How does the market look for the renewable energy field?
For value investors, we are coming out from a prolonged 10 years of constant quantitative easing which started after the financial crisis. Globally we have witnessed a major and unprecedented distortion of market dynamics that has been seen very rarely in modern times. This ultimately has caused a massive bubble on pretty much any asset and created several new dynamics that are now evolving.
This bubble had a major impact on valuations due to the massive abandonment of cash and has subsequently created a very expensive stock market and an expensive startup investment market with extremely high valuations. As a result, this has adversely also made work of value investors very difficult. Not only because we are supposed to invest at the current valuation of a company instead of future projections, which is always very subjective due to future cash flows, it has made the competition for financial investors too difficult to overcome.
The investment principles of value investors or family offices or private investors are very often different from financial investors who, on average and historically, are keen to take more risks. They are willing to leverage their investment, which has been the case in the last ten years and this is a major difference with family offices that usually invest for equity and use very little leverage.
Another factor is the psychological aptitude of the players in the market. Take for example, finance managers who are playing with other people’s money of course who have a different approach to investing, be that portfolio approach or different incentive schemes to deploy capital compared to private investors who have evaluated other risk factors for example.
What’s happening now is of course that has receded and inflation is back and that’s a massive change. In my opinion, inflation is here to stay for a few years. It is not due to overheating demand but it is pretty clear that it is due to issues with supply, rather than demand, with problems caused by logistics, production and geo-politics.
The distortion in the correct functioning of the supply side is defining most of the inflation dynamics and this is why I believe inflation is here to stay for a while until the mechanisms on the supply side are corrected which will take a couple of years. Additionally, there is a parallel potential hike in interest rates from central banks which, in my opinion, is not going to work on bringing down inflation. If central banks continue with these policies it will further depress the economy and will have negative consequences on the economy globally.
So in this difficult scenario, which comes post an economic cycle, could potentially also be a great opportunity for value investors. The valuations on the stock market had taken a massive hit and this will continue for at least another six months. In the tech world, more reasonable valuations will create more opportunities for value investors, angel investors and private investors and family offices.
There will be less competition from financial investors because of more difficulty in fundraising and therefore we will be able to tap into areas where the mid-market investors were not present earlier.
Another factor related to this is the cost of debt which is clearly rising. With more expensive debt, private investors will have an advantage since they usually invest in equity. Also companies will also be looking at raising equity rounds which will have more appeal for private investors as well.
As an Arabian Business Falcon, what advice would you give to startups that are looking to secure funding?
I expect turbulent times this year and the coming few years which could be a challenge as well as an opportunity for start-ups. As the pandemic showed that there is always demand for innovation during crises and technology can bring solutions to a problem. This will make any startup stand out from the rest when it comes to investor interest.
Funding is going to be a big challenge of course. Startups that are not breaking even or producing profits are going to have a hard time to raise funding. Also the VC market is drying up and I don’t expect much from this area in the near future. The biggest advice for startups is to get to break-even position as quickly as possible and relook at the strategy and perhaps compromise on the growth and target niche markets. Most importantly show economic results to boost the confidence of the investors.
Focus on investors that are medium and long-term oriented than on funds that require exit in three to four years. It is possible that the current economic conditions may last a few more years so it’s better to be more flexible. It is good to have investors who are buying into the concept of the business rather than the funds who want to exit in a few years.
What specific technologies do you see as key to addressing climate change?
Climate change is getting more and more important and it is imperative to take immediate action. Of course renewables play an integral role in achieving faster and long-term results in addressing climate change. The focus on renewables is also critical in the current geo-political crisis, to guarantee energy safety and independence to nations.
Apart from renewables another unspoken factor is the consumption of meat and the deforestation caused by the increase in animal food stock production. It is having a big impact on climate change and I believe there should be more laws and fines but I don’t see this happening at the moment. The climate crisis is here to stay with us till overall solutions and policies are put into place globally.
How will, and has, technology impacted your own management style as a CEO?
There’s a lot of debate around remote working around the world. In my opinion it is not about one or the other but having a combination that can improve productivity of employees in general. If you believe in the human potential then it is a question of setting the right incentives. People have short and medium-term goals – personal and team goals – then remote work can be very useful and help achieve massive productivity. Of course team-work requires people to be in the same space so a combination of remote and office works out to be a good solution from my perspective.
As a CEO, what the pandemic showed us is that when it comes to negotiations (we are always negotiating with internal and external stakeholders) not being physically present can help some forms of negotiations but there’s no doubt that it makes a huge difference when negotiations are done in person. For a CEO, physical presence makes a huge difference to the overall team and the work environment.
How have Middle Eastern governments sought to encourage the renewable energy sector?
UAE has been at the forefront of renewables starting from Masdar City, which has been a great achievement. With all year sunshine it is one of the best locations to deploy renewables in the form of solar concentration and photovoltaic (PV) technology. Within years the Middle East can be completely run with solar energy, especially by counting on new storage technologies, now much cheaper compared to the past.
Another clear opportunity for the region is hydrogen. While it is not clear what the killer application of hydrogen will be, there are different potential uses, it is very clear that the success is going to be driven by access to water, sun (renewables/solar needed for the process of hydrogen), and potentially infrastructures (pipelines), all available in the region.
What are your expectations for COP27 in Egypt and then COP28 in the UAE?
One of the challenges of COP27 is how to boost the adaptation of renewable energies in developing markets, and the promotion of the tools to facilitate that, mostly financing. The gap between the rich and poor countries will be one of the main topics, and I do believe that addressing that through private capital deployment should be the first priority, by promoting the right schemes and policies to attract foreign investments.
In COP28 I would like to see the UAE and Middle East pledging to promote the adoption of large scale sustainable transportation (EV and e-mobility). On this, we at Bay Capital are working on new technologies and software related to urban mobility that I expect to contribute to transform the sector in the next 10 years.