Sustainable Project Finance with Nexus PMG
Ben Hubbard is CEO and Co-founder at Nexus PMG, an infrastructure advisory and project development organization dedicated to reducing carbon intensity and enhancing resource efficiency. Ben co-founded Nexus PMG in 2013 after multiple years of working on complex metal refining facilities in locations including Mongolia and Saudi Arabia.
In this episode, Cody and Ben cover how Nexus PMG got started, what key risks the firm explores when assessing a project for development capital, Ben's advice for infrastructure-heavy startups as they scale, and how he sees the next five years of infrastructure deployment playing out. And they cover a whole lot in between, including the criticality of feedstocks, the role of insurance, opportunities for private equity, and first-of-a-kind project finance.
*We encourage you to share feedback on episodes and suggestions for future topics or guests at info@mcjcollective.com.
Episode recorded on Jan 8, 2024 (Published on Feb 5, 2024)
In this episode, we cover:
[01:56]: Ben's early mining experience in extreme climates during the 2007 recession
[05:24]: Nexus PMG's founding story
[11:51]: Abandoning all fossil-fuel projects and full transition to low-carbon focus
[17:01]: Observations on declining investment returns in wind and solar projects
[20:39]: Challenges in variability and quality of sustainable materials
[27:15]: Turnaround of a distressed biomass plant in British Columbia
[30:08]: Launch of Nexus Development Capital for scaling businesses
[36:04]: Recent shifts from strategics investing to meet ESG goals
[38:17]: Why team dynamics are critical to project success
[42:50]: Trend forecasting in sustainable projects: hydrogen, sustainable aviation fuels
[46:01]: Ben’s optimism about capital deployment in the next decade
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Cody Simms (00:00):
Today on My Climate journey, our guest is Ben Hubbard, CEO and Co-founder at Nexus PMG. And our topic is Project Finance for Sustainable Infrastructure. Nexus PMG is an infrastructure advisory and project development organization dedicated to reducing carbon intensity and enhancing resource efficiency. Ben co-founded Nexus PMG in 2013 after multiple years working on complex metal refining facilities in locations including Mongolia and Saudi Arabia.
(00:31):
We cover how Nexus PMG got started, what key risks the firm explores when assessing a project for development capital, Ben's advice for infrastructure heavy startups as they scale, and how he sees the next five years of infrastructure deployment playing out. And we cover a whole lot in between, including the criticality of feedstocks, the role of insurance, opportunities for private equity, and first-of-a-kind project finance. But before we start.
(00:59):
I'm Cody Simms.
Yin Lu (01:00):
I'm Yin Lu.
Jason Jacobs (01:01):
And I'm Jason Jacobs and welcome to My Climate Journey.
Yin Lu (01:08):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (01:13):
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
(01:26):
Ben, welcome to the show.
Ben Hubbard (01:28):
Hey, thanks for having me, Cody.
Cody Simms (01:29):
Ben, so I was doing a little homework here looking at your background and boy, it looks like before you started Nexus PMG, you lived in some really different places all around the world working on various types of energy projects and whatnot. And so I would love to start this conversation with you, maybe charting a little bit of your background and how that led you to build the company that you're now running.
Ben Hubbard (01:56):
Yeah, certainly. I graduated college in 2007, which was for those that are younger, might not recall what 2007 was like, but that was the great recession, if you will. It was a joyful time to graduate college and try to get a job. Interestingly enough, in engineering construction, the vast majority of the growth was in mining and metals. A lot of precious metals prices rose in 2007 and eight because of the recession that occurred. And so a lot of the boom in my world was in gold, copper, silver, things of that nature.
(02:28):
And most of those facilities are built in rare deserts around the world. Right, wrong or indifferent, I agreed with my boss to jump on a plane and move over to Mongolia where they were building a $6 billion gold and copper extraction facility out in the South Gobi Desert. So I had the privilege and joy of living out in minus 50 degree weather in a yurt with a person who didn't speak any English. So that was fun just in and of itself trying to figure out how to communicate with my roommate.
Cody Simms (02:54):
What is a Gurt?
Ben Hubbard (02:55):
A yurt is like a glorified tent.
Cody Simms (02:58):
Like a yurt, but with a G?
Ben Hubbard (03:00):
Same exact thing, just pronounced like someone from Texas.
Cody Simms (03:04):
Oh, got it. Okay. All right, there we go.
Ben Hubbard (03:06):
So lived out there. When you live out in the middle of nowhere for hardship assignments that most people aren't willing to go do, you can rise up the ranks pretty fast. There's just not a lot of people to willing to take these hardship assignments. And I moved into a pretty senior role on that project even at a young age and was fortunate to gain some pretty great experience and thereafter got offered a job to jump to Saudi Arabia to go work on a $10 billion aluminum box site refinery where I would hold an even more senior position at still a fairly young age.
(03:37):
So spent three and a half years in the deserts of Saudi Arabia. I like to say to my father that I went from the winter of Mongolia to the summer of Saudi Arabia. I don't think there's many places on planet earth where you could have two more extreme climates in one year. Held a really great role there and became a project manager level position overseeing this very complex project.
(03:58):
And what was great about that position is my partners that now run Nexus with me, we had a lot of exposure to the investors of that project and we were responsible along with some of the senior stakeholders of presenting the status of that project every month to some of the big players and that really empowered us to gain this confidence to start Nexus.
Cody Simms (04:17):
All right, so before we go there, I do have to ask just my curiosity meter is going off. It sounds like these were not specifically the mines that were in these locations, it was the processing facilities or whatnot. Why are gold and copper facilities or aluminum facilities based in remote deserts in the first place?
Ben Hubbard (04:38):
Yeah. It just turns out that from a geology perspective, the vast majority of rare earth minerals and things of that nature are located in deserts. And so to be able to extract them from an economically viable perspective, you have to obviously build the infrastructure where the deposits are. Most of the big deserts in the world are fortunate to house these types of rare earth minerals.
Cody Simms (04:58):
So it is the actual mines that are in those locations, it's not just the processing?
Ben Hubbard (05:03):
You go deep into the earth and you drill and you build these concentrators and these large extraction facilities. But yeah, that's where the actual minerals stand.
Cody Simms (05:10):
So you had insight then into how these large mining natural resource facilities are operating and that led you to have an entrepreneurial aha moment. I think that's where we left off.
Ben Hubbard (05:24):
I'm sitting in the desert of Saudi Arabia. I'm 27 years old at this time. I feel like I've got some pretty great experience. I would say the most applicable experience that gave me confidence to say jump into the entrepreneurial boat was dealing with all the banks and large investors that were involved in that project and realizing that we had gained a lot of experience on how to communicate risk of something of this magnitude to investors.
(05:50):
There's a whole niche world in due diligence and advisory services that are designed to help investors get confident in making their investments. I say 40% ignorant to what it takes to build an advisory firm, be an entrepreneur, 40% purely wanting to get out of the Middle East and the Mongolian deserts just to go back because I've been away from my family and friends for so long and then 20% just an inherent natural entrepreneurial drive that exists within me.
(06:16):
My father was an entrepreneur, my great-grandfather, my grandfather and so on. So you take all that, me and my partners got together and said, "You know what? Let's go take a stab at it." We were also fortunate to make good income over there. You don't have a lot of expenses when you live out in the desert. So you put all those things together and we jumped ship and started Nexus PMG back in 2013.
Cody Simms (06:35):
Of the 40% that was to some extent pure entrepreneurial energy and maybe a little bit of entrepreneurial naivete, which every entrepreneur has to have in order to do something as crazy as starting their own thing, how much of what you perceived to be unique insight about risk management and how project finance works and where there were new avenues or pathways to do it turned out to be accurate? In other words, do you feel like Nexus PMG brought something to the space that wasn't there in terms of the way these things were always done in the past?
Ben Hubbard (07:12):
Great question. So I'm going to give you both sides of the coin. On the head side, the positive side, what we had figured out, and I think what was partially by our personality types as a partnership, was that investors were craving just unbelievably transparent information. Unfortunately, and what we've learned over the years is there are so many advisory firms that are very talented, very knowledgeable, but they hesitate a little bit to give very almost near blunt feedback to the investor base for various reasons.
(07:42):
And it could be because they're hesitant to blow up a deal that investor has been working on for so long. It could be because they don't feel confident that they're not going to get sued. It can be a million reasons why people don't give it really clear cut information. And I'd say the other side of the coin though was trying to be a consultant and advisor when you're 28 years old. I'll tell you a quick funny story. Our first pitch is an example. I'm sitting in Baton Rouge, Louisiana.
(08:06):
The CEO of this firm is a real 65 years old, has been through it all, seen everything. Louisiana, hard-cut, oil and gas guy. Sitting in the corner. I give my pitch with my partners, he's quiet for about 15 seconds, makes an awkward uncomfortable environment by design. And he points to his boots over in the corner of his room and says, "You see those boots over there, young man?" I said, "Yes, sir."
(08:29):
He says, "Those boots have more experience on the job site than all three of you combined. Why would I ever hire you?" And we all just wide-eyed go, oh my goodness, how do you respond? And obviously we were able to say, "Look, we're going to tell you how it is." And we approached our value proposition, but we had the two sides of the tale. We felt like we had something, both skill sets and this communication protocol, if you want call it that. But we also had this, we're very young and a lot of people don't hire consultants that are only in their late 20s, so it was fun to see it come together.
Cody Simms (08:59):
I love that story. I'm curious, thinking through your 2013 era pitch, the world is moving to cloud-based software and mobile apps, you think of what's a 2024 pitch, and if you're five, 10 years out of school feeling younger and more energetic than maybe some of the legacy players, you'd be bringing an AI and machine learning story to the market that you think is super unique relative to the incumbent solutions. Was there an aspect of your story that you all were super confident was unique, but in retrospect turned out to actually not be all that different than what everyone else was doing?
Ben Hubbard (09:40):
An aspect of it, yeah. We had an experience that many others could argue they had the same experience. There were lots of people that had deep construction, project management, et cetera, experience on large international projects.
Cody Simms (09:52):
Not as much experience as that guy's boots had though.
Ben Hubbard (09:55):
Apparently not as much as the boots. And to this day he's still a client and he's still a great friend. So we did win the day at the end of the day. But nonetheless, I think what we realized was that the biggest hurdle we had was somebody had to give us a shot, right? And prove that we had an opportunity to showcase what we said. So what we decided to do was make a unique commercial approach and said, "Look, we will do these things for free."
(10:19):
The loss-leader approach in consulting was not really a thing per se, but we decided we have no choice here but to break into the market. We're going to have to prove to people that the value proposition we're pitching is actually real. And so we decided to go in with this offering that said, "Look, let us do what we call now a red flags analysis.
(10:36):
Let us come in, we'll spend two weeks and we'll give you this red flag report that says these are the binary risks we see. These are the red flags, this is how we portray the risk and this is how we communicate the risk," et cetera. And I think doing that allowed us to showcase the skillsets that we had with basically no cost to the counterparty and to let them realize that we weren't just BSing our way through a good sales pitch.
(10:56):
And so it took a little while, but I was happy to say that we were able to earn a client. One client became two and then a few months later that client said, "Hey, these guys, I just work with them. They know some stuff about biomass. You should check them out because I know you're looking at something." Before you know it, one became two, two became four, and then the rest was history. And that's what it took was just rolling up the sleeves and doing some free work and showing what we were capable of.
Cody Simms (11:17):
You charted how the work that you had done, and I think your co-founders as well, were in the metal space, right? First you in Mongolia doing gold and copper and then in Saudi Arabia working on aluminum. Somewhere along the line you also carved out positioning for yourself that you're specifically focused on projects that are dedicated to reducing carbon intensity or increasing resource efficiency, which is certainly a subset of the broader natural resources space that you could play in. When and where did that positioning come to bear and how did it come to bear?
Ben Hubbard (11:51):
From 2013 to 2016, generally we were doing combined cycle power plants, we were doing mining and metals projects, we were out in Australia looking at Garnet mines for Riverstone. We were doing all these projects that were in our core competency. And then I would say toward 2016, we kept getting just one-off inbounds from some of our clients and, "Have you ever heard of this thing where people convert manure into natural gas?
(12:14):
Have you ever seen this thing where people take biomass and make a pellet and sell it to power plants?" But what we started seeing was over the course of those 12 months in 2016, it was one out of every 10 deals we were seeing was that to two, to three, to four out of every 10. And we're saying there's a trend here where these funky asset classes are starting to become across our desk a little bit more often than we would've expected.
(12:36):
We made a conscious decision in late 2016, early 2017 that was a combination of we felt like it was great for the partnership that we had at the time, for our personal values and for partners children and just thinking about what motivates us, coupled with the business opportunity we saw, which is this is two out of 10 and three out of 10, it's going to be 10 out of 10 in the next five to 10 years. It's very clear where things are headed.
(12:59):
And so we rebranded the company in late 2016, early 2017, new logo. We worked with a creative consultant and we basically converted our business into 100% low carbon infra focused and we have transitioned away and abandoned all things fossil fuel related, which was a huge thing for a young consulting company to do is abandon the one thing they knew into something that was, but it was, I'll say a gamble we were very well-educated to take and it paid off quite well for us.
Cody Simms (13:27):
You're in the business of risk management. As I understand it, what you do is you assess on behalf of project developers and on behalf of project financiers, the diligence around a project and understand the risk to either party as it pertains to the ultimate success of the project. That's in my words. I don't know, you may say it way better than me, but that's how I tend to understand what you do. Actually, let me pause there, give you a chance to reframe that in a better way and then I'll ask my next question.
Ben Hubbard (13:53):
Nexus as a business, as you can imagine, over the past 10 years of being in business has grown substantially. That advisory practice that I noted is still a huge core focus of our business. We now represent over a hundred funds representing hundreds of billions of dollars under management. We've worked on over 30 to 40 billion dollars worth of projects directly. We've expanded now. We have an engineering services, so we design these facilities.
(14:16):
We have the advisory practice, so we provide diligent services to the funds. We have a operational turnaround, so we help the tax-exempt muni markets, et cetera, fix broken assets. So we've really expanded the services company tremendously. And I'm sure we'll talk about this shortly, but we also raised capital to essentially launch our own development platforms. We're investing in businesses.
(14:36):
So the umbrella of the Nexus Holding company is now pretty substantial with all these different aspects of it. But from a core competency in the root of this company, it stems with being able to assess risk at any point in time in a project's life cycle and being able to evaluate what the probability of any given risk coming to fruition is or for generally the company or the project to be able to achieve its ultimate goals.
Cody Simms (14:59):
Great. So from that sort of core competency of risk management, you mentioned you were starting to see in around 2016, 2017, these new types of projects come across your desk, whether it was manure to energy or something in the biomass to energy space. At what point, just because you see a lot of projects doesn't mean they're not risky, doesn't mean they're good projects, at what point did it become clear to you that there was a new category of things or maybe a few new categories of things and that they were viable, that the technology itself had hit a maturation point to obviously give you the confidence that you wanted to focus the business wholly in this area?
Ben Hubbard (15:39):
Yeah, I'd say it was within a 24 to 36 month period. From 2017 through 2020, we were seeing tremendous amount of capital be deployed into these asset classes from biomass, power generation to wood pellet production, to anaerobic digestion to renewable natural gas, biofuels markets. SAF was starting to become a buzzword. The early days of hydrogen was starting to become a buzzword. All these things were starting to pour in.
(16:04):
Cody, this is hilarious, but my very first email foray into this space was an email from a colleague of mine at Apollo that just said, "Cow poop?" Cow poop became a big part of Nexus's future, as funny as that sounds. And it just evolved so quickly and then we can talk about this, but the COVID timeline thereafter only accelerated these things with the ultimate ESG movement as a global endeavor.
(16:25):
But I think what's happened in general was you had a converging influence of the predominant areas where people were focusing was wind and solar and batteries and things of that nature, but those returns by design because of subsidies were starting to come down. Those were 10 to 15 percent on levered IRR projects for a long time and then were slowly becoming four to eight percent. And you had a lot of general partners raising capital in these new funds that still needed mid-teen percentage return projects and those core infra asset classes no longer offered that anymore. And so they started looking to alternatives.
Cody Simms (17:01):
Why were the IRRs on wind and solar coming down?
Ben Hubbard (17:03):
Because what you had was a very strong subsidy regime with PTC and ITC tracks, credits, all this for a long time that was driving down the cost to build these plants. The cost per megawatt installed of a solar plant was rapidly declining on a hill. And so because CapEx was going down, you now had less capital that had to go in, power prices were going down, power purchase agreements, rates were coming down, competition was emerging.
(17:28):
And so you just had a lower cost of capital world. Pension funds were now starting to fund these things at lower cost of capital because they were long-term contracts. So you just had a subsidy that did its job over a long enough period of time and drove down the cost of capital.
Cody Simms (17:42):
Great. So basically the combination of policy and technology maturation made it to where you didn't need as much capital to achieve the same amount of financial results for these projects?
Ben Hubbard (17:55):
Yeah, less risk, more efficient outcomes in the product itself. And then you just had EPC, comfort level for people installing these plants. All the things matured to the point where the returns just declined, but that's what allowed it to scale to the degree it is and continues to do so.
Cody Simms (18:11):
What I'm hearing you say is you work in the area of sustainable project infrastructure finance and that risk management is a huge part of what you do, and yet as projects risk starts to decrease so much, you don't need your amount of specialty necessarily to be able to come in and do this type of project to where broad generalist funds can start to participate.
(18:35):
So you actually have to find a sweet spot somewhere where technology has some degree of risk to it, where just not any quote unquote, "Dumb money" can just come in and be fine. You need to find projects that are risky enough that requires your amount of intelligence, expertise, diligence to get in there and make those projects available for capital that is seeking some degree of risk and therefore can get a greater amount of return because they're taking on that risk. Am I understanding the really high level forces that play here to some extent?
Ben Hubbard (19:07):
Yeah, spot on. I mean, as said differently, we like the hard stuff. We like process, infrastructure, difficult. And I would argue that the technology is usually actually not the gateway as much as it is portrayed in the media and as much as people think it is, it's actually the feedstocks. It's what you're processing through that technology that's usually the challenge.
(19:27):
So where we see that most of the projects are either successful or unsuccessful in our asset classes is the folks who understand how to take food waste, manure, wood waste, DDGs, ethanol, spent grains, all these things that are waste streams, learning how to sort, separate, process and prepare those items for going through the various different technologies like gasification and pyrolysis and organic anaerobic digestion, all these different things that exist is the gateway to success.
(19:59):
And I think that's where Nexus largely differentiates itself is we're very strong in understanding how to manage, source, process and handle the waste stream or the thing coming in to turn into the downstream product like sustainable aviation fuel and hydrogen and all these things that are emerging. But that is the hardest part of this whole thing.
(20:16):
If you do that right, the technology in between that process, the good into the product are actually pretty proven. It's just those things unfortunately get a very bad rep. But what's really happening is you're designing the plant to take X and you end up unfortunately putting Y into it and it doesn't work, but people blame the technology. But that's usually not the case as to what's the actual problem or the root cause of the issue.
Cody Simms (20:39):
So what I'm hearing you say then is major factor we should expect is in a business ultimately being viable is the ability for that company to gain a reliable, high-quality, consistent source of materials that they need to ultimately run their process as a business.
Ben Hubbard (20:54):
If you really think about it, what you're describing is mimicking a fossil fuel, a very, very consistent, reliable day in, day out source of X to generate Y. Right? Over the last 50 plus years we've been attuned to taking natural gas, taking coal, taking a mineral that is the same, more or less day-in and day-out, coming in from a chip or a pipeline or whatever it may be, and processing that into something.
(21:21):
Now you have this massive shift into things where every day you could be getting something different. You get a black bag of trash and it has banana peels and X, Y, Z in it one day and something the next. You get wood waste, one day it's 60% moisture, the next day it's 30% moisture and it's construction waste and it has nails in it. So developers and businesses alike are now being forced to figure out how to take this next revolution, what I like to call the next gold rush, which is the waste rush, which is super valuable.
(21:48):
But it comes with a massive headache, which is you can't just take it and process it like you've been doing for the last 50 plus years with fossil fuels. Now you have to add in this whole incremental front end part of a plant and you have to manage, process, sort, treat and prepare, which has never really had to be the stage for infrastructure in the past.
Yin Lu (22:08):
Hey, everyone. I'm Yin, a partner at MCJ Collective here to take a quick minute to tell you about our MCJ membership community, which is born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view.
(22:28):
What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change. Some awesome initiatives have come out of the community, a number of founding teams have met, several nonprofits have been established and a bunch of hiring has been done.
(22:43):
Many early stage investments have been made as well as ongoing events and programming like monthly women in climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to MCJcelective.com and click on the members tab at the top. Thanks and enjoy the rest of the show.
Cody Simms (23:09):
In the traditional energy space, those have broken out as separately run and operated businesses. The things that do each of those are not all owned by the same company. You even yourself said, "Hey, I worked out in the desert in these processing facilities," which may or may not been owned by the same company that were doing the mining themselves, right? I don't know. In your case, if they were, are you starting to see in pick your favorite space, you want to talk about whether it's biomass to energy or whether it's cow manure to energy, are you starting to see companies specialize in certain parts of the supply chain there?
Ben Hubbard (23:43):
I guess the best way to describe what I'll call just the waste to value sector, which is transforming all these waste streams and things into valuable products is very fragmented. The waste haulers are a great example. They have a tremendous amount of control over food waste and these types of things. You have all these different sources of collection.
(24:02):
And I think what we're actually starting to see is the emergence of insurance markets that are guaranteeing development companies that they will provide the insurance product necessary, that if your waste doesn't show up at your facility, that they will provide insurance accordingly. Or if your X, Y, Z product that you counted on in this region that they did diligence on gets comfortable doesn't come in at the fees that you expected, they'll do that. So I think in a large part, oddly enough, the insurance companies and lots of specialty insurance products are stepping up now and we're starting to see emergence of those solving the gap.
(24:36):
Because the issue isn't really the structure that exists to be able to create these projects, it's the underwriting necessary from the funds not getting comfortable that if you build it, they will come. They don't feel comfortable with that putting hundreds of millions at risk, but the insurance companies are well-designed to be able to help mitigate that risk.
Cody Simms (24:54):
Now on the power side, when it comes to traditional clean energy like solar for example, ensuring the power purchase agreements and ensuring essentially the off-take of that power that's been around for a long time. As long as this relatively new industry that we all see emerging in front of us has been growing, I'm starting to hear of insurance on the off-take side of some of these alternative renewable energies, whether it's biomass or whatnot or the credit side of it, for example. But I haven't heard of it on the feedstock side, which is super interesting. Is this a unique crop of insurance player who is showing up there?
Ben Hubbard (25:27):
Yeah, it's similar to the off-take side in that you're taking a risk on potentially something in general that's [inaudible 00:25:33]. If I build this plant here and here's all my thesis around why tons of food waste will come in and I can process it accordingly versus a biochar project for example, where I will process all this waste and I feel comfortable I can sell all the biochar to the local farmers.
(25:48):
But either way you look at it, an insurance company's looking at it from it, "Can I do the diligence to get comfortable with whatever this region is or this local area is, the merchant risk associated with whatever it may be on the front side or the backside is something worth taking that risk?" And then obviously pricing that insurance, which is super expensive.
(26:05):
But that's also why going full circle, that insurance product exists for solar and wind is everything, but that's also why they're getting six to eight percent returns and not 15 to 20. So it's a tricky one, but yeah, we're starting to see it emerge on the feedstock side as well. It's still early days, but it is starting to happen.
Cody Simms (26:21):
I love highlighting opportunities for folks who are listening who might have interest in building things in the insurance space too. It sounds like there is an emerging opportunity for builders.
(26:30):
Another place my mind goes based on what you're describing is you said technical risk is not the devil it's made out to be necessarily in terms of why things fail, which would lead me to wonder if there are a lot of facilities or plants out there that did fail ultimately because of this feedstock risk such that private equity or somebody could step in and inject a new round of capital into getting a plant up and running if it could indeed secure good feedstock for that facility.
(27:04):
Are we anywhere near that type of life cycle yet where the first generation of these things failed not because of technology but because of these other business factors and it's time for new capital to come in and revitalize them?
Ben Hubbard (27:15):
Yeah. You either intentionally or unintentionally just set up an entire segue into one of our business lines of our company.
Cody Simms (27:23):
Totally unintentionally, I can promise you.
Ben Hubbard (27:26):
Let me give you an example. Two and a half, nearly three years ago, Nexus PMG bought a distressed biomass firepower plant in British Columbia. In large part for what you just described, the status quo was struggling to secure the necessary biomass supply into the plant. There was a number of operational and technical issues they had to work through as well. But we acquired that plant and we were fortunate enough to revamp that supply chain and rethink some of the operational and technical challenges.
(27:55):
And happy to say, that plant now runs north of a 99% utilization rate month in and month out. And as is part of that, we decided to raise pretty substantial capital, which is a large part about that capital we just raised about 10 months ago to actually pursue what we believe is a very prominent distressed asset acquisition strategy around what you just described. Now sometimes it's a combination of operationally and technically distressed with feedstock risk.
(28:21):
We're uniquely adept to unwinding that risk and restructuring it based on what we've just been talking about, our unique focus on risk. There is a hundred percent an appetite for that. Now the funds aren't well suited to take that risk because they could buy the plant, but they need somebody to go in and fix it. So we are usually either a service provider to them to go do that or better suited, we are the ones that co-invest alongside and go do it ourselves. And so that is a big part of our growth strategy as a company.
Cody Simms (28:48):
And in that case, you're actually operating the plant now? You've added it to an operational footprint in addition to either your advisory side or your pure investing side of the business.
Ben Hubbard (28:58):
And when I say we're an operator, I like to clarify that we typically are best at finding the right people to run the plant. So we're not literally contracted to run it, but we go recruit the plant manager, the maintenance manager, reliability engineers, we build the core structure of a team and then we serve as an asset manager over the top of that to make sure that team is properly running the plant and running it to our expected standards with our policies and procedures and things like that. So it works out pretty well.
Cody Simms (29:24):
So that's one end of the life cycle of how these things can get up and running and hit scale, which is as you're doing in this business, you take technology that works perfectly fine but had broken business fundamentals. You fix the business fundamentals in particular around the supply chain and access to the feedstock and get the plan up and running.
(29:42):
If you look at the other end of that where there is technology risk and getting a first of a kind facility going and supporting a project for the first time, what are you seeing happen there? I work with early stage startups for the most part who have still technology risk and getting that initial infrastructure finance to get their first plant up and running for many of them is quite a challenge.
Ben Hubbard (30:08):
Yeah, for sure. We definitely work a lot of businesses in that environment and interestingly enough, we actually created our own separate product from the capital we raised called Nexus Development Capital. It's a $50 million development capital vehicle that's designed to help businesses and project developers get to their first commercial. Now we always like to separate first of a kind technology risk from development risk.
(30:31):
I think there's a big difference between those. Will the thing work in general is a lot different than, can this team get this to be economically viable? And there's a big difference between those two. And what we see is the venture world and a lot of the emerging family offices and some of the folks like yourself are really well suited to take the risk necessary to help get to something that proves that at a certain scale these technologies work. And typically those funds are looking for 10X returns or higher. They need one out of five to work to make up for the four that might not work.
Cody Simms (31:02):
We think of that as going from grams to kilograms, but going from kilograms to kilotons is a very different jump to make.
Ben Hubbard (31:09):
Exactly. And then once that level of capital and that investor base has allowed those business or technologies to mature to that point, that's typically where we find ourselves in our sweet spots. Okay, you've proven at the kilogram scale is a work, we'll help you go to the hundred kilogram scale.
(31:25):
We're still in the kilograms, but we're a lot more of them and we'll provide the capital that's necessary to take things like off-take risk, the cost you need to pay lawyers to help structure your feedstock supply agreements, to help you pay for the site option contract you need to secure the land where you're going to build the plant, to help pay for your front-end engineering design from an EPC or someone like us to do your front-end engineering design package, which could cost a lot of money.
(31:50):
Is to pay to mature what has proven at a certain scale to a point where you can get to a financial investment decision and secure infrastructure capital. And even then there's different pockets. There's infrastructure capital, the Apollos and Blackstone that are only going to come in and help you build units three through 20, but your units one and two better already be working.
(32:07):
And then you've got folks that are more like Generate Capital, Equilibrium, Ember Infrastructure, our partners that can take that first commercial scale up risk. And so you've got all these different pockets of capital. The real challenge is the average developer doesn't know where to go in that ecosystem. It's like, "Where am I at? What do I need? Which pocket of capital should I be approaching? Who are the players?"
(32:28):
Our advisory practice tries to work really hard with prospective and current clients to help them figure out where they are and then introduce them to a lot of these capital partners. And that's a big part of the story is just knowing who to talk to because there's a lot of money that wants to find these homes. It's just marrying the two up can often be a challenge.
Cody Simms (32:44):
In my world, let's say you've got a startup, their series A, series B scale, they've proven that technology generally works at lab scale. They certainly don't have commercialized infrastructure yet where they're again, generating hundreds of tons of something, hundreds of kilograms of something.
(32:59):
And you mentioned there's this development capital potential, whether it's someone like a Generate or the like, and you mentioned the project developer themselves that are looking for these types of projects. What is that persona? What is a project developer? Is this a construction firm essentially? Is this a financial organization? Explain how this works and who these actors are.
Ben Hubbard (33:20):
That's a great question. The hard and honest transparent truth is that a lot of technology companies, I'll call them that, are very quickly forced to become development companies. "Hey, your thing works. Now go deploy it." And there is a very different skill set required to go from, we'll just call it creating or inventing a technology to deploying that technology with a lot of different capital raising required for what I'll call highly complex due diligence that gets into play.
(33:47):
Because you go from, "Does your mousetrap work? To, "Do you have the right site location? What are your markets that you're going to sell it to? Are they credit-worthy counterparties that are buying your product? Is your feedstock coming from someone who's reliable? Is there enough of it? What happens if so-and-so doesn't show up? Are the other players going to show up behind them? Do you have the right insurance?"
(34:02):
And there's a million things and oftentimes it overwhelms these technology companies whose leadership is often designed to figure out how to create the mousetrap. And so we often either provide a service and or recommend people or hopefully the leadership themselves recognizes that need to bring in what I'll call a chief development officer or a commercial development team.
(34:23):
It's people who really understand how to reverse engineer the underwriting process for hundreds of millions of dollars that need to come in. What are these contracts for the off-take need to look like? What tenure of contracts do you need to have? What's the credit worthiness of your counterparties? And if not, do you need an insurance product to backstop that?
(34:40):
And that's a skill set that often exists with what I'll call commercial developers, people who really understand the contracting side and the underwriting risk and the project finance side. And those people unfortunately are few and far between relative to the rest of the folks out there.
(34:55):
And so that is usually the deficit that we see in these companies is they either don't recognize that they need those people on board or to outsource it and try to go out alone. And oftentimes unfortunately it doesn't work because it's like trying to put an engineer in a doctor's office as I like to say. That's the challenge.
Cody Simms (35:12):
If you were running a series B stage startup today and were looking to hire your first chief development officer, what would the profile of that person be?
Ben Hubbard (35:19):
Yeah. Ideally you find somebody who has experience negotiating contracts, feedstock, off-take site lease, etc. Has actually gone through the ringer. Somebody who has hopefully worked for a business and been in a position where they have been involved in going through a project finance process, so has worked through the confirmatory due diligence.
(35:40):
So let's say Apollo is interested in investing in you and they hire a Black & Veatch or a Lytus or a Nexus PMG to do robust due diligence, someone who has been on the other side of those counterparties and knows how to handle that process and speak to the risk, speak to the contract risk, et cetera. And somebody who has ideally been through the capital race process and successfully reached a financial investment decision and got a project into construction.
Cody Simms (36:04):
In certain areas of the climate tech space today, particularly around the carbon removal category of stuff, we're seeing off-take agreements show up pretty early in the lifecycle of these companies coming in from Microsoft or coming in from Frontier that are providing sizable contracts or advanced market commitments to these companies before they've secured in many cases the development capital necessary to actually hit the scale needed to fulfill those contracts. Do you see those contracts as being beneficial to companies when they go out to try to secure full development capital to build their first real facility?
Ben Hubbard (36:45):
Absolutely. Without question. I would say that the nail on the head to some regard that the biggest change we've probably seen in the investment world over the last 24 months in particular has been the strategics. There's a lot of companies out there with incredibly strong balance sheets that are, through some combination of ESG pressure from their board and stakeholders to being opportunistic and seeing opportunity to de-risking and spreading their risk around, are starting to put their own money to work off their balance sheet and solving a lot of the gap that institutional investors just struggle to solve because of the risk adjusted returns that they require and how sometimes those don't align with the pockets of capital they've raised from, like insurance funds and pension funds and things of that nature.
(37:26):
So you're starting to see everyone from engineering procurement instruction, contractors that want to invest a little bit of money to secure an EPC agreement. You're starting to see a lot of, like you just noted, the off-taker, the Microsofts and Amazons and even the [inaudible 00:37:40] and Chevron, a lot of the oil and gas majors step up and put capital in.
(37:44):
You're seeing airlines put money in because they want to secure the rights to some of the staff that they believe these certain developers are. So you're starting to see a major landscape shift from strategics investing for vertical integration to protect their own businesses and to diversify and meet their ESG goals, which is a huge game changer because it's serving as a catalyst to a lot of these companies to access capital is just really hard to find.
Cody Simms (38:05):
What risks do you think are the hardest to overcome when you're looking at a project? We talked about feedstock risks, so I guess that's probably one of them, but what else are the things that really cause you to stand up and walk away from the table?
Ben Hubbard (38:17):
Team. I am personally, as Ben Hubbard, not as anything other than that, am a huge advocate of diligencing the team itself. I think you can look at any industry, any business, any vertical, any asset, it doesn't matter. It requires people to do the work. I think a lot of the underappreciated and undervalued component of due diligence is evaluating people. And I think that's inherently very difficult to do because it can be very instinctive, it can be very much driven by what questions you ask.
(38:49):
It's not as easy as saying, "Does one plus one equal two? Does this technology have a heat rate that does the science behind it?" It's people, it's human nature, it's human behavior, it's psychology. And I believe that the successes we've had in various investments we've made, and even internally to business lines we have has been because we made a lot of effort to find the right people to do the right things.
(39:10):
And I think that at the end of the day, the biggest number one, two and three gateway to success as an investor into these sectors is making sure you find the strongest management teams. We have our own recipe of what we look for, including things like has the management team work together before? How many years of experience do they have working together? Because I always find that partnerships are only as good as the strength of the bond between the partners themselves.
(39:37):
We look for what I'll call self-reflection human behavior. Do these folks have the ability to recognize where their weaknesses are and where they need to round out their team? One of the first things I always ask is, "What risks do you have?" If somebody says, "This isn't very risky at all," see you later. Because everything's risky in some regard, it's just a matter of what is the risk and what's the probability of that risk occurring?
(39:57):
So I like to find leadership teams that immediately come out and say, "These are the risks, but we've mitigated them in this way and we truly understand them." Because trying to hide or pretend like risks don't exist just shows that you don't have command over your endeavor. So the combination of all those things, but at the end of the day that all comes back rooted in the people and the team you're investing in to me is number one, number two and number three at the top of the list.
Cody Simms (40:18):
That's not what I expected you to say. And it's so fascinating because again, in early stage venture capital, I would venture to say it's quite similar, maybe some slightly different qualities that one would look for in team. Certainly you need to look for teams that show entrepreneurial energy and show the ability to problem solve and anticipate.
(40:41):
A lot of what you said really resonates with me, which is super interesting to hear. And I guess maybe to that point, these projects that you're funding still are in many cases relatively early in terms of their lifecycle when you look at the broader sort of commercial infrastructure world. Yes?
Ben Hubbard (40:56):
Yeah, absolutely. And even more reason why analyzing the strength of the team is important because the way I always talk to my team internally and the way we bounce around ideas is if shit hits the fan, for lack of a better way to say it, can I sit across the table from the folks I've invested and know that we're all going to be in it to win it and we're all going to speak openly and honestly about what went wrong?
(41:17):
Are we going to be able to work together to solve the problem or are we going to be at odds and are we going to be ripping each other apart to try to solve the problem? You have to have these types of things as an investor, but if I have to actually trigger step in rights and take over a business, I always tell my team, our investment has failed. It doesn't matter even what the outcome is.
(41:34):
That's the honest truth is we take these risks, but I know with confidence that the team I'm investing in, if things go wrong, it's not going to be because they're not honest. It's not going to be because not transparent. It's not going to be because of a risk that we had no idea existed. It's going to be because a risk that we knew and identified came to fruition and that's life and that's business.
(41:54):
You inherently underwrite with a philosophy and if I assume that X is going to happen and then just the market changes or it doesn't happen, that's on me because I knew that risk and we took that risk and that risk came to fruition in a way that didn't make this work. When I can't stand is when a risk that no one ever exclaimed or not that wasn't one that we didn't uncover because of our own poor due diligence, but that wasn't portrayed or that wasn't ever spoken to, that's a totally different dynamic. And we're looking for deals where we know the risks and we take them and if they come to fruition, that's life.
Cody Simms (42:25):
Ben, you mentioned when you first started creating the mandate yourself to focus on lower carbon, lower emission technologies that you had started to see first two, then four, then six projects coming across your desk in a few specific spaces of biomass energy or waste to energy broadly. What technologies or what things out there right now are starting to show up with increased frequency?
Ben Hubbard (42:50):
Yeah. So funny enough, the flow has been following the treasury guidance that's been coming out as part of the IRA. So big buzz in hydrogen, green hydrogen. The treasury guidance came out just a few weeks back. That really allowed a lot of developers to determine which projects were a go and which ones were a no-go based on that guidance. So we're seeing a tremendous amount of movement in green hydrogen.
(43:11):
We're seeing a tremendous amount of movement in sustainable aviation fuels. I would say that's one. We actually have our own development company called Pathway Energy that is very advanced in a late stage project of building a very significant supply of sustainable aviation fuels through the gasification of woody biomass and using 100% carbon sequestration. So it's 100% of the COâ‚‚ will be sequestered in an offshore geological well feature.
(43:35):
So SAF is a huge one. And then we see a lot still growing in renewable natural gas production through the anaerobic digestion, gasification, pyrolysis, all these different things of waste streams into RNG. And there's a very robust and proven credit market, the low carbon fuel standard and the renewable fuel standard being the two main ones that are driving the growth of those.
(43:54):
So we're still at the point at a big picture level where subsidies are moving the needles, this is solar and year two where all these industries are growing because of that with the intent like solar that over the next 15, 20 years, things like electrolysers, all these different equipment and processing technologies become more efficient and become cheaper to install so that a subsidy isn't required so they can stand on their own two feet. But I would say those are the three sectors. And then right behind, that's carbon capture, but I still think that's pretty early.
Cody Simms (44:23):
How much do you discount the potential of those subsidies going away in a different administration?
Ben Hubbard (44:30):
Great question and one that I spent a lot of time on and talked to a lot of law firms and a lot of lobbyists trying to understand. It's a tough one, Cody, because you have to take a view and if you don't, you just paralyze yourself and you don't do anything. And that's almost worse than making the wrong call sometimes.
(44:45):
We as Nexus believe that most of the sectors that are growing, the subsidies supporting them are probably going to stick around in large part because, I don't want to get deep into politics by any stretch, but the voter bases that are very core to both groups drive a lot of these farmers in the Midwest and things rely on the ethanol industry, which relies on the RFS.
(45:04):
So I think a lot of the subsidies that are deeply rooted in the heart of people like farmers, a lot of waste suppliers, people at the core of the voter base is neutral, I guess is the best way to say it. So I think it's probably a little bit specific to each subsidy, but generally we're pretty bullish that they're here to stay.
Cody Simms (45:23):
Ben, what else should I have asked you or what else should we have covered today?
Ben Hubbard (45:27):
I think we talked about a lot. It was a fun conversation. One thing that I always like to finish on is just my overall, for whatever that's worth, my overall view on what the next five years look like or next 10 years. I'm very optimistic that the pace of acceleration for capital deployment is going to show itself. I think we're at the point where the early winners are starting to show themselves in a lot of these sectors and large infrastructure capital that is there to build plants two, three, four, five, 10 and beyond is ready to go. It's there, it's been raised.
(46:01):
You can see the announcements from BlackRocks and Riverstones and GIPs and all these folks all around the world, CIP ready to deploy billions if not hundreds of billions. And we're right at that cusp where the winners are emerging and we're going to see a scale probably like nothing we've seen since oil and gas in the 80s, quite honestly.
(46:18):
And so I'm very optimistic that we're going to see almost like a hyperbolic function of deployment of infrastructure in these asset classes over the next 10 years. And we need to, I truly believe that this is a vast need, not necessarily a want. I think the capital's there, the technology comes through enthusiastic. You've got government support. The DOE is stepping in. All the pieces of the pie are there now to see tremendous growth and success over the next 10 years. So I'm incredibly optimistic and bullish that that's the way this is going to unfold.
Cody Simms (46:46):
Well, wonderful sentiment to end on for all of our sake. I super appreciate you joining us today. Folks, definitely if you're looking to understand more about large scale commercial project development in the renewable energy economy, sounds like Nexus PMG is an organization to take a good look at.
Ben Hubbard (47:05):
Yeah, appreciate it, Cody. And thanks for taking the time to connect and great conversation.
Cody Simms (47:10):
Thanks so much.
Jason Jacobs (47:11):
Thanks again for joining us on My Climate Journey podcast.
Cody Simms (47:15):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (47:24):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter at mcjpod.
Yin Lu (47:38):
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Cody Simms (47:47):
Thanks, and see you next episode.
