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Lightrock CEO: Sustainable companies will deliver better returns ‘over the long term’

Sustainable investing has gained momentum in recent years as many investors prioritize social and environmental impact alongside financial returns.

Sustainable investing has gained momentum in recent years as many investors prioritize social and environmental impact alongside financial returns.

Lightrock, a London-based growth equity firm that spun out of LGT Group, is one of several fund managers that have developed a portfolio with a focus on impact investments. The firm, which has been led by Pal Erik Sjatil since 2020, has closed three funds since its inception: a $900 million global growth fund; a $300 million Latin America-focused vehicle; and a $860 million global climate fund, which closed in October.

Lightrock invests in Europe, India, Africa and South America but it has also made some notable investments in the US, including companies such as Mainspring, Group 14 and Liqid. We spoke with Sjatil about today’s opportunities in sustainable investing. The following interview has been lightly edited for length and clarity.

PitchBook: How does an investor balance making an impact investment while also looking to make a return?

Sjatil

Sjatil

Sjatil: It’s important that you either do philanthropy, or you don’t. Do not fluctuate, and don’t try to do something in between.

When it comes down to the individual company, an independent quality assessment around impact should be done, and you could argue you have quite a similar discussion as you would have on the returns. If it’s a climate deal, we definitely look at what impact the company would have on CO2 reductions, for instance.

In an environment where a lot of things are labeled “green,” it’s important to have both a disciplined approach and an acceptance that there will be a degree of variability in outcome. Greenwashing is not good, and we need to combat it. At the same time, we must also not assume that we can predict everything that might happen 10 years from now.

Ultimately, we do not view investing impactfully as a balance or trade off. We believe that impactful and sustainable companies tackling pressing issues will ultimately deliver better commercial returns over the long term.

When investing in renewable energy, are there sometimes misunderstandings over what investments can be considered green?

Yes, there is always some complexity. To give you an example, it’s important to understand that if you source biomass from certain sources such as trees, I would not claim that’s a good thing. If it’s sourced from garbage—like our company, Antec, which produces biogas from organic waste, sewage and fish sludge—it can be very positive.

Hydrogen is another example. You need quite a lot of energy to produce hydrogen. The fact that … the energy crisis [has increased] the willingness to invest in energy transition is positive. But it has also been causing some challenges because of very high energy prices. One of our companies in Germany, Sunfire, produces electrolyzers, which generate renewable hydrogen and syngas for industrial applications, an essential area that would require the use of fossil fuels if there were no alternatives.

What are the differences between the US and Europe when it comes to renewable energy policies?

I think you have a lot of innovation happening in Europe, a lot of innovation happening in the US, and a little bit of almost-healthy competition.

The notion that the US is not taking renewable energy seriously or that the company founders’ landscape is not very vibrant would be wrong. I think some would claim that Europe came to [renewables] a little bit earlier.

A lot is made of the public funding available in the US, but we will not make an investment that relies heavily on subsidies or a stimulus like the Inflation Reduction Act. If there will be some changes to the act, our investments should sustain that.

We don’t worry about the political risk. What we worry about more is regulation changes. You cannot underestimate how important it is to have stable quality regulation—everything from permitting how to regulate the grid to what type of biomass you can and cannot use. When you set up a biofuel tank, the input that goes into it has massive implications, as these are long-term projects.

Tell us about your LP base. Has the denominator effect impacted investor appetite for the strategy?

Apart from our anchor investor LGT and its private banking clients, it is a very standard list of LPs. It consists of a few European pension funds such as AP1 and a couple of Australia and New Zealand funds such as NGS Super and BayTrust, along with many others. We also have some family offices, which diversify our investor pool quite nicely.

Regarding the denominator effect, for this year we haven’t seen as much allocation, but rising interest rates have also played a part in that. If you can invest and get 10% a year, then of course private equity funds have a different competitor.

Going forward, what do you consider to be the biggest growth areas?

The growing importance of the technologies that regulate AI, which I put under the banner of “trust and safety,” is an area of interest—regtech, in a way. Investors are very focused on how these technologies are being used and want inclusion in this emerging tech.

We have two companies operating in this sphere in our portfolio: Dataiku and Neo4j. When we had a meeting with Dataiku, the firm’s founder said we were the only ones who didn’t only ask about some financial KPIs. We actually started by asking them to expand on how this technology is being used.

Featured image by jaroslava V/Shutterstock

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