The Interview – Ilya Golubovich and Irakli Menabde, I2BF: “Technologies once considered uneconomic have emerged from obscurity to become one of the fastest-growing global industries”
Ilya Golubovich (pictured), managing partner of specialist clean technology fund manager I2BF and Irakli Menabde, manager of the I2BF-Arbat Technology Fund, say the fund is unique in its field by employing a relative value strategy with a fully systematic investment process based on the notion of consistent outperformance.
GFM: What is the background to your company and funds?
IG: I2BF was established in 2005 as an international fund management group focusing on venture capital and public equity activities in the clean technology sector. I2BF has USD100m under management in two main funds, the USD70m Venture Fund I and a hedge fund, the I2BF-Arbat Technology Fund.
IM: The long/short renewable energy-focused global equity fund was inspired by Ilya, I2BF’s founding partner, and is managed by Nicholas Merzeau and myself. The fund has achieved a total net return of more than 40 per cent since its launch in November 2008.
The investment methodology of the I2BF-Arbat Technology Fund is unique, combining quantitative, thematic and fundamental disciplines. The fund’s assets have grown from USD6m at launch to more than USD27m.
GFM: What is the structure of your funds?
IM: The I2BF-Arbat Technology Fund is an open-ended fund incorporated as an offshore structure in the Bahamas.
GFM: Who are your key service providers?
IG: The fund’s administrator is Custom House Global Fund Services, the custodian is JP Morgan and the prime broker is Morgan Stanley. Our audit firm is KPMG.
GFM: What is the profile of your current and targeted client base?
IM: Our fund is ideally placed for a risk-aware institutional investor who seeks exposure to an exciting sector with positive long-term drivers and wants liquidity and superior risk-adjusted returns.
Our offering complements long-only or absolute return portfolios as it provides a net long bias to the industry, while aiming to reduce the beta of the portfolio to the broad equity markets as well as various factors, limiting downside risk.
GFM: How would you assess the impact of the recent global financial crisis and economic downturn on your business?
IM:As with any downturn, there are negative impacts and new opportunities in equal measure, and as fund managers we have to identify and capitalise on both. The high volatility in the equity markets has brought significant alpha generation opportunities in the relative value space.
IG: As a business I2BF is well-positioned to benefit from investment in a new and growing cleantech sector. Although the amount of capital flowing in from private investors has decreased (although better than originally expected), governments have been stepping in to plug the financing gap, ensuring that cleantech assets will continue growing.
The key to the success of our industry is that over the past 10 years the economics of energy generation, distribution, and consumption have changed dramatically. Technologies considered uneconomic just a few years ago have risen from obscurity to form a new global industry that is now among the fastest-growing sectors.
GFM: What is your investment process?
IM: We employ a global, long/short equity investment approach, utilising our quantitative stock selection models on a broad investment universe with liquid and investible equity securities. We look to add value by identifying the best relative investment opportunities within our equity universe on a systematic basis. Risk management is integrated into our investment process alongside return generation, rather than separating the two.
GFM: How do you generate ideas for your funds?
IM: We run a quant fund with a fully systematic investment process based on the notion of consistent outperformance, so we rely primarily on continuous quantitative research to improve our investment process.
GFM: How has your recent performance compared with your expectations and track record?
IM: Our annual expected return is 37 per cent with an information ratio of 2.2 excluding costs, as indicated by our backtests. In 2009 we delivered more than 35 per cent including all costs, with an information ratio of 3.
GFM: What events do you expect to see in your sector in the coming year?
IG: Post-Copenhagen days we expect tighter legislation and an increase in taxation on businesses that do not meet environmental standards. We also believe governments will continue to support job creation in the cleantech sector and work toward a global solution to the climate change problem.
Another trend we see continuing through this year and beyond is China’s growing appetite for alternative energy, which is likely to remain strong for years to come. Private equity and venture investment in the region surpassing that in Western counties is clear evidence of that.
It is also clear that investment in ethical and sustainable companies and products will continue, as institutional investors become more aware of the upside of investing responsibly. I2BF is a shining example of superior returns in a sustainable and responsible investment space.
More generally, should economic recovery persist, we expect much more capital to flow into the sector, which will fuel the expansion of capacity in wind, solar and other clean industries that is needed to achieve economies of scale and eventual grid parity for new energy technologies.
GFM: How will these developments affect your own portfolio?
IM: The more capital that is invested in the cleantech space, the bigger our investment universe becomes, increasing our opportunity set.
IG: The greater the liquidity through private and public investment in our sector, the easier it is to raise further financing, resulting in higher valuations. This may be some sort of bubble, but that’s how real money is made.
GFM: How do you assess investors’ current expectations?
IG: Investors are now primarily concerned with the preservation of capital rather than the high double-digit figure returns to which they became accustomed during the bull market. They have become much more risk-averse, and while we expect appetite for risk to begin to return this year, fund managers will need to show they are responsible when investing clients’ money.
GFM: What differentiates you from other managers in your sector?
IM: We are multistrategy fund managers with experience in running a large number of portfolios across many sectors and regions. We therefore examine the risks and opportunities in any given sector objectively.
Another important differentiator is that we use quantitative investment methodology in a long/short context to capitalise on both upside and downside opportunities on a systematic basis. Traditional managers in the cleantech space are typically fundamental and long-only.
Finally, synergies between the public and private sides of I2BF’s business are unique for the industry. While our peers in other hedge fund firms are reading annual reports of cleantech companies, we have first-hand knowledge of what is going on through our venture capital team.
GFM: How do you view the environment for fundraising over the coming 12 months?
IG: While capital should be easier to access in the next 12 months, the fundraising environment will remain challenging in 2010, with investors remaining risk-averse, although we might start to see confidence pick up toward the end of the year. There is a lot of cash looking for a home right now, both in the West and in emerging markets such as Russia.
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