Gino Borges:
I’m here with Richard Seamans and Eleanor Seamans of the Seamans Capital Management Group. Previously we’ve had members like Jed Emerson, Joel Solomon, John Fullerton, and many more join us for this particular Journey to Impact series to articulate and take a behind-the-scenes look at what it means to actually be in the impact investing space and how our personal lives and the journey behind them leads to us making certain decisions and not others. In essence, it really draws out the human component and to realize that there’s people behind the money and there are people behind these investments. I’m really looking forward to hearing from Richard and Eleanor today and sharing this message as the topic today in which they’re very adept and very familiar with this idea of essential services, essential technologies, and relating that back to the sustainable world that we’re all trying to create.
Richard and Eleanor are both the founders and Chief Investment Officer and Chief Executive Officer of Seamans Capital Management Group. They have a pretty extensive background in terms of service work in particular in the northeast of the United States.
Richard went to Wharton and I have a sense of how they train people at Wharton, but at what point did you guys make that switch over to saying that, maybe this world of investment involves much more of a multi-stakeholder model? How do we incorporate and engage the multi-stakeholder model?
Eleanor Seamans:
We do not make important decisions without the benefits of a confluence of factors. In terms of the intellectual factors, the macro picture, Richard will talk about those later. We began to sense the beginning of the end of the fossil fuel-based era, and we began to have concerns about what would emerge next. History is filled with cycles. Even our individual lives’ are cyclic. The point where I felt that we should begin to be primarily focused on sustainability on a global level, was at a meeting with a scientist from Georgia, outside of the USSR. He came to our office because his wife was ill. He wanted to find a way to bring a technology that he had discovered to an investment firm that would help develop it. At the same time, he wanted to help his wife get the right care at Massachusetts General Hospital.
We assembled a group of physicists to review his technology. We assured him, whether we went forward or not, we would certainly help him receive the right medical attention for his wife. At the end of the day, I didn’t understand what all the physicists had been saying. I asked Richard, “What does this actually mean?” He explained that energy could be free on the planet indefinitely for everyone based on the sun alone.
I thought that his technology was a military grade secret because he had found a way to change the melting point of solids and we wouldn’t be able to develop it, which was unfortunately true. From that point on, we began to really pay attention to concepts that were simple and scalable and not caught up in bureaucracy. This was one of the first technologies that we saw that could have a positive impact on the socio political and economic turmoil we saw coming.
Gino Borges:
What time frame was this for you guys?
Richard Seamans:
In the 2010-2012 time period.
Gino Borges:
How does that particular story turn into a pivot for Seamans Capital Management? It’s one thing to have that lesson, but how did it become a practice for you to create that platform?
Eleanor Seamans:
We began to look at other investments in the wind, solar, and water sectors. There is an opportunity for technology to address a lot of the social ills. I don’t think we thought about it in terms of the commitment to financial investing, because the favorable financial metrics weren’t there until about 2013.
Gino Borges:
So, we needed time for the math to catch up with the technology.
Richard Seamans:
Absolutely. I’m an economic historian by avocation and have been studying financial history. I’m a physicist by training, which really means I’m a mathematician. I gravitated to bonds – first municipal bonds, then global bonds, and finally to resource equities in the late 1990s because I could see a potential rise in commodity prices, which had been declining since the 1980 peak. The world population of middle-class people was growing at 50 million people a year. It’s now up to 140 million people a year. These people wanted better diets, better housing, and better infrastructure, all of which required commodities. In 1999, I identified the likely rise in commodity prices, which I predicted would last about 14 years.
It turned out to be only 12 years of rising prices for metals as well as oil and gas. In 2011, China changed its economic focus from being an export led economy to being a consumption led economy. That told me, “That’s the end of the commodities bull market.” In the spring of 2011, we sold all of our base metal stocks. We sold all of the oil and gas companies in 2012. We sold the last of the mining companies in 2013.
In early 2013, we reviewed a proprietary analysis that showed that solar energy was competitive economically with conventional energy on a worldwide basis. The solar stock index had declined 95% from its peak and Sun Tech and Solyndra had declared bankruptcy. I said, “I’ve seen this play before.” It looked like the commodities market did in 2001, when the average mining stock declined 90% and oil and gas were down 80% from their peak. We started investing in solar companies, moved to wind, then to energy efficiency and clean transportation, to water and agriculture, and to waste management and to the many technologies that supported them. It takes 62 minor metals to enable all of these technologies, so it was not-so-clean after all. Rather than call it clean energy, we call it New Era Technologies.
Gino Borges:
How did that manifest into you guys establishing a fund around essential technologies and services? How did you end up communicating this idea?
Eleanor Seamans:
My background and training is as an educator and sociologist. We think in terms of the parts to the whole within any given matrix. We looked at what was unfolding and realized this is going to be a very interesting time in history because we’re at a transformative time. We think that the geopolitical structures that we’ve taken for granted in our lifetime will undergo massive change. We could see that a lot of common-sense assumptions about how the world was organized were going to be changing. We had a proprietary document that had been done as an OD study, by a very large pharmaceutical company. It basically said that when the internet came along and was well-integrated into everyone’s life, the hierarchical bureaucratic organizations and structures that had been in place, (where power and knowledge were held at the top in a few hands) were going to dramatically change. Essentially, you had a very mechanistic approach to life where you went to work and only did what you were supposed to do. That was the basic definition of what they called the military industrial complex.
The adoption of the internet meant that there’s going to be a different level of skills spread out throughout the entire organization. The whole definition of work, the expectations for work, the flow of communication is going to change. This will no longer be a situation where older people automatically have more knowledge than younger people. We’re going to begin to see a serious set of disruptive belief patterns, and the government will have to find a way to deal with change as well. We could do a lot of sidebars on this piece, but I think the most important thing added was, “What are the essentials that people need.” What is it in our natural environmental systems that need protection; recognizing that we are all interdependent?
What are the essentials that people need to survive? That was how we began to zero in on energy. As Richard said, we paid attention. Over time, what emerged was that technology was actually going to be embedded in every aspect of our life. When we started, we did not think of technology as an essential service in the same way that we thought about what it was that people needed to have in vibrant communities. Then, we identified our expertise and looked for an intersection with of the investment opportunities that would be stable enough for us to feel comfortable meeting our fiduciary responsibilities. That took us down a lot of paths. In private equity, you do a tremendous amount of work. Of course, most of it is in the “this’ll-be-interesting-to-follow, but-no-thank-you” phase. It’s been a long journey with a lot of different pieces.
Richard Seamans:
I would call it a learning experience. After we sold all the resource stocks, we basically returned investors’ money. We kept the money we made, and a few investors stayed with us. But we also kept our organization. We simply reached in our pockets and wrote a check every month to maintain the organization. We began experimenting with our own accounts. We were not going to risk anyone else’s capital initially. We bought solar stocks and the solar index was up 3 fold in about 15 months.
We were used to making money in mining by knowing there was valuable ore in the ground and investing with serial entrepreneurs who could extract it at a profit. We
focused on identifying the right commodities and how to hedge the currencies. We thought we could repeat this process with new technologies, but adoption took longer, so it did not work out. The markets for many stocks rose and fell. We realized we needed more stability in our portfolios. Energy efficiency showed steady growth. We first looked at companies that remodeled building systems for greater efficiency including Johnson Controls and Acuity.
Over time, we realized the fastest way to energy efficiency is through the cloud. We continued to make adjustments in the portfolio. To increase stability, we added water utilities and water infrastructure. Waste management was another stable sector with steady growth. It took us a while to define what was working, and what was not. We liked cash flow, and companies that paid dividends, but to have a sustainable model, dividends need to be covered by earnings. In 2016, we wrote an analysis of “Lessons Learned” and defined the final product as Essential Services and Essential Technologies.
Gino Borges:
How did you make the connection between energy efficiency and the cloud? What are you seeing in the cloud space that led you to say I can satisfy my desire through and feel good about energy efficiency as a result of investing in cloud-based companies?
Richard Seamans:
We found that when businesses move from their own servers to the cloud, there’s roughly a 70% energy savings. We began focusing on those companies that served this sector. Less than a quarter of businesses had moved onto the cloud. There’s an annual growth here of at least 23%. Companies that offer solutions in this sector are growing rapidly. Salesforce, Workday Service and RingCentral are examples of very successful companies.
We look for companies that produce strong and rising levels of free cash flow. In our portfolio, the average free cash flow yield to enterprise value, bond and equity capital employed, is about 4%. That cash flow grew about 37% over the past 2 years. In bond terms, that would equate to a 4% coupon, that doubles every 4 years. We just kept looking for companies that had these characteristics.
Eleanor Seamans:
It might be helpful, Gino, to explain that we’re very research-based. We spend a lot of time researching. We also have quantitative systems that provide daily, weekly and quarterly signals. We chose three that were based in different approaches to improve accuracy. It’s been an interesting journey. I feel particularly grateful because we have a number of friends, colleagues and clients who are very steeped in their own expertise and are happy to share. Being part of different communities or networks of people, who are open and collaborative makes a really, really big difference.
Gino Borges:
One of the things I’ve learned from your group is that you have a pretty distinct profile criteria for the companies that you’re looking for, particularly in terms of the private placements. You have this criteria about proprietary technology cost, relative to
the existing technology or the existing solution needs to be a fraction of what it is. Walk us through how you came to that conclusion and the why behind making sure that those metrics are in place before you say “yes” to something.
Eleanor Seamans:
We do have an idea, and we sometimes have to do a lot of work before we accept that something does not hit every single one of our benchmarks. We think our ideal criteria is fairly bulletproof. It shows that we thought a lot about different scenarios and the alternatives for adoption to become cash flow positive. I just want to be clear that it’s definitely a backboard and that we dig fairly deep. But, we don’t hit every ideal every single time.
Gino Borges:
You obviously want to see certain cash at certain point. You want to see a proprietary technology at some level in likelihood to create some type of margin of safety, a moat of some kind, so you’re not wiped out because somebody else comes in. That whole element of cost is very educational.
Eleanor Seamans:
Before Richard unpacks that, our early co-investing with the serial mining entrepreneurs with Richard was very place-based. We always planned to give back 50% of a project’s economic value to the local community. We knew that Shell Oil has lost a huge part of their market share at a global level in the late 80s and early 90s because they hadn’t honored local culture. We dig really deep on each aspect with the entrepreneurs in order to build out investments. It was an evolution really of boots-on-the-ground, making sure that you are participating in companies that had certain characteristics that you could make sure that they reached a place of stability by unpacking all the variables.
Richard Seamans:
It comes from a combination of things. First, it comes from our experience with the serial entrepreneurs. By the end of the 1990s, only the best and strongest resource producers had survived. Fortuitously, because these companies were taking our research on commodity prices and currency prices, we were able to meet and work with management. We knew we wanted serial entrepreneurs, people who had done this before. We made some of the best gains co-investing with about a half a dozen entrepreneurs on two to five projects each. These people were fully committed “heat seeking missiles,” as Eleanor liked to say. They put up their own money. They put in their own teams. We knew we wanted to co-invest with them.
The other part had to do with the change in the dynamics of the financial markets in the post-2008 period. Some large development projects needed continuous access to capital over periods as long as 10 years.
As we looked at what happened in 2008, we realized the market is not going to be a continuous source of capital. The other factor was the speed of technological change. We realized that technology was evolving so fast that we wanted to make sure that we made all of our money back and a return on that money within three to five years
before a new technology emerged. That’s the reason that we created our tight ideal model. We wanted innovative technologies with a 50% to 80% cost advantage that were proven, proprietary and patented. We wanted a catalyst for its adoption and a management team with a demonstrated ability to create shareholder value that was “all in” themselves, with their own money and their own teams.
In investments, I know that if there are 3 or 4 ways to succeed, the likelihood of a positive return is much better. I just took that and applied it to the technology space and looked for those with a clear path to being cash flow positive in 2 to 4 years. There are many great technologies with lots of money “down the road” including Uber, Lyft, and Airbnb. We also want to see a plan to monetize the company either through an IPO or a sale to a strategic partner. We have looked at hundreds of opportunities, and only a handful have met most of our metrics.
Gino Borges:
You both have one of these rare situations where you are partners in social life and partners in business as well. How has that relationship evolved between you two? You came out, you take your profits, you returned money, but you still kept the business and you’re still writing the check. Sometimes there’s pressure on our relationships whenever there’s just not any direction, or worse, when we’re unsure about what our next step is. How do you navigate that individually, but then also as a couple?
Eleanor Seamans:
One of the things that’s interesting when I look back was that we each had separate businesses before we joined forces. I had a consultancy, the company that was part of that whole learning experience. I was in the consultancy part of something called the Society for Organizational Learning out of MIT. I had a pretty clear set of experiences that I had as a consultant that I didn’t want to have again, should we have a business. We had originally put our businesses together in the same office space because we needed to move when Richard became the sole parent of his three children, who came to live with us. In order for them to continue their education, we moved both businesses out of Boston into a suburban location.
It was really a gradual evolution where we could see what each person was doing on their own. Then when, from disparate sources, we began to have a unified voice over some of the social change that we’ve already referenced, we started to look at what would it take to really combine our expertise. We did that gradually in terms of, should we continue or not? Because our life was so richly textured, each of us always had a separate discipline of meditation. We found that it was far more useful to hit a disagreement and say we’ll put that on the list. This meant that we’d each meditate on it separately and then compare notes so that we didn’t spend a lot of time in dialogue and all the intellectual aspects. It’s not that hard to debate an issue from both sides of the table.
That’s been our ability to take a look at things and just move along. That said, there were points when we really felt as if it would take an exceedingly long time to have our
everyday reality match what we had envisioned. We felt that we could see the beginning of a global sustainable society, but we thought it would be far more likely to come into being for our grandchildren. In the beginning, we thought we could retire or look for other places where there’s a replica of what had made us successful the first time around in terms of people who have a similar value systems, where you trust people and share collaboratively.
That really was our foundation. We’ll go back to our researching roots and leave the infrastructure in place. But, we didn’t keep all of the same people. What we did was we changed our approach to bringing in employees, and we explained to people that the chances were good that they would probably only be with us for a period of time. But, we would do a lot to help them in terms of laying a foundation for their next career because we didn’t want people looking at us as a place where they could come and be for a very long period of time because we didn’t think that that would be true. That was an area that it took us a little while for Richard and I to agree on because Richard thought more in terms of building a team that would stay with us all the way through. I thought more in terms of the fact that it was going to be so continuously changing that if you go through different stages of business development, the first things that you do in some stages is to unpack in order to go to the next stage. We navigated our way through each piece as it came along.
We were just fortunate that it moved faster than we thought because of technology enabling change.
Richard Seamans:
I watched my father be forced to retire at age 70. That wasn’t a positive experience because he had a much too inquisitive mind. One of the things that really helped here is that we both had our own financial accounts. We weren’t dealing from a pool of money; we could both go our own ways with our own pools to spend our own capital, if you will, to do whatever we wanted to do individually. As Eleanor said, we’ve just gradually evolved over time so that we always worked in the public markets first, because at the important turns, the public markets offered the best values. The private equities are never the best values at turning points.
But after three or four years, the private or closely held companies offer some of the best opportunities. We’ve developed a team where we help develop management. We brought on Bill Brady this year, who’s done half a dozen startups and two turnarounds, as CFO of our water technology company. When management wasn’t able to deliver the sales expected, he was promoted to CEO. The payoff is that we have the prospect of recouping all the money we’ve spent over the last half dozen years and make clean water more available on a global basis.
It was a belief that we were going to find things that could make a difference in people’s lives around water, agriculture, and essential services – to make things that are less expensive, more viable, giving a little bit more social stability in a time of technological driven transitions. Everything is being disrupted. The other factor for me was that I did not want to let somebody else manage my money in a period of radical transformation. I wanted to be on the cutting edge myself.
Gino Borges:
Where do you see your strategy right now in central technologies and services? Describe the landscape of essential technologies. Where are we in this nine-inning ball game with this particular strategy that you’re engaged in?
Richard Seamans:
For us, it’s in water and agriculture. Water is the next most critical commodity. What we’re trying to do is to build a portfolio of the companies in which we are invested that can provide multiple water solutions. In terms of the baseball analogy, I’d say we’re in the first inning. In the agriculture sector, we understand that the nutritional value of food has declined 50% over the last 40 years. When people look at farmland, they think it has a 20-year life span. When we look at farmland, we think it’s closer to a 7-year life span because of the depletion of the soils.
The question is what can you do to improve the quality of farmland? It’s important to get the nutrients back into the soil. Microbials work but they are not simple and scalable, and there is too much competition. There is nothing that is proprietary or patentable, so it is not for us. But, we do want it to be part of our inventory of solutions. Our water solutions company can solve the methane issues in cow and pig ponds. It can also resolve issues with nitrates and phosphates. There is another water company that we have reviewed and declined twice because of management issues. That company has solutions for metal and chemical contaminants. We would invest if the management issues can be resolved.
We are looking for a way to take these water solutions across the world.
Eleanor Seamans:
The definition of what is essential is probably beginning to evolve because when we first started thinking about this, we weren’t worried about the electromagnetics of people being continuously assaulted. It changes them and their lives by being always in electromagnetic field. That will be an incredibly important area as we go forward. We just have a lot of things on the back burner, but they have to come along up into this model where we really think it will fit.
Gino Borges:
Water, energy, food and agriculture is pretty self-explanatory, but not a lot of people know EMFs. While it may be important to you and is important to me, how do you know that there’s actually a market there for something that may be important for you? Even if it’s not on people’s radar, there may be a great product to reduce EMFs. How do you sort of navigate that?
Eleanor Seamans:
That’s where patience comes in. I don’t think that we are in the business of trying to change people’s belief systems or trying to educate them because it’s just a too richly textured environment. But, a lot of people are starting to pay attention to this. In terms of a backdrop, when interacting with people who have knowledge, we ask them
to share it, and then we build the library of that knowledge. We pretty much wait for it to build its own consensus reality so that, there’s an awareness of the need. I really salute the people at Ceres who are part of this because they do such an incredible job of educating people on climate change and being huge sources of positive change. We’re happy to participate in that. We’re very grateful to them for their water toolkit work. But, we wouldn’t try to create a market. I think that enough people will come to the fore and recognize. Already, you’re seeing people talking about the incidents of greater rates of cancer or childhood diabetes. As individuals, we need to be very responsible. I worry about some of the erosion of personal advocacy in face of some of the things that we’re seeing.
Gino Borges:
How do you know if the EMF issue is timely? There may be great technologies and it is an essential service.
Richard Seamans:
Aequion is a good example of that. Its water technology was originally designed to treat the orange greening disease, which caused $5 billion worth of damage to the Florida orange trees in the last few years. However, it was too expensive for the orange growers; great technology, good results, but ultimately a non-starter. In November 2017, however, California passed a new air control regulation requiring dairy farmers to reduce the methane coming from their cow ponds. We knew this company’s technology was one-fourth to one-eighth the cost of the anaerobic digestures that were being used. We also knew the state was going to begin enforcing this regulation in November 2018. California also had a program where they had set aside $260 million which could help fund these installations.
Once the company’s technology was certified, California would make grants up to $750,000 to fund dairy farm installations. This was the catalyst we needed. However, it has taken longer than expected to get certification. This is the reason we look for applications in multiple sectors. It turned out that agriculture was the first sector to develop because the water treated with the company’s technology penetrated the ground 48% faster than untreated water and offered savings of 15%-20% of the water consumed. It also offered a 7%-20% improvement in crop size. So, in the end, agriculture was the company’s first commercially successful sector.
Eleanor Seamans:
One of the things we haven’t talked about is our concern that whatever we’re investing in fit into the built infrastructure. For example, we always look for, but I think we take it for granted now, distribution systems. Where is there already a distribution system that is in alignment with what it is that you’re investing in? Richard focused on it a lot in this call with Aequion. When we talked about having it go into India, the question was what would be the distribution system so that it would be handled well and make a difference rather than something that couldn’t be implemented in a sustainable, meaningful way. We’ve seen a lot of things that are enticing and standalone beautifully, but they basically do not fit into the built infrastructure and can’t be utilized. Again, it’s that application of paying attention to where you are in a cycle or a system.
But we wouldn’t try to push it ahead of time. Does this have momentum? Does this have roots if this happens?
Gino Borges:
One of the more interesting topics is this idea of this intersection between intellect and instinct when it comes to making your investments. Can you give examples where both are involved?
Richard Seamans:
The key to investing for us has always been management, management and management. We saw p-Chip’s wonderful new technology. My instinct was, “Wow!” This was the replacement for the passive RFID chips, which cost 10 to 25 cents. These new chips were going to cost one-and-a-half cents each. It had applications in multiple sectors for authentication and verification. So, we checked off multiple markets, sectors, and geographies. But when we looked at the management team, the team had not worked together to build a company, so we chose to watch and see how it developed. If it developed on course, we would invest in the next round.
Eleanor Seamans:
One of the things that comes to mind is that we did a lot of work on an opportunity to invest in a series of greenhouses and everything hit the metric. Intellectually, it was fine, but I really felt uncomfortable. I couldn’t put my finger on it. First, you get a signal that you’re not comfortable. There’s a disturbance. It doesn’t feel right, which is not exactly a technical term. We just kept digging on down layer after layer. Then finally it came to the point where I recognized that on the management team, there was the potential for a really large learning opportunity because we had two people who were steeped in what they had done with a lot of serious technical and managerial experience.
The problem was that one was from the Netherlands and one was from the U.S. and they hadn’t worked together previously. That cultural difference where they were in a shared role, where one didn’t have clear authority over the other one, meant that we might be putting our investors at risk while someone learned to sort out the nuances of language because one of the things over the years that we’ve learned is that language often times is assumed and that people think that they have the same definition of language when they don’t. In a financial decision-making role in that task/talent, management space, it’s really important to communicate clearly. Once we identified that piece, at first, I thought it was too small or too picky a piece, but I realized that once I addressed it, I really felt that it was enough to stop us. I felt as if I had found the right thing. We shouldn’t go forward, and we stopped.
Richard Seamans:
One that I looked at that immediately resonated with me was a company that came out of MIT’s Metallurgical Labs. If you look at the history metallurgy, there was a 40% improvement in the strength of metals over the last 40 years. Veloxint’s technology offered an immediate improvement that was 3x to 5x stronger than steel. Braidy Industries, which owned Veloxint, resonated right away with me and it was the only company that checked all of the boxes because it was led by a serial entrepreneur whohad already led three multi-billion dollar companies. This was one where intellect and instinct matched, and we invested.
Gino Borges: Thanks to both of you, Richard and Eleanor for sharing such a rich, rich background on what you have been up to and where you guys are heading. There’s no doubt that you, first and foremost, have really thought your way and felt your way through this whole process. The journey obviously always hasn’t been clear, but the outcomes and the learning lessons are first and foremost.