial, send your name, job title, company and email address to Daniel Coyne: Daniel@energystmedia.com   

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