Promoted content: Thoughts for budding business founders from an investor in environmental markets

Impax Environmental Markets plc (IEM) is a publicly traded investment trust. Since its launch in 2002, Impax’s portfolio managers have spent over two decades investing in companies producing innovative solutions to environmental challenges. Almost without exception, these businesses have engineering at their heart. 

The UK has a rich history of producing high quality engineering companies. From Halma to National Grid, many of them continue to occupy the FTSE 100 to this day. Yet the journey from start-up to multinational corporation is a long one. To get there, founders must pass through “the valley of death”, a place where even good ideas – starved of external funding – wither and die. As investors in high growth smaller companies, we have seen how some of the best teams manage their way through.

IEM is built on a simple investment proposition: companies enabling the cleaner and more efficient delivery of basic needs (such as energy, water and food) or mitigating environmental risks – like pollution and climate change – will grow faster than the global economy over the long-term. Underpinning this dynamic is the insatiable demand for higher living standards on a finite planet. Investing in these businesses, should produce higher financial returns for our shareholders, as well as a positive impact.

This fundamental insight shapes everything we do, from the companies we look at, to our conversations with CEOs. The best companies in our portfolio share this sense of purpose. Not only does it bind the employees together in a common mission, but it also helps management understand the key growth drivers of their business, and strategize accordingly. If an activity doesn’t directly contribute to the company’s core mission, then why are you pursuing it?

However, a sense of purpose is not enough on its own. Understanding the market and your place in it is crucial. Since its launch, IEM has had a unique focus. As a result, it has grown to be the largest trust of its kind. Similarly, some of the most successful businesses produce deeply specialised solutions, with high barriers to entry that dominate a niche. This binds them closely to customers and puts them in a position of strength when it comes to passing on costs. Porter’s Five Forces can be a useful framework for plotting your company’s position in a competitive industry.

A compelling growth story and distinctive market positioning will entice investors. Showing them a clear route to healthy returns on their investment will make them stay. Doing this means demonstrating how your product or service can make money and, once that’s done, what you will do with that money thereafter. If decisions about capital allocation, cost management and business operations fill you with dread, ensure that you have the appropriate people in place to tackle them.

Businesses also benefit from long-term investors. One of the easiest ways to attract them is by showing that – as the manager – you have similarly long-term time horizons. At Impax, analysis of financial fundamentals goes hand in hand with an assessment of material Environmental, Social and Governance (ESG) risks. In other words, is this business taking the right steps to ensure that it will be resilient to the fullest array of possible challenges? This can range from having the right Board members in place, to proper management of greenhouse gases, or even ensuring that your supply chain meets legal standards.

Lastly, and perhaps most importantly: can you communicate all of this to your potential investors and employees? While the managers of IEM take pride in being able to identify under the radar companies, founders and executives who can properly express their vision are essential to bringing in new capital. They can also help retain investment when times are tough, encouraging stakeholders to be patient, despite facing losses on paper. What attracts investors is also likely to draw in valuable colleagues, laying the foundations for the success of your business down the road.

Over the years, IEM has invested in many companies. Establishing the extent to which a business has developed – or lost – these qualities can be key to determining when to make and exit an investment.

As an example, Spirax Group has been held in the portfolio for over ten years. The UK-listed company originally established a market-leading position in industrial steam applications with healthy margins and a growing focus on sustainability. This allowed it to expand into and dominate new niches, such as electrical heating and peristaltic pumps. Recently, a period of weaker industrial activity and softer demand from life sciences customers has weighed on the share price, and a new CEO has joined the firm. Yet the vision and fundamentals of the company remain intact, as well as its place within the market. Keeping sight of these qualities is as important for long-term investors as business owners.  

Thomas Morris Brown is a Portfolio Specialist for Impax Environmental Markets plc