It was 20 years ago today…
By Helge Tveit, Managing Partner
Everyone who is old enough remembers exactly where they were on Tuesday, September 11th, 2001, when terrorists flew hijacked planes into the World Trade Centre and the Pentagon.
Ole Melberg and I were sitting in our office in the Bergesen Building, an iconic landmark in the centre of Stavanger overlooking the harbour, getting ready to launch the first ever fund by our fledgling Energy Ventures. It was an exciting time; just a week previously, we had received confirmation from investors and were ready to sign them up and launch our new investment strategies.
Then an analyst walked into the room and said, “I think you better switch on the radio”. 9/11 was happening.
Those tragic events proved to be a tremendous blow. The New York Stock Exchange and Nasdaq closed for a week and then plunged when they reopened. With the dot.com bubble rapidly turning into a bust, markets were spooked. Every single one of our investors told us they would not proceed. Everything froze overnight, and the investment market stayed that way for six months.
In volatility terms, 9/11 was a classic Black Swan event; it was an outlier; it had an extreme impact; and was only retrospectively predictable.
Eventually, investor confidence returned and, on 7th June 2002, with the oil price at $24 a barrel, we finally launched our first Fund. Looking back, it seems appropriate that Energy Ventures was born in such circumstances, as resilience and adaptability in the face of subsequent market Black Swans have become one of our defining characteristics.
Ole, former CEO of Smedvig, the marine drilling company, and I shared a passionate interest in disrupting and transforming the energy industry through technological innovation. That moment, exactly 20 years ago, was both an end and a beginning: simultaneously the realisation of a long-held ambition and the start of an exciting journey that continues today.
Pablo Picasso worked in a different kind of oil, but he said something that resonates with EV: ‘I begin with an idea, and then it becomes something else’. So, let’s look first at the idea behind EV, the origin story, and then see what it became.
The inspiration for EV came during my time working as a petroleum engineer with Amoco. I was stationed in Houston in the US, and I had a thirst for knowledge. At the time, Amoco had a super-generous scheme for sponsoring workforce MBAs, and I was selected to join the programme.
Not just any MBA either, but one from the University of Chicago School of Business, which ranks consistently among the top five business schools globally. I didn’t realise it at the time, but the school has an impeccable pedigree for producing investment leaders: my fellow alumni include the founders of Carlyle Group, McKinsey and BlackRock.
I was already feeling restless before doing my MBA, with a growing urge to create something new from scratch. The corporate world was fascinating, but I had a gnawing sense that my impact was quite limited. You were a very small piece of a vast machinery, and whether you did a good job or a lousy job didn’t matter for the corporation, although it would certainly impact my career.
Once I got my MBA, the urge to do my own thing intensified. The catalyst came from an unexpected quarter. In August 1998, BP acquired Amoco in a $48 billion deal, becoming the third-largest super-major in the world behind Royal Dutch Shell and Exxon.
Almost overnight, my entire leadership team – all the people I knew in the organisation and reported to – pretty much disappeared. It was a little bit of an earthquake in my professional career.
Following the acquisition, everyone was sent back to their home location or they were let go. Five of us came back to Norway, and I began working for the new managing director of BP Norway, Greg Coleman. He was a very inspiring manager, responsible for 2 million barrels per day of production, and he had an appetite for finding new and better ways of doing things.
With oil languishing at $10 a barrel at the time, Greg was looking for some big ideas to take the company forward. He picked me and four others to form a kind of Skunkworks team. We were tasked with coming up with some bright ideas that would significantly impact how oil companies were performing and how they did their business.
My idea was that technological innovation was the key to making oil companies more efficient, both from a capital and an environmental point of view. The service companies are typically the technology providers in the oil and gas industry, and the E&P companies are the technology consumers. There are a couple of exceptions, but usually, the two don’t mix.
So, the prevailing wisdom was that Schlumberger, Halliburton, and Baker Hughes, should sell their technologies to E&P companies. I saw this as a strange situation and had the idea to set up a BP vehicle to invest in technology companies. Greg liked that idea, and we worked on it for a year, with consultants from McKinsey, before presenting it to senior management at BP’s London headquarters.
They didn’t like it. They said, ‘we don’t want to step on Schlumberger’s toes’. It was as if they didn’t want to start a turf war. It was a disappointment, but by that time, I had fallen in love with the idea of investing in technology. When they turned it down, I realised I needed to find another way to realise that idea.
That’s when I met Ole, a very respected, experienced, and extremely well-connected businessman in Norway. He and I decided we would try to establish an independent investor in technology from the energy side. We called it Energy Ventures because we had a broad remit to invest in everything in energy.
Initially, we were quite cautious with our investment strategy. We wanted to invest in more mature companies that were EBITDA positive, had existing customers, existing products, and so on. With a couple of exceptions, we did only that in our first Fund.
But those two exceptions were significant. Moreover, one of them was highly successful, returning close to ten times the money in a relatively short period. This was MTEM, a spin-out from Edinburgh University.
We decided to adjust our investment strategy to focus on more early-stage companies on the back of that success. We concluded that early-stage investing represented a great opportunity for EV.
Consequently, our subsequent funds, between 2005 and 2010, were dominated by venture investments. We continued to have some great successes in venture. Still, by 2013, we came to realise that our growth focused investment provided a better risk-return ratio. Profitable companies in the growth-stage provided EV with a very attractive exposure to the technology scene.
Our thinking was crystallised by another Black Swans that have punctuated the 21st century: the Global Financial Crisis and Credit Crunch of 2008. In this case, defaults on sub-prime mortgage debt in the US created a domino effect that led to the collapse of Northern Rock in the UK and the near-collapse of RBS and HBoS. In the US, Lehman Brothers and Bear Stearns both went bust. As a result, $10 trillion was wiped off global equity markets. Our growth-focused portfolio proved to be much more resilient during this period.
With the focus on growth-stage companies, we were faced with another dilemma; We were called Energy Ventures, but we weren’t investing in early-stage companies. It was becoming very confusing for investors. That’s why we decided to rename the firm EV Private Equity. For the next decade, all we have been doing is to invest in growth-stage companies.
EV itself was also a growth-stage company seeking to expand and internationalise. If the capital for our first two funds came predominantly from Norwegian investors, this changed radically with our third fund, thanks entirely to Ole.
Ole was extremely internationally oriented. He had launched Smedvig on the New York Stock Exchange, and he wanted us to professionalise and attract large international institutions. While we can’t name names for confidentiality reasons, we can say that our LP investors are among some of the biggest asset managers and sovereign wealth funds in the world.
In 2010, we took it one step further with our decision to break America, as European rock bands like to put it. Again, our ambition was rewarded, and some big names in the university endowment space, typically major investors in private equity in the US, came on board with our fourth fund.
If that internationalisation of our investor base was a milestone, so too was the opening of our international offices. Greg Herrera joined us back in 2005 and spent a couple of years in Stavanger before opening our UK office in Aberdeen in 2007.
That same year, I moved to Houston to open our US office, spending a couple of years there and hiring some new colleagues.
So now we were genuinely international in terms of team composition, locations, investor profile and portfolios.
Money never sleeps, and neither do ambitious private equity managers. So in 2017/18, after several years of investing in growth buy-out, we decided to look into the crystal ball again. We realised there was a need to internalise what was going on in the energy industry, and that was the drive towards a lower carbon energy supply.
We’ve always been technology investors, so we felt that the energy transition was a very relevant and adjacent domain for us to engage in. Einar Gamman, a senior partner in our Stavanger office, was the driving force behind that, pushing us in the right direction and leading.
In our discussions, we concluded that, for all the ESG focus on the environment, very few KPIs tell you accurately what impact you are having or, indeed, whether you are making any progress.
As an investor, you want to make good money but positively impact the climate. So how do you know if you’re doing that? It’s very difficult, and you can be accused of greenwashing if you don’t have the analysis properly lined up.
So, we started to look at how we would characterise impact linked to CO2 emissions if that were to be our goal. That ended up in a framework called EVIQ, which is now XIQ– a standalone business that we have spun out from EV and in which we have external investors.
That’s the methodology that frames our impact calculations. It looks at scopes 1-3, the standard approach to emissions, but since we are investors in technology businesses, it also looks at your contribution to reducing your client’s emissions.
Say, for example, you invent a new spark plug for gasoline-powered engines that reduces fuel consumption by 50%. The company itself will have a very low scope 1-3, most likely because all they do is produce spark plugs.
But reducing gasoline consumption by 50% is a massive contribution to CO2 reduction, and you need to take that into account. It’s called scope 4 – avoided emission. Thus, the contribution from the portfolio company is their own scope 1-3 and the avoided emission that they enable in their clients.
However, we realised that it’s more complicated even than that. You can imagine that producing such a spark plug will lead to more driving because it’s cheaper to drive. That’s called the rebound effect. With a significant rebound effect, you might undo all your CO2 savings. Our framework takes that into account. It illustrates the complexity of assessing the impact effect. Establishing that framework was a crucial development in the history of EV.
Another milestone was our decision to discontinue investment in oil and gas. So, in our next Fund, we have committed not to invest in companies that are predominantly focused on oil and gas, exploration, development and production.
With the oil price currently five times higher than when we launched EV two decades ago, that might seem counter-intuitive. But we feel that the long-term prospect for the oil and gas industry is declining. While it will probably grow in the next couple of years because of energy security concerns arising from the war in Ukraine, another Black Swan event that will have a short to medium-term effect in a long-term shrinking market.
However, we also believe that, while we are now on the path to net-zero, phasing out oil will take longer than many think. As a petroleum engineer, I embrace the drive to decarbonise, but it is unfair to demonise the oil and gas industry and portray it as evil.
Historically, it has delivered significant benefits for humanity, and it will remain an essential component of our energy security for many years to come. Given that reality, there is an imperative to reduce the carbon intensity of the industry using technology.
Our strategy of focusing on the energy transition domain positions us in markets that will grow substantially over the following decades.
Given our heritage in energy investment, the decision to curtail our investment in oil and gas was not made lightly. But effectively, we have always been global technology investors as much as energy investors, and our portfolios bear this out.
For example, one of our companies today, Motive Offshore, provides cable insulation and offshore cable inspection. It operates across several sectors – renewables and telecommunications as well as oil and gas – but the sophisticated service it provides is very similar in each case.
So, the change in investment strategy is more of a nudge on the rudder than a radical alteration in the course. It’s just that now we’ll concentrate more on energy transition-oriented investment opportunities.
We’ve been technology investors in the energy space for 20 years. We’re simply continuing to evolve our strategy to match what the market and the planet require. The approach is consistent in anticipating and adapting to changing dynamics.
We are excited about the massive opportunities created by the strength of the low carbon imperative. There are many avenues that we can pursue and which we are actively exploring. One is offering different kinds of capital to these same players. There is a growing congregation of credit funds that provide credit where banks are unwilling or unable to provide capital on a competitive basis.
There are also venture capital models that are potentially interesting but a different model from what we have pursued before. We’re also looking to become grow because size matters in allowing you to do more things in a more sophisticated way.
It’s been a fascinating journey over the last 20 years, a rollercoaster ride with as many ups and downs as the oil price over the same period. We successfully rode out another Black Swan, the 2014 oil crash, which saw prices per barrel plunge by 70%, one of the most significant oil price declines in modern history.
Like Picasso, those two guys in Stavanger in 2002 started with an idea, and it has become something else: it has become a recognised global leader in technology-focused impact investment with a team of experts who deliver competitive returns while substantially cutting greenhouse gas emissions.
EV’s origin story features a Black Swan event, and our 20th anniversary sees us still navigating a world that is almost defined by extreme volatility. Yet, our quest for resilience and sustainability remains constant in the face of this socio-economic and geo-political turbulence.
Through all this change, EV Private Equity has stayed true to its core values of inclusion and integrity. Our democratic and open culture and our mantra of ‘one team, three locations’ are strengths that put us in good shape for the next 20 years.
In the 1970s, the legendary Saudi oil minister, Sheik Yamani, said: “The Stone Age didn’t end for lack of stone.” Instead, it ended because we rethought how we lived, because we invented better tools, and we developed better technologies.
At EV Private Equity, we are helping to usher in the end of the Petroleum Age with our impact investment strategy. It will not come to a halt because we run out of oil but because we create better technologies, cleaner technologies, and more efficient technologies. That spirit of innovation was where we started 20 years ago, and it will continue to guide us in the exciting years ahead.