The New Patrons of Finance
Institutional Investor, November 8, 2016
Van Gogh was a crazy person. The things he did could not be explained by any rational or objective criteria at the time. Oh I’m not talking about Vincent Van Gogh – he was a genius – I’m talking about Theo Van Gogh, Vincent’s brother. Theo, in case you aren’t familiar with him, was the financier who backed all of Vincent’s 900 (!) paintings. Do you know how many of those paintings Vincent sold in his lifetime? One. He sold a single painting. Clearly, Theo was crazy.
Or was he? We now know that Vincent was producing some of the most valuable assets, per square inch, on earth. He was responsible for eight of today’s 30 most valuable paintings, together worth more than $1billion. And those eight are just the paintings that have been priced as a result of a sale, meaning Vincent’s true masterpieces, e.g., Starry Night, aren’t included in that value. In short, Theo’s crazy financing led to unimaginably high returns. So, was he really crazy? Or was he a genius? Should he go down as one of the most important patrons in the history of art?
I believe Theo, perhaps unwittingly, represented a form of market intermediary that brings commercial acumen together with social purpose. To be sure, more than profits motivated Theo. He wanted to see his brother succeed. But he was also a sophisticated art dealer. Theo was a legend in his own right and had many important contributions to the world of art. Consider this: 70 of Claude Monet’s paintings passed through his hands as a dealer. He was responsible for Degas’ fame by pushing his employers to buy his work. He even introduced his brother to Gauguin, Cézanne, Pissarro and other artists because he thought their collaboration would be mutually beneficial. He was right.
Theo wasn’t just his brother’s patron. That’s underselling what he did. Theo was a sophisticated financier who had the wherewithal to add value to a portfolio of artists. While there was no market for Vincent’s paintings during in his life, Theo clearly knew that what Vincent was doing was valuable and worthy; so he bridged his brother across the proverbial ‘valley of death’ – a valley that Vincent’s paintings, if not Vincent himself, successful crossed.
As a market intermediary, Theo combined remarkable skill as a commercial art dealer with a desire to help his brother create valuable pieces of art no matter the immediate commercial results. I think it’s fair to say that if it weren’t for Theo, the world wouldn’t have any of Vincent’s portraits or colorful windmills.
You, dear reader, must be wondering at this point: What this all about? It’s about financing long-term, uncertain assets of social value. The question I’m asking myself is this: When true commercial expertise is combined elegantly with social and commercial objectives, can we hope to develop unique and profoundly valuable assets? I have a suspicion that we can and I think Theo may offer an interesting model that mixes philanthropy with icy-veined capitalism to develop remarkable and socially valuable assets, such as windmills. Not the colorful windmills on Van Gogh’s canvass, but real windmills.
Just as there was no market for Vincent’s paintings when he was alive, there are many similar market failures today, especially in areas of long-term social and environmental value. For example, the world of mainstream finance and investing today doesn’t seem to appreciate the value and importance of developing, scaling and deploying clean energy assets. For example, to meet the commitments that 195 countries have made under the 2015 Paris climate agreement, Bloomberg New Energy Finance estimates the need for around $70 billion per year of direct institutional investment into new renewable electric power generation. In 2014, however, such investment totaled only ~$1 billion. The world simply hasn’t caught on yet. This is strange given the recent global commitments to transition to a clean economy, which implies taxing dirty industries and empowering clean ones.
What’s going on? Well, in my view, it’s not that the investors aren’t ready for these kinds of climate infrastructure assets. Rather, it’s that the kinds of intermediaries we typically look to for private market strategies simply aren’t aligned to connect the investors to the assets. And there are two reasons for this.
First, the products being sold are too expensive for the performance profile of the assets. Imagine Theo had a fund and was charging 2% asset management fees on all the investments he made in his brother’s artwork. Would he have had the patience to fund his brother through 899 unsold paintings? It’s doubtful. However, as a direct investor in the artwork, he (and his heirs) could hold on to it forever.
Second, the big investors that actually have the time and scale to make these sorts of investments do not have the requisite skills. The fact that many LTIs lack internal resources to execute direct investments on their own remains underappreciated in the marketplace. We find that when people see large pools of assets under management at Giants, they assume that these assets can be used for internal resources. The truth is that people inside pension funds often feel like one-man bands; playing many instruments at once just to produce a tune that is somewhat recognizable. Theo was a legendary art dealer, so he had capital, patience and skill. That’s rare. Those, I believe, are the magic ingredients.
In short, there’s no Theo-equivalent in the clean energy financial markets; there’s nobody using deep pools of long-term capital and commercial acumen to advance assets of social importance towards positive social and commercial outcomes. But maybe we can build one? Could we get charities and foundations to donate money to create professional investment organizations in which skilled commercial investors are recruited and tasked with helping deep-pocketed and patient pension funds (and their peers) get access to these high quality buy-and-hold assets of high social and financial value?
Well, that’s exactly what we did with the Aligned Intermediary. We’ve built a best-in-class investment advisory organization funded by charities and philanthropists with the explicit goal of helping long-term investors make profitable investments in climate infrastructure. Check it out. Will our windmills be as valuable as Vincent Van Gogh’s? I hope so. In fact, I hope we show the world that it’s worth the time and effort to make a new market in these all-important assets.
As we learned from the Van Gogh brothers, the financing of long-term assets is complex and challenging. My hope is that a generation of philanthropists sees the benefit in backing new finance entities to combine deep pockets, patience and skill to bridge assets of fundamental importance across valleys of death. We can’t rely on government, so we may need new ‘patrons of finance’ to move us forward.