Hedge Fund Founder Jeff Tannenbaum’s Next Act Will Be Green
(Bloomberg Markets) -- Jeff Tannenbaum made his fortune through investing; now he’s investing that fortune.
He’s chairman emeritus at New York-based Fir Tree Capital Management LP, the hedge fund he founded in 1994, though he began handing over investment responsibilities in the early 2000s and had ceased day-to-day portfolio management by the middle of the decade. In recent years the firm has struggled with staff departures, soured investments, and a drop in assets of more than half from a peak of $13 billion in 2015.
Now, Tannenbaum, 56, is again managing a portfolio. This time he’s running his own money at a new firm called Titan Grove. After more than a decade of advocating for clean energy to address climate change, he created Titan Grove to fund growing businesses rooted in sustainability.
“I probably couldn’t do this at Fir Tree,” Tannenbaum says. Fir Tree’s clients “sign up for classic value investing. Investments have to be very large. Here I can do startups. I can do smaller investments and investments with longer time horizons.”
Then there’s sustainability. Fir Tree has taken stakes in energy companies such as Ultra Petroleum Corp., a gas driller whose shares plunged more than 90 percent in 2018. “The move into distressed oil and gas investments occurred well after I relinquished portfolio control,” Tannenbaum says. “I remain a large investor in Fir Tree’s funds but am in a share class where I do not participate in any future fossil-fuel-related investments.”
Titan Grove does share one common thread with Fir Tree: Both blend finance vehicles. Fir Tree is a hedge fund with private equity roots. It typically makes investments for one to three years and sometimes plows more than $100 million into mature, cash-generating businesses. Titan Grove, meanwhile, is like a family office combined with an impact fund. It’s structured as a B corporation, a company set up to create some kind of public benefit rather than only maximizing shareholder value. The aim, Tannenbaum says, is to build and own profitable businesses that promote sustainable, healthy, and just capitalism.
Titan Grove, which is targeting investments of up to $50 million, has done two deals. Both involve San Francisco-based NextEdge Networks, a smart-cities business focused on wireless infrastructure. NextEdge is also a B corporation. Titan Grove is nearing an investment in a for-profit entity that will work with apparel factories around the world to reduce energy, water, and chemical use and improve labor standards.
Tannenbaum’s climate advocacy began in 2001. After the Sept. 11 terrorist attacks, he organized a conference on energy security with an eye toward helping wean the U.S. off foreign oil. “I didn’t understand why we weren’t financing energy improvements,” he says.
Seven years later, he hosted a gathering for candidate Barack Obama’s energy advisers at his family’s summer home in Sagaponack on Long Island. There he met Obama’s future director of the Office of Science and Technology Policy, who later suggested that Tannenbaum look into a home-improvement program being piloted in Berkeley, Calif. Within the Sustainable Energy Financing District, homeowners could finance sustainable and clean-energy upgrades and pay back the costs over time via their property tax bills. “It’s very important that we fix our buildings—that’s a third of carbon emissions,” says Amory Lovins, co-founder of the Rocky Mountain Institute, a Boulder, Colo., nonprofit focused on sustainability.
Tannenbaum liked the concept but not the name. He rebranded it Property Assessed Clean Energy, or PACE, and founded an advocacy group to market it and lobby for government support. The program soon expanded beyond Berkeley. “It seemed revolutionary to me,” Tannenbaum says. “People had spent 20 to 30 years trying to figure this out. The problem was homeowners were reluctant to pay for retrofits, and businesses weren’t interested in retrofitting.”
Disruptive and wonky, PACE operated at the intersection of finance and policy. Although residential PACE boomed in California, it’s struggled to expand much further amid a yearslong fight with a federal housing administrator and allegations that the program is susceptible to abuse. It’s now being marketed in California and Florida to create resilience to hurricanes and other weather events. PACE for commercial properties, meanwhile, has become a popular program in more than a dozen states—especially for older buildings. Today, Tannenbaum is also working to support Puerto Rico’s expansion of emission-free power in the wake of Hurricane Maria.
He says his proudest climate-related accomplishment came in 2017. Three years earlier, Tannenbaum had championed a move by Fir Tree to save U.S. solar company Silverado Power from bankruptcy by merging it with another company he thought could better manage its growth. The new company, sPower, had about 50 megawatts of projects under development. By the time Fir Tree sold the company in mid-2017 for about $1.6 billion in cash and debt, it was one of the biggest solar companies in the U.S., with 1,300MW of operating assets and a pipeline of developments totaling 10,000MW, enough to power about 1.8 million homes.
It was a rare solar-power success story from a financial point of view. Many earlier stars of the industry created wealth by listing their companies on stock exchanges, only to lose it when the shares dropped. Shi Zhengrong, for instance, rose to become one of China’s richest people through the rapid growth of Suntech Power Holdings Co. Forbes estimated his wealth at $2.9 billion in 2008. The company’s 2013 bankruptcy erased most of that. Li Hejun’s rise and fall was even more dramatic: His stake in Hanergy Thin Film Power Group Ltd. was worth about $15.4 billion before a collapse in its stock price in 2015.
Despite sPower’s rapid growth, Tannenbaum pushed for a careful approach to its expansion. “We lost some auctions by 30 to 50 percent,” he says. “We didn’t rationalize acquisitions.” When investment bankers armed with briefing books pitched an initial public offering for sPower’s power plants, he ultimately said no. He resisted doing residential solar because of the heavy cost to acquire customers. While he tried to imbue Fir Tree with his climate concerns in other ways—the firm’s Midtown Manhattan office, he says, exceeds LEED Silver standards—“I ultimately concluded that it wasn’t enough for me.”
At Titan Grove, he’s focused on young, principally private companies that need guidance with strategy and business planning. “In some ways, this is harder,” he says. “It’s different muscles than the last 10 years at Fir Tree, when I was much more in a management role. It’s more akin to the muscles I used building sPower and PACE.”
The firm is drawing on lessons Tannenbaum learned from his mentor Jerry Kohlberg, a leveraged buyout pioneer who co-founded KKR & Co. Kohlberg preached the importance of aligning corporate ownership and management. (Tannenbaum says Kohlberg, who died in 2015, in turn derived part of his thinking from Adolf Berle and Gardiner Means’s 1932 The Modern Corporation and Private Property, which warned that managers who aren’t large shareholders might not act in stockholders’ interests.) With Titan Grove, Tannenbaum expands that principle to include other stakeholders. “It means when making board decisions you have to consider four things: shareholders, employees, the community, and the environment,” he says.
That approach will be more appealing to the next generation of wealthy investors, Tannenbaum says. The reason is simple: They’re interested in social justice and the environment. “They’re living the negative consequences of having unsustainable capitalism,” he says. “So they’re more on board with moving our nation and globe towards sustainable capitalism.”
Eckhouse and Martin cover energy at Bloomberg News in New York.
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