Private Equity For Your Wallet And Your Heart
Xeon International focuses on value creation capacities in major International markets. Its focus on business value creation is supported by global experience in a wide range of industries. Xeon looks at early stage emerging markets with good headroom for development, by selecting high-quality investments with strong growth and integration potential. It has a strong focus on socially responsible corporate investment. In the interview below, Yves Duponselle and Giancarlo d’Elia of Xeon describe how they are catering to a new generation of socially responsible investors.
1 Corporate social responsibility has emerged as a prominent theme in the wake of successive financial crises. What is the next-generation investor calling for?
YD: We have observed that in today’s market, a third-millennium investor typology has emerged, focusing on investing in projects that benefit society. That caused us to rethink value creation today. We went back to the fundamentals of the value creation process, and the cornerstone of our thinking was to redefine the terms of good investment. We concluded that we needed to expand the profit generation objective to include other considerations.
The idea is to be smart enough to make substantial profits while focusing on an important additional dimension: making a contribution to society. And this contribution should have a social and an environmental impact. We believe that the current generation must start taking action to accelerate responsible corporate social investments.
2 Why should the public trust you? Are you different from any other hedge fund that bet against sovereign states prior to 2008?
GDE: We are a private equity fund. We are not interested in financial speculation, and our primary task is to create value over the medium and long term. We aim to improve the standard of life in the communities in which we invest. It is our chosen objective to invest in an ethical way. Third-millennium capitalism should be more socially inspired.
Given our industry track record, we have proven that continuous high returns can be made while investing in sustainable solutions that are highly beneficial to investors, the environment, the economy and ultimately people’s lives. We should not forget that we are held accountable by our investors to deliver our promise. We believe that the best value propositions are those for which created and perceived value are synchronized. Our mission is to generate value while contributing to the sustainability of society.
“The cornerstone of our thinking is to integrate the notion of contribution to Society in what is considered a good investment “
3 What type of investors are interested (e.g. institutional, individual)?
YD: So-called next-generation investors are an emerging wave of business leaders and investment managers that are conscious of sustainability. They may belong to a second generation of investors that wants to expand on the ideas of first-generation investors that created wealth from scratch. They are present in all investor classes, from private individuals to institutional investors. They are usually younger, less established and conscious that change can be positive. They are mostly well educated and value new technologies and new business concepts. They like club investments and are prepared to take a calculated risk.
4 What is their risk profile?
GDE: These investors followed various life paths before becoming successful in their investment management activities. Some have taken a lot of risks and others were much more interested in wealth preservation, but the common denominator is that all of them are disposed to a greater or lesser extent to take calculated risks in parts of their investment portfolios. Our Luxembourg-based fund structure is optimized to mitigate a great number of investment-related risks while limiting uncertainty to intrinsic industry specificities. We make sure that our management teams and funds have the best available skills to generate outstanding results for investors who trust our judgement.
5 How does Xeon turn its corporate social and environmental vision into reality?
YD: We have addressed this by proposing two clearly focused value propositions. The first concerns bio-fuel manufacturing which is one of the major ways to satisfy, which is now the only way to satisfy the need for energy in emerging markets. Their desire to grow rapidly is legitimate in terms of improving living conditions and can be fuelled in a way that is environmentally compatible. We believe that you can grow without destroying the environment.
Our proposal is based on taking two underperforming sectors (waste-to-energy and bio-fuel manufacturing) and combining them to create a new disruptive business model with an absolute price leader. As such, we generate excellent financial performance as well as long-term employment for farmers and skilled people in the target investment markets.
Our other value proposition is a water fund targeting the expected worldwide shortage of potable water. We produce and supply potable water to populations in regions of water scarcity. This has a positive impact on living conditions. When you learn that the lack of access to water determines if children can go to school or not, you will understand that this was for us a massive call to action.
At the 2015 World Economic forum in Davos, water security emerged as the number one global risk in terms of the impact of development. In 2016, this will remain the case, but environmental impact will need to be afforded the same level of importance.
6 How are you proving this is a socially responsibility and wealth generating opportunity?
GDE: We act according to the principle “if you can measure it, you can improve it”. The two funds we created to address the demand from next-generation investors are managed such that newly defined investment criteria (social contribution and environmental impact) are part of our key performance indicators. Thus, our portfolio management quantifies the indicators and monitors them.
On the one hand, we can illustrate how much water or bio-fuel we produce, generating financial performance and showing the expected returns. We can measure how many households can access the potable water produced, and we can calculate how this translates into jobs or green certificates.
“Third-millennium capitalism should be more socially inspired or it won’t be anymore ”
7 What is your company’s vision of investment?
YD: Our starting point is the same as all investment companies: it should generate profits for our investors. We have simply added the additional dimension of contributing to society to our investment criteria. This should have a social and an environmental impact. It is our chosen objective to create value in an ethical way.
8 How has the current economic climate shaped that vision?
GDE: Over the last 15 years, we have experienced three major crises. We believe that these can be partially explained by the development of ever more sophisticated financial products that have nothing to do anymore with the real economy. They are highly speculative and mostly to the detriment of consumers and investors. There are still far too many of these out there, and this is not very reassuring.
We have observed that many financial players are ready to sacrifice quite a bit in the name of short-term results. The economy tends mostly to swing back to the natural point of equilibrium after the hype. We pursue growth, development and returns without having a negative impact on people and the environment. We do it our way and many investors like it.
9 You mentioned that many modern financial products are not about value creation but rather speculative tools that benefit the few at the detriment of the many. Could you expand on that point further?
YD: Some investment products helped create the financial crises, while nobody (apart from a small circle of specialists) really understood what they were about and how they generated profits, often not even those who distributed them. It was a form of financial contamination whereby individuals made a lot of money on the back of small investors and ordinary people. You could see the crisis coming as the situation was not in line with economic principles. Another phenomenon was that certain corporations became so big and diversified that conflicts of interests were to a certain extent unavoidable.
10 How do you think wealth should be created for investors?
GDE: Our approach is to go back to the basics of value creation. We carefully select the markets and sectors in which we are going to invest. We then analyze the companies and other players in this space. We talk to shareholders and management. We share our philosophy and check our compatibility. Our investments are medium- to long-term oriented, hence it is mandatory to have the buy-in of all people concerned in the daily effort of delivering the best products and services. By doing so, we make sure that the number of disruptive factors is reduced to a minimum, ensuring a smooth development and growth process.
11 What do you mean when you talk about going back to the basics of value creation?
YD: At a basic level, value is created by taking actions that make economic sense. We look at tangible companies/projects and their potential to generate revenues and growth. If they have potential, we verify that we have the skills to fulfill that potential, thus adding value to the company/project. There are many ways to further develop an existing company or an interesting project. Adding value to project, physical products or dematerialized services is what we are good at. In the end, this naturally generates profits and returns for our investors while being socially responsible.
12 Could you explain what next-generation investors are and how your philosophy will appeal to them?
GDE: We address our proposal to every investor that shares our philosophy. We take the time to explain what we do and how we do it. Investors and investment managers who believe that making a contribution to the environment and the next generation is important are our natural matching counterparts. We call them next-generation investors. It is easier to develop a long-term relationship when both parties share the same values and when they feel good about the way their returns are generated, it is rewarding for all of us.
13 How do you think the world can balance the need for economic growth and environmental stability?
GDE: Growth is a necessity for every individual and for societies in general. That process should not and cannot be hindered. What has to be controlled is the way you go through the process.
Many emerging markets are realizing that they have reached a point of saturation and cannot continue toward self-implosion by ruthless exploiting the environment and people. If at the end of the development process there is nothing more to enjoy, then what is the rationale behind it? Social and environmental responsibility will become the guideline for long-term growth.
14 How is Xeon attempting to find that same balance?
YD: For us, growth is where social and environmental investment is not meeting demand, like in water supply or alternative bio fuels. We are also working on health care and CSR technology development. By increasing the capacity of those needs, we will contribute to a reduced carbon footprint, ensuring a more equitable and sustainable balance. We also focus on measurable ratios and targets. When we select an investment opportunity, we look at others factors besides the ROI (return on equity) and IRR (internal rate of return). Social and environmental impacts guide our approach to long-term growth.
15 What are your hopes for the future?
YD: The social and environmental call for action has too long been associated with green activists only. We believe that social capitalism also has a role to play. I hope that everyone takes responsibility for contributing to preserving our exceptional planet, especially now that scientific research is urging us to do something immediate against the threats of tomorrow. We should be accountable for our acts to the next generation. We can’t tell them that we did nothing when they ask us what we did for the planet.
GDE: We at Xeon Fund have decided to do something. We have decided to make a clear commitment to certain environmental and social values. It’s a small contribution, but if many people make a small contribution, there will be a sizeable impact at the economic and social level.
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