When Nino Tronchetti Provera and his team launched their sustainable-investing private equity fund in 2007, just when the term ESG was catching on, they decided to keep it dead simple and unsexy.
The operating philosophy of the fund, called Ambienta, a derivation of ambiente, the Italian word for environment, was that mass consumption of everything from disposable plastics to cheap fashion was morally and materially unsustainable.
They would not go after the cool stuff like start-ups, fancy software or disruptive technologies. They would instead target established companies whose products reduced pollution, not just carbon output, and made manufacturing greener – Ambienta would not specifically be a climate-change fund.
“We will soon have nine billion people consuming the planet,” Mr. Tronchetti Provera, 52, a former McKinsey consultant, said in a Zoom interview from Milan. “Every sector of the economy has to look at sustainability.”
The investment philosophy would hand Ambienta a profitable niche in the now-massive ESG investing universe.
ESG stands for environment, social and governance. Companies that embrace ESG’s best practices – from ever-lower production of greenhouse gases to ever-higher female representation at the director level – are driving the investment decisions of funds with assets of more than US$40-trillion. An evolution of the old socially responsible investment movement, which saw funds dump their holdings in “sin” industries like tobacco and weapons, ESG strives to combine sustainability with strong investor returns.
Ambienta’s target niche was open hunting territory, allowing the firm to go from small, very Italian and obscure to fairly large, very European and well known within the European private equity universe. Its three funds manage almost €1.2-billion of assets and its new long-short absolute return fund has US$400-million of play money. It has opened offices in Paris, London and Dusseldorf.
Mr. Tronchetti Provera says the third fund, which raised €635-million in 2018, was six times oversubscribed and that the fourth fund, potentially worth €1-billion, will launch in 2022. The new one might attract the Canadian pension funds. “Sustainability is at the top of the agenda for the Canadian funds,” he said. “We should have Canadian investors in the next fund.”
By now, Ambienta has a formula that hasn’t varied much in its 13 years in the private equity game. It buys small and medium-sized private companies (SME) that are profitable or close to it. It wants a long operating history – the age range of the companies in its portfolio is 20 to 90 years – and it usually seeks majority ownership, ensuring fast decisions. Ambienta targets companies with €30-million to €40-million in annual revenues and likes to write takeover cheques in the range of €30-million to €100-million.
The universe of SMEs in Europe, especially in Germany and Italy, the continent’s two manufacturing powerhouses, is vast. According to a 2019 European Commission report, Italy alone generates 67 per cent of the added value in the non-financial business economy from SMEs, well above the European Union average of 56 per cent. At last count, Italy had 3.8 million SMEs, though the vast majority fall in the “micro” category, family shops that are of no interest to private equity funds. But there are about 190,000 bigger ones, some of which are. Germany has about 450,000 SMEs, excluding the micro ones.
The SMEs in those countries tend to shun initial public offerings and rely on banks to fund their operations. Some are pocket-sized global companies with winning products but lacking the financial, production and management clout to take their business to the next level. Ambienta’s investment scouts go after those companies.
“They don’t find us, we find them,” said Fabio Ranghino, Ambienta’s head of strategy and sustainability. “We don’t look for turnaround situations, and we don’t look for disruptive technologies. We look for environmental technologies that already work and have good potential for growth.”
Above all, these technologies have to help clean up the environment.
One big success was Oskar Nolte, a German company that played a prominent role in Ambienta’s second fund, which raised €323-million. Nolte was founded in 1959 and specialized in paints for furniture makers. In the 1990s, the company moved away from solvent-based coatings, which are usually toxic, flammable and harmful to the environment, and adopted water-based coatings. The transformation prevented the use of 23,000 tons of solvents a year.
Ambienta bought Nolte in 2015. Over three years, Ambienta built up Nolte’s senior management team and pushed the company onto the international stage, where it picked up some big-name clients, including Ikea, an effort that doubled the size of the business. Ambienta sold Nolte in 2018 to a German family holding company, earning 3.5 times its original investment.
Ambienta gave an Italian company called AromataGroup similar treatment. Aromata made natural flavours and colours for the food and beverage industry, setting it apart from competitors, whose products came from synthetic sources, like inorganic chemicals. A series of acquisitions turned Aromata, since renamed Nactarome, into a European leader in its field, with 10 factories and sales in 95 countries. Ambienta still controls the company.
Mr. Tronchetti Provera says Ambienta’s biggest hit was a German company called Lakesight Technologies, which was picked up in 2012 and sold six years later at 10 times the original investment. A “machine vision” company, Lakesight’s products receive and interpret images, looking for waste and inefficiencies. One of its platforms specializes in licence-plate recognition, allowing cities to track cars and apply traffic charges that are aimed at reducing congestion and pollution.
Ambienta has had its losers, too. Some 40 per cent of the investments in the first fund were bought just before the 2008 financial crisis and went nowhere. But overall, the results are encouraging. Mr. Ranghino said that performance data from Cambridge Associates puts Ambienta “materially above the average of the top quartile of its peers,” though the firm will not release specific results.
Mr. Tronchetti Provera says Ambienta’s success came from building a fund that did not focus purely on energy, cleantech and climate change, where the investment returns often have been elusive. “We were just looking for normal companies,” he said. “We didn’t go into garages and give start-up money for new technologies. We just took the view that we humans were creating too much pollution, consuming too many resources, and saw that as an opportunity.”
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