Karen speaks with Longbow Capital’s Tyson Birchall about the firm’s longstanding history as energy specialists, their investment thesis and how they have pivoted into energy transition.
Karen:
Hi Tyson, how are you?
tyson:
I'm great Karen, how are you doing?
Karen:
I'm really good, thank you. I'm really happy to have you here and you and I have known each other a long time. I remember when I spent a lot of time in Calgary visiting your offices and meeting your father, Larry Burchill and was so impressed with your family at the time. And then over the years, we got together and I was able to watch what Longbow has done. in the traditional oil and gas industry by raising multiple funds, which I hope you're going to talk to us about. So when I got your email that said that you had reached one billion in assets, I was just so happy for you. And I picked up the phone at that time and called you to congratulate you. And that's when I thought this is a great story. And it's a story that we should tell to our audience in the alternative investment industry. So I wanted to start by asking you to give us... the background of the firm and why I think Larry and your mom actually started the firm in 1997.
tyson:
Yeah, sure. Well, thanks for the opportunity and right back at you. It's been wonderful to watch your business flourish as well. And I really enjoyed the relationship and appreciated it. So Longbow, yeah, Longbow goes back to 1997. And if everybody recalls back then, the words private equity didn't quite roll off the tongue the way they do today. So we have a little bit of an unconventional background. My father started the business, had been an investment advisor. and left to start Longbow. And so from 1997 until about 2010, Longbow was relatively small. Larry would have described it as a cottage industry. It was mostly Calgary investors doing entirely upstream oil and gas investing. The funds were small and they were raised rapidly. So we're actually investing out of Longbow Fund 23 right now, which is a lot even for a 26 year old business. But I would really think about that as our fourth institutional style fund which we've raised since 2012 on a more normal cadence and prior to that there were a whole bunch of funds, they were funds, multi-asset funds that were raised mostly from retail investors. I joined the firm in 2009 and we had a pretty significant transition right around that period when we did two things. One, we started to diversify and grow the scale of our investor base so today out of the billion dollars we manage, about 15% of that would come from institutional investors and the balance comes from mostly single family offices across Canada. We would have about 30 or so single family offices that represent 75% of our non-institutional capital and then we would have a whole smattering of smaller investors, some of which have been going back all the way since day one.
Karen:
Right, okay. And are they predominantly Western Canadian? I know you said all of Canada, but would they predominantly be in Western Canada, the investors?
tyson:
No, no, it's actually predominantly not in Western Canada. So we got maybe a quarter of our capital out of Vancouver, 10% or less out of Calgary, which was an intentional decision that we made around the time I joined the firm, was to stop marketing to oil and gas people while we were raising oil and gas funds, because that just seemed dangerous.
Karen:
Yeah.
tyson:
And so we intentionally went after Toronto and Montreal and those markets where we seem to have had some success.
Karen:
Okay, and about what would the average asset raise be per fund on average? How
tyson:
So
Karen:
much would
tyson:
it's,
Karen:
you raise?
tyson:
average probably isn't a useful metric. So our first, what I would call institutional fund was in 2012, that was 50 million, the next one was 100, the next one was 160. The last fund we raised was 180 million, that was the first fund that we branded as an energy transition fund, and we can talk about how we got to that. Our next fund, which we'll probably be raising in the first half of next year is my guess, is when we'll launch that, and it, we haven't. We haven't pinned it yet, but it'll probably be 250 is my guess.
Karen:
Okay, gosh, that means there's lots of opportunities clearly in the pipeline. Okay, great Tyson. So the management team really has a lot of experience. I think it's a hundred years collectively amongst your senior people. Can you talk about how the firm has transitioned specifically and what that process looks like?
tyson:
Yeah, sure. So when I joined the business in 2009, in addition to changing and growing our investor base, the strategic decision we made, which has proven to be very important, was diversifying what we were investing in. So pre that time, it was 100% upstream oil and gas investing, and that really is still part of the DNA of our firm. But we also started to invest in adjacent businesses, things related to energy and power more broadly, energy technology. to be totally honest, as a hedge, saying, hey, this upstream model's been great for 40 years, but I'm young, I'm gonna be doing this for another 40 years, and who knows what the world's gonna look like. We better start growing our experience just in case things change. Things change much faster than we thought they would. And by 2016, 2017, we were sure happy that we had a track record of non-oil and gas deals that we had done inside of our energy funds. Our investors gave us a way to do that. I think the first deal we did did was actually a battery manufacturing company back when batteries weren't nearly as cool as they are today. We started a compressed natural gas low carbon fuels business that we just exited recently to Superior for a little over a billion dollars. We've got power generation assets, software business, a whole bunch of different things.
Karen:
Do you? Yeah, no, I'm just curious. Do you take majority or minority stakes typically?
tyson:
Most of our investments end up being minority, what we call strategic minority. So we go out of our way to try to get partners around the table who can add value in various different ways. We've got everything from insurance companies and a software business that we are invested in that we've got a commercial partnership with, people who can bring first customers, specific expertise, specific technologies. So we've got a few. sort of go-to's, strategic's that we've partnered with on a lot of stuff, but we end up usually owning less than 50% of the business, always, pretty much always leading deals, always taking active governance roles on the board and things like that, but we're not hung up on control.
Karen:
Okay. And have you been strategically involved with helping these businesses grow or giving them advisory services over the years?
tyson:
Yeah, for sure. I mean, our primary job, to be completely honest, is to find a really great management team that needs less of our help rather than more.
Karen:
Right.
tyson:
We're
Karen:
Yeah.
tyson:
trying to find the best people to partner with. But that said, we have a level of experience and a different set of experiences, inevitably, than they have. And I've seen a lot of things over the last quarter century, and so we take a pretty active role, everything from helping stand up a business. at an operational level and getting systems in place, ultimately through to when they're mature enough, really just serving in that governance and strategy position.
Karen:
Right, good, okay. Can you give us some examples of businesses that you've invested in? And
tyson:
Yeah.
Karen:
I just wondered if most of them are Canadian.
tyson:
Yeah, so about outside of our upstream business, which is not really an active strategy at the moment, in our energy transition investment vertical, roughly half would be U.S., half would be Canadian. The last fund is also working out to that, but over the last 10 years that has been the way it is. Some examples of businesses in our transition fund now, we've got six investments, and I'll give you sort of two that span the gamut. on both sides of the spectrum. So one would be a business called Clear Renewables. We led their series B financing. It's a software business that their base product helps their customers optimize the performance of wind farms so they can get another 2% or 3% out of their wind farms. But when we made that investment, we partnered with a company called Tokyo Marine, which owns the largest insurer in the world to the wind industry, a company called GQ. and G-Cube and Clear have since launched a smart insurance product, which is the sexy part of the business that we were excited about and the real growth driver for it, which is a first of its kind in the world. And it's kind of like if you had a fleet of trucks and were willing to share that black box data of how you drove and maintained those trucks with your insurance provider, then they could price your insurance more competitively. So it's like that, but much more strategic because in the wind industry... insurance would be the second largest operating cost and if you can change the way you insure your wind farm you can actually change the way you finance it, get more leverage on it and so it's a big lever for the customers, a big value add. The very other end of the spectrum, a much more capital intensive business is a business that we're one of the largest shareholders of called VoltaGrid, it's based in Houston and this is a business that helps the oil and gas industry, mining and various others. reduce their carbon emissions through displacing diesel consumption with electric power, so natural gas-fired electric power. And really, their primary customer base is in the oil and gas industry, where they're helping electrify the fracking operations, which allows an operator to reduce their CO2 emissions by 30% overnight. That business is really sort of the best of what we're trying to do. The business was an idea with the CEO in our boardroom in the summer of 2020 in the middle of COVID with no money, no name, no team. And it has scaled to become one of the largest mobile power generators in North America over the last three years. The reason it was able to do that is because we had a product that saved the customer money. It didn't rely on any subsidies or any credits. It was just it had a sort of natural and pure economic reasons to exist. It solved the customer's CO2 emissions problem by overnight being able to reduce their CO2 emissions materially in their most CO2 intensive process and had no operational drawbacks and in fact has operational benefits which I won't get into but there's a lot of reasons that you would want to use an electric power source for this type of operation. So with that trifecta and catching the wind in our sails of the electrification theme and these large old industries trying to figure out how they're going to operate in a low carbon future It's just absolutely taken off and it's been one of the fastest growing businesses we've ever been involved with. And again, it's just that nexus of all of those things coming together at the same time. That's what we're trying to accomplish. It doesn't always work that way.
Karen:
Yeah, no, of course not. Well, that's, that sounds great. How did you come across these groups and how typically do you originate?
tyson:
So our origination, I think we're a little bit old school in this nature and in this realm. We still think investing is very much about relationships. It's very much a people-first business. There's lots of great ideas out there, great execution will trump great ideas every time and so we spend a lot of time just working with management teams and people that we want to work with. We would see hundreds of deals a year. We keep the deal log like everybody else, and we'll see probably 250 or 300 this year, of the ones that get across the line, of which there's maybe going to be three, two to three, all of them we will have some sort of longer term relationship with the management team or maybe it's a director that connects us with the management team. There will be some link to our past and their past that brings us together. We tend not to. be great investment making clients, we don't participate in auctions, we are allergic to broker processes, and so it's really just that one off road or tilling type process that takes a lot of time and patience, but it's an effective way to find good quality deals.
Karen:
Yep, yep. Okay, and let's talk about challenges, like challenges from the level of managing these funds on your part and then maybe some of the challenges that these businesses are facing right now.
tyson:
Yeah, I mean, challenges abound. Investing is hard, making money is hard. I say that every single day. I say it to our team. I say it to our management team. It's just like, get over it. It's hard. That's just the way it is. Finding good deals is hard. Turning those good ideas into good execution is hard. And then actually selling that and turning it back into cash is maybe the hardest part of the whole thing. And so that's just part of the business. I mean, a big part of business is just solving problems that pop up every day. has to be comfortable with that. So we have challenges everywhere finding good opportunities that are priced the way we want to. The pricing has gotten a lot better over the last couple of years but back in you know 2021 and the early part of 22 we spent a lot of time sitting on our hands watching interesting businesses that we thought were very expensive go by and in retrospect we're grateful we did that. But yeah things are difficult. The other part about our business. A lot of the businesses we're in are hard asset businesses. You've got to deploy real assets into the field with real people. It's just hard. In a supply chain constrained world, managing all those problems is just a never ending thing. That's okay though. There's no market where it's ever easy. Again, I always say to our team, if you ever think it's easy, that's when you should probably be taking a break and letting a few years go by. but figure out it's hard. It's just the way it is. But that's okay
Karen:
Yeah,
tyson:
and it makes it fun.
Karen:
yeah, for sure. You sound so competent in this area. And so your expertise is just really coming through here. It's really nice to hear you talk about the investments and what you guys are doing. If you were to talk about your process, not just origination, like you've already discussed, but right through to making an investment. just so that an investor that might be listening would understand how that would work. So you've got one of those three companies and now what?
tyson:
Sure, so I'll actually start before the three companies. So we, of all of those, you know, multitude of deals that we see every year, we do meet with them and we make a very concerted effort to learn about their businesses and some of those relationships that we're forming with deals we're not doing today, maybe two or three year or four or five years from now, turn into things that we will do in the future. And so we do spend a lot of time meeting with companies, understanding different verticals, the whole energy transition theme, in a way it's not a theme. It's everything. I actually believe five or maybe it's ten years from now, people, to say you invest in energy transition, will be like saying, I invest in businesses that leverage the internet. Well, we all do that. That's just the way we operate. And so, we look at a lot of different stuff and a lot of different verticals that have very different business dynamics that drive them. They all kind of come back to a fundamental understanding of how our energy system works and how you get... energy in all of its forms from one place to another in a cost effective way. So we spent a lot of time learning about a lot of businesses. When we find one that we like, that we want to engage with at a deeper level, it's still quite a process. Really getting into the nuts and bolts of all the dynamics that can push and pull a business. We've got 14 people on our team, nine professionals on our investment team. And it's, you know... many months long process that can start sometimes very slow and has been going on for several years as we monitor a company as it develops and we see a seed of something we're excited about but it's just not quite there for us yet. By the time it gets there, we probably already know a lot about that business. But then from, hey, we've got a real opportunity here all the way through to legal paperwork, it takes months typically. That's just the way it is. that goes into if we're going to be involved at an intimate level with these businesses, we really want to understand what we're getting into and not accidentally walk into any fires just by not doing the work. So it's a pretty labor intensive process. It can be frustrating at times for the management teams while we're getting through that process, but the good news is when we come out the other side, we know a lot about that business and we can move pretty quickly and we're pretty nimble in making decisions once we have that base level of knowledge.
Karen:
Mm-hmm. Okay. And so when you're doing a raise for a fund, like the new fund coming up, is it a, how does it work? Is it a you raise capital and then draw it down as you find opportunities?
tyson:
Yep, yep. So it's a very traditional middle of the road private equity structure, two and 20 model, 8% hurdle, four year investment period will raise the capital, it'll probably take us about three years to get it fully deployed. Most of the businesses that we're investing in, we would describe as more growth stage businesses. And so we're looking for things where we've got some sort of line of sight to how we're going to monetize these even, even if we're like the VoltaGrid example, starting something from a pretty white sheet of paper. Even in those conversations, we kind of have a decent idea of when and where it will go. And so we're looking for things that might have a three to five year hold and trying to generate at a gross level, you know, north of 20% rates of return across the entire portfolio. And at a net level for our investors over the last 25 years, we've had sort of a high mid-teens rate of return net after all the fees. not perfectly consistent, but somewhat consistent over most of our vintages for 25 years.
Karen:
Yeah. Okay, great. And because you're raising more money in the next fund, does that mean there'll be more positions or will you allocate larger sizes to the same amount of positions that you typically invest in?
tyson:
It'll be a little bit of both. So our last fund was 180. I think we have six investments in it now. We'll probably have nine at the end of the day. Quite a few of those investments we have brought in co-investors or raised SPVs in order to get the amount of capital that we needed to complete at VoltaGrade. Again, just for example, we put a total of $80 million of capital into that business, only a portion of which actually came out of... our energy transition fund until we got to our concentration limit and then we had to go to our LPs to get the rest. So if we raise $250, we'll probably have 10 to 12 positions and they'll probably be slightly bigger than the ones that we have in this fund, but it's not honestly a material change in what we're doing.
Karen:
Right, okay. Tyson, can you talk about Alberta participating in energy transition and your view on that?
tyson:
Yeah, for sure. I mean Alberta, again, our deal flow is not necessarily Alberta-centric. I think out of our six investments, we only have two, one and a half really, that are based in Alberta. And even for those ones, by the time we're done with them, most of their revenue is probably going to be coming out of the U.S. But to your question, I think Alberta, Houston, Denver, the oil and gas industry in general, is playing a really significant role. in the energy transition and I've always said this is a physical problem. We have to deploy physical assets, we need large projects, we need projects execution, we need to solve some very challenging engineering risks or engineering problems. These are not the kinds of things that typically get solved in Silicon Valley in a traditional sort of tech sense. This stuff's hard and a lot of the problems that we're still trying to solve today. various parts of the energy sector have been trying to solve for 20 or 30 years. If you look at hydrogen, these are not new ideas. And people have spent hundreds and hundreds of millions of dollars and decades working on them already. And so I think a lot of these problems are going to be solved by people who really understand how to deal with those types of problems. And already today, if you look at, for example, direct lithium extraction, which is sort of the holy grail of being able to fuel the battery revolution. Two of the top 10 companies, I think, in the world, or maybe two of the top five companies in the world that have the most promising technology of how to crack that nut are both from Calgary and both run by people from the oil and gas industry who had an expertise in water processing.
Karen:
Mm-hmm.
tyson:
And I think that's just indicative, it's just an example of how that expertise translates across to the energy transition world.
Karen:
Okay, great. And global warming, climate change, what are your thoughts there?
tyson:
Yeah, I mean, I think the world has coalesced behind this theme for the first time ever at scale. And we had the clean tech revolution in 2000, which we watched come and go. We had another version of that in 2008, 2009 came and go. And it really didn't work out for investors and frankly didn't really move the ball forward that much. What we found in the way we got to this strategy was really by looking at the response we were getting from our customers inside our portfolio and our energy technology businesses and seeing the conversation shift. And this would have happened, I would say there was a real catalyst moment for us in 2017. We had a business, Soteris, a compressed natural gas distribution business that went from us. or a company being out in the field trying to convince the guy responsible for buying diesel, to buy natural gas, all of a sudden it switched and the customer CEOs were calling the company and saying, hey, I've got a new slide in my deck, it says ESG at the top and it's blank, what do you guys do again? And they were for the first time willing to prioritize lower carbon solutions over just financial. Now, they go hand in hand that you have to have part of sustainability is making money and we're very big believers in that you have to have a business that makes money. But customer behavior has changed and so that was a big catalyst for us to switch to this energy transition strategy or start growing that vertical within our firm and even today seeing the momentum behind it and we talked to we do customer calls of all sorts of different kinds of companies that are you know big fortune 500 companies and we're talking to them about their plans and they're real they're not They are doing stuff today, but it feels like we're sort of at the bottom part of that S-curve. And over the next five to ten years, the scale of that transition is going to become a lot more apparent, where people are now still working through their plans, trying to figure out how they're going to do it, starting to deploy, starting to test things. But over the next decade, there's going to be more capital deployed around decarbonization than anything else in the world, and maybe anything else ever in human history. particularly if we're actually going to reduce our CO2 emissions to the net zero that we would like to by 2050, the scale of that problem is beyond comprehension.
Karen:
Mm-hmm.
tyson:
And so we think that makes for a pretty good investing environment where you need a lot of innovation, you need a lot of capital, and you have customers that are willing to move.
Karen:
Yeah. And if you were, you know, what would, what would you say to an investor that is thinking about their portfolio and how an investment with Longbow would fit and why they would want to invest in your fund?
tyson:
Yeah, so we don't describe ourselves as an ESG fund or an impact fund. We are very clear with our investors that we are here to make money on their behalf and we think that's, we're not mixing philanthropy and investing. Not to say people shouldn't, that's just not our approach to it. And so we think we've got pretty good track record, pretty good expertise, a lot of demonstrated success in this. and frankly a tailwind in the industry that we think is going to be very persistent. It's hard to imagine having a portfolio where we're not trying to get exposure to this type of thing in one way, shape or form. There's lots of ways to do it. You can do it at public companies, you can do it at all sorts of different kinds of vehicles. We think that we've got a demonstrated ability to find pretty interesting opportunities, grow businesses quickly and then turn that money actually back into... cash for our investors and it's worked fairly well. We don't expect investors to overweight to longbow and nor should they. I mean this is part of a portfolio, it's illiquid, it is sort of nichey although I would say becoming less nichey in nature and it's a private equity fund so it should only be so much of one's portfolio but I think something like this should be part of everybody's portfolio.
Karen:
Yeah, yeah, okay. Well, great. Thank you. And you know, what's next for Longbow? What, uh, outside of raising this new fund, do you see lots of exciting things that will be in the fund?
tyson:
Yeah, you know, we have taken, I think, a reasonably disciplined approach to how we're growing the firm. We add people slowly. Our team continues to grow. Our fund size continues to grow at a modest pace. And I don't see any change to that. I think we just keep doing what we're doing, keep our head down, try to make more good decisions than bad decisions. And if we deliver for our investors, then everybody wins and we'll continue to do this long into the future. Right now we're very focused on deploying. our existing energy transition fund. We've got three more deals to find there, as well as a portfolio of things that we're working with every day. And then like I said, next year we'll be back in the market again and looking for more capital.
Karen:
Yeah, okay. And if your dad's still involved?
tyson:
He is still involved. So he was very, he took a big step back from the portfolio management in about 2012, but continued on the investor relations and fundraising side until the beginning of COVID. I would say he thought he really loved fundraising and doing the marketing until he stopped. And then he realized, you know what, I actually don't like this so much. So he's 70, his health's great. He's still the chairman of our firm, still very valuable partner of mine. We have a wonderful relationship and I very much value his contribution. but he's not involved day to day.
Karen:
Yeah, well 70 definitely is not that old.
tyson:
Exactly.
Karen:
So
tyson:
Yeah.
Karen:
good, good. And I think you have, is it two brothers that work at the firm as well?
tyson:
I've got one brother in the firm who's been here since 2004, and then I've got another brother who was with the firm and has been with one of our portfolio companies since 2013, and that's really what he's been working on.
Karen:
Right, okay. And lastly, I think I'll just ask you if you could share something insightful about what you've learned as an entrepreneur, not only in the oil and gas industry, but in the private equity space.
tyson:
Yeah, you know, we've learned so many things. We've made so many mistakes over the years. We've had so many challenges. We've had the wind on our backs. We've had the wind on our faces. I, again, I've said many times, in our industry, sometimes you look a lot smarter than you are and sometimes you look a lot stupider than you are. You're always the same person and the market will push things one way or the other. I think at the moment maybe we look a little smarter than we are and I'm sure we'll be humbled again at some point in the future and we just try to keep that humility and remember how hard things are and that will help us make better decisions in the future. But just keep your head down, be persistent and try to make as many good decisions as you can.
Karen:
Yeah, great, great interview, really good information. I think our listeners will really enjoy that. I'm so glad that you came on here with me. Thanks so much, Tyson.
tyson:
Well, thanks, Karen. I really appreciate it. Great to see you again. I'm so grateful for our relationship and so
Karen:
Me too.
tyson:
happy to see your business flourishing.
Karen:
Thank you so much. Take care.
tyson:
Thanks, Karen.