The Illusion of Crowds with Francis O’Sullivan

In this episode, Sanjeev Krishnan sits down with Frank to explore what’s changed since his Missing Middle paper three years ago, why the ​“wisdom of the crowds” is breaking down in energy markets, and what the findings mean for company leaders, LPs, and allocators.

Sanjeev Krishnan: Hello, Frank. Welcome back to the podcast

Frank O’Sullivan: Hey, Sanjeev. How are you?

Sanjeev: Good.

Frank: Good

Sanjeev: I think we’re here to talk about first of all, the meteor.

Frank: Oh yeah. 

Sanjeev: in Boston

Frank: We collectively as a metro area heard a huge explosion in the middle of the afternoon, and everybody was freaked out that their next door neighbor’s gas had exploded or something. But it turns out a meteor hit the atmosphere just somewhere off in Massachusetts Bay and there was this huge sonic boom effectively that we all felt.

So it was surreal.

Sanjeev: That must have been scary

Frank: It was a little scary. I’m not sure this is an adjunct to this conversation, but we are doing a big house renovation project right now, and a lot of the foundations in the building have been removed basically. And so my wife was like, ​“The house has just fallen down.” Hopefully not. 

Sanjeev: Speaking of foundations and the energy transition, it’s been an eventful, I would say, three years since you and Gokul released the missing middle paper- … which was really important to S2G, in terms of how we thought. And, there’s so many now missing middle definitions.

I’m sure we’ll get into this. But before getting into this new paper that is an update, just reflect on since that paper was released, the evolution of sort of the energy transition how do you see the market evolving?

Frank: So towards the end of 2023 we released the paper, ​“The Missing Middle: Capital Imbalances in the Energy Transition.” And really what that was an exercise in exploring what parts or what stages of the transition were seeing a lot of capital allocation and reflecting on what was that really a fit for purpose allocation as it relates to the ability to gestate the really important technologies, concepts, and so on that we need through from earlier stage right the way into, truly scalable, bankable infra-type opportunities.

And the relatively straightforward takeaway was that both the early stage and certainly the late stage in the infrastructure segments were five years ago exceptionally well capitalized, but that between those two stages, there was a lot less capital available. And that was a real challenge because what would happen, and certainly I think this has played out multiple times, is that those good ideas that managed to gestate through the early stage would arrive at a juncture where they were not yet ready for primetime, so to speak, in terms of an infrastructure investment or whatever.

But they had a shot, and that’s really important. And what they needed were investors who could contemplate a return that wasn’t a venture scale return, but that was also a riskier bet than what the infra guys are willing to accept. And that could write larger checks than the typical earlier stage venture kind of consortia could write.

And that just didn’t exist at the time. Certainly it was much more limited. Because it was limited, it added a further crease in the whole dynamic in that the over-capitalization of early stage meant that valuations tended to be quite high. The under-capitalization of the growth segment tended to provide growth investors with a view that they shouldn’t be paying as much for these deals, and that caused a lot of friction and so on and so forth.

We laid out, a data-driven review of the situation, and I think what we did as a collective at S2G was said, ​“Hey, there is an underserved opportunity here where, good companies that are making progress, albeit not quite there yet, can be supported through that revenue growth phase into profitability.”

And then beyond that, many of them are just going to graduate to the large infra private markets or maybe even indeed continue on into the public markets. Take Fervo as a very interesting,  recent example of all of that. So that was what that paper was all about.

And since that paper was released, I think our collective community has focused more on this issue of the missing middle, and there have been various different definitions, whether it’s growth equity, whether it’s, first of a kind pilot project debt or equity, et cetera. But nonetheless, it has become a term in the vernacular that’s thrown around to a much greater extent.

Now we’re three or four years hence, and Gokul and I have gone through an exercise of stepping back, taking another look at what the market looks like today, and reflecting a little bit more on that core question about the missing middle. But also, as I’m sure we’ll chat here, interestingly, we’ve seen some other takeaways now that I would say are they’re not necessarily double clicks on the missing middle itself, but they’re important parallels and adjuncts to that core missing middle question, which I think perhaps are now issues we should also start talking about because they have some real implications for our ongoing motivation to continue to help support these businesses because we need to move this space forward and unlock value for our investors.

Sanjeev: Yeah. There’s so many directions that we could go, but I wanna start with the original one on the first principles basis which is really the highlighting in the ​’23 paper of early stage versus infrastructure.

I think just your reflections, ​’cause I know you teach this as well on the early stage side, and you’ve operated in the infrastructure world. But, I was in Singapore in 2013, and I was critiquing how I thought China was dislocating markets with enormous subsidies and infant industry stuff, and it was creating global issues.

And my friend was like, ​“You think China’s dislocating stuff? Like the US Federal Reserve is dislocating pretty massively.” And as I reflect, zero rates allowed two things to occur, and perhaps even negative rates.

One was, I think zero rates, in my opinion, led to the growth of infrastructure as the modern bond, effectively. And so there was a ton of financing that occurred because people were searching for yield that they were not getting in the sovereign treasury markets. Two, as again, zero rates and negative rates if, or if you remember during COVID in 2020 and a little bit ​’21, that led to, I think, a lot of frothiness in early stage in ​’22 and ​’23, which in hindsight are seen as very bad vintage years across asset classes, but particularly in venture.

And now last week, the 10-year spiked to a 2007 high, just can you reflect on how infrastructure and early stage, in your opinion, have evolved just in the time you wrote the paper

Frank: Yeah. I think we’ve seen a major reset between when that paper was originally first published and where we are today. As you said, that has been driven by how the base rates have evolved. Five, six, seven years ago, in a much lower rate environment, the renewable business specifically meant wind and solar were at a phase, I think, in growth and development, certainly here in the States, and I was involved in this myself, where the low rate environment coupled with the relatively intense competition at the time was really driving value, prices for the commodities way, way down, and people were really leaning on and reliant on very low rates in order for project returns to be just about acceptable.

When in reality, I think if you step back now and reflect in the cold light of day, that was a very poor risk-return kind of trade-off in reality. And you’ve seen the impact of that on a lot of the pure play renewable players and how the public markets, for example, have really stepped away from that space.

And there’s been a general reset on expectations around what return expectations should look like at the infra end of things. And, with the base rates re-rising during that period of time, it’s made that challenge even greater, right? You’re dealing with a rising tide with respect to interest rates, and then on top of that, you had supply chain constraints and so on, and that really has led to a lot of pain.

I do think, Sanjeev, for the larger infra clean energy space, there has been a degree of a reset that has taken place, right? And we’re coming out the other side and people have a different expectations now around what the return profiles need to look like and what these commodities are gonna ultimately cost.

Interestingly, of course, we’ve also had this very interesting dynamic with the upturn in demand for electricity and expectations around AI and so on, and that has led to a more buoyant power market and so on. And that’s reframed what the performance envelope needs to look like, I think, for infrastructure assets.

Now reflect that back into the early stage space. I think in five, six, seven years ago, with respect to early stage clean energy, there was a view that’s colored by low rates and so on, and an expectation that the price of power was going to continue to fall. That a whole host of electrification modalities to address cleaner sources of molecules and commodity products and so on, that those tech all had a chance of getting there or at least that the key techno-economic analyses at these lower input cost expectations and this lower cost of money régime could get you to a place where some of these tech,

Sanjeev: Electrify everything.

Frank: could be interesting.

Absolutely. And I think in the last two or three years, Sanjeev, things have changed very significantly, and unfortunately for a set of those technologies very much in the wrong direction in that now you’ve seen the price expectations for things like power, I think have changed.

Maybe not dramatically, but I think it’s difficult to countenance the notion of a lot of free electricity hanging around because that’s just not where we’re at right now. And then the base cost of money flowing into challenging infrastructure, long life infrastructure, has also increased meaningfully.

And all of that has moved the needle, and I think those true tough tech technologies face meaningfully tougher paths now forward over the next five, 10 years. That’s the reality.

Sanjeev: Before getting to the new report and the data that revealed, I have two hot takes for you. And tell me how wrong I am or, whatever. This was a prominent,

Frank: You’re never wrong Sanjeev. Come on.

Sanjeev: this was a prominent regulator that I think the notion was that these zero rates or low base rates coupled with some of the renewable incentives created an atmosphere where it effectively kept power prices low.

And so when we think about power price increase that was not an artificial market, but it was like a very dislocated market that…

Frank: artifact of the market, certainly, yeah.

Sanjeev: Exactly. What’s your view on that hot take?

Frank: Yeah, I think that there’s clearly something to that. I think, to step back on the broader question of electricity price trajectory, and I think we do this a lot at S2G, we think about the components of the cost of electricity.

There is the capacity component, there is the grid component, and then there’s the energy component. Certainly on the energy component if you have very low rates and you have on top of that further subsidies as you have with wind and solar, with the ITCs and PTCs, you are going to be able to bring on very low-cost LCOE megawatt hours onto the system.

And I think we’ve done that, and I think now there’s been a degree of reset in that space over the last while. So I think that’s adding some upward pressure to the affordability issue.

But I also think it’s important to acknowledge that a lot of the the overall affordability challenge that’s now emerging is also coming about because in order to support the system to deliver on all of this new demand and so on, we are just having to invest into the bits and pieces, the wire and so on in a way that hasn’t previously been the case.

And that is not cheap either. And so we have a little bit from column A and a little bit from column B converging. And I think the long-term thing is power is gonna be a little bit more expensive, and we just have to realize that,

Sanjeev: And that could have happened much earlier had it not been for base rates and some of the policy. 

Frank: Yeah. And maybe one final crease on that is I do think we will see over the next few years, the US gas market couples more aggressively upwards towards the European LNG

Sanjeev: The TTF. Yeah

Frank: I think that there’ll be some further pressure coming out on power prices because of that.

Sanjeev: Yeah. The Henry Hub to TTFs sort of conversion story. The second hot take, this one from a prominent investor. I’m just recycling other people’s hot takes today – I’ll get to my own later – was early stage was you either lever to electrify everything.

Now, if you’re not levered to AI and the power load story, it’s very hard to catalyze capital. What is your view of that hot take?

Frank: I think that’s probably very fair. I think the capital allocator class, if you wish, that they’re naturally looking for where they feel like the growth opportunity is going to be. And I think that and it’s unquestionably the case, that where that growth opportunity and where all of those challenges are in the nearer term certainly are no longer related to this need for the decarbonization of long-term commodity manufacturing in reality.

Much more focused on the very near-term need to get more data center capacity online to run that as efficiently as possible to do more with less et cetera, et cetera. And so in our world, I think Sanjeev, I’m sure you’d agree with this, we see that scarcity value around things like transmission, those assets, there’s a lot of interesting opportunity, I think, on services for supporting the system as a whole. I think there’s probably a lot of interesting opportunities too, in and around the data center and its operation, quite aside from getting into the actual technology in the racks and so on.

And that’s what people want to talk about. That’s what allocators are focused on.

Sanjeev: Totally. Okay, so tell me why you updated this report.

Frank: Yeah. So we’ve written an update to the missing middle paper, and it started off as an exercise again in just reviewing how that original concept, the fact that there wasn’t as much growth equity as we felt was necessary in order to continue to support those successful early companies, how that had evolved.

And so we have taken a snapshot of the past five years in the let’s call it energy transition for all of the defined market, private market here in the US and in Europe. And we have gotten into the nitty-gritty to understand what’s happening in terms of how capital has been raised, the stage which that capital has been raised, and then how that capital is being deployed into the market and what the realizations have looked like from that in terms of value back to investors and so on.

And there are a couple of very interesting, I think from our point of view, insights that have emerged.

The first I would say is that although people have spoken much more about the missing middle, what we discussed earlier on during our chat now we haven’t really seen that much more money coming in specifically to well-disciplined growth funds. What I will say is that we have seen, I think, a lot more people speaking about making growth investments, but those growth investments and that allocation into the growth investment I think we would not define that as growth. We would define those as very large venture investments actually, because a lot of that capital has continued to go into businesses that are truly pre-revenue.

And so there’s a nuance to that. It’s not good enough for us necessarily just to say we are growth investors. The point about the missing middle paper was we said there was a lack of capital available to revenue-generating businesses that were in that early growth phase not businesses that just needed a very large check.

We certainly see some of that behavior. The other thing that’s interesting is that a pattern, and this was probably the case actually several years ago as well, but we weren’t really looking at it at the time. But if you look at how funds focused on different stages, how they have come together, what you’ll see is that funds that are targeting infrastructure, certainly private equity and even the true growth funds, there are very few small ones, and they tend to get quite large.

What we would’ve expected was that for the earlier stage funds you’d have lots of small funds and very few large funds. But actually over the last five or six years, what you’ve actually seen is that a very significant amount of the early-stage capital has actually been raised into large early-stage focused funds and some of them being very large.

And in the paper and in the analysis that we are presenting in this ​“Illusion of Crowds” paper we’ve drawn on that thread because we believe there are some challenges that have arisen because of that pattern. The first is, and we know this well, Sanjeev, in terms of our own earlier stage work, those large funds they have had over the period of time a challenge in finding deals to do that kind of intersect with good management of a billion-dollar fund.

If you have a billion-dollar fund, you need to put that to work within a reasonable timeframe, and ultimately you need to write reasonably large checks. And that need to write large checks early on limits very substantially, I’d argue, the envelope of investable opportunities that exist for you.

And we see that. In the paper we give an example that you know, 1.7% of the early-stage deals within a five-year period together accounted for 45% of the total capital deployment. And when you drill into those 1.7 percent deals and who’s involved, it tends to be much larger funds.

And there are two elements to that. The first is, of course, there are just some deals that require a lot of money and this is coming back to some of these more capital-intensive deals and so on. But there is another question as to whether or not it’s just that these large funds have to focus on those larger deals in order to move the money out into the market.

Because the other 150 smaller funds, they’re out there doing 3,000 smaller deals. And there is an interesting question, I think, as to how effectively are we rastering the entire opportunity space with that type of allocation. The other thing, Sanjeev, that I think is particularly interesting in this second analysis, is that as we continue to follow the money, what we do see is that those larger funds tend to do a lot of co-investment with themselves within that peer group of large funds.

And part of the reason for that is, of course, that a lot of those deals are large deals and large funds needing large deals can do with the help of other large funds needing large deals in order to support those big concepts that you’re going after. Now, what’s interesting about that, is that there are implications for capital concentration in the market that flow from that type of co-investment behavior.

It’s one thing to have a cohort of large funds all doing relatively large deals. But what is actually the case is that there’s a much narrower aperture of companies receiving that capital because the larger funds tend to heavily co-invest with each other actually into a smaller set of companies.

And very interestingly, as the data in the paper will highlight, those co-investment deals tend to be meaningfully larger, on average about twice as large as the deals when one of those funds does not co-invest with one of its peers. So that is an interesting take from our point of view because the implications there is a perhaps a slightly opaque concentration, capital concentration mechanism playing out within the early stage.

And if that concentration is too extensive, I think there may be questions about whether or not we are fully rastering across all of the opportunity set that needs capital or that may have a solution. And then of course, there are implications there for the LP and the allocator community, because you could find yourself in a situation as an allocator where you have a diversified allocation into many of these leading investors, but actually your actual allocation is much more heavily concentrated within a few individual companies because all of these allocators or all of these funds are invested in those similar businesses.

And it’s very important to point out there’s absolutely nothing out of order with all of that behavior. From an individual fund point of view, everything that we see in the market makes complete sense. But in the paper we framed the analysis around an interesting framework called the Wisdom of Crowds by James Surowiecki.

And the whole point about the Wisdom of Crowds framework is that a large crowd, if behaving or operating with certain parameters in place, should be able to deliver a more thoughtful outcome. And in our business, as we try and move energy transition investing forward, we need lots of that.

And, what we see in reality is that some of the parameters that constitute the wisdom of crowds behavior are not being met because we’re seeing more concentration, ​’cause we have a lot of this co-investment behavior and so on. So that’s a second order issue for sure, but I actually think it’s a very important one right now.

The other issue, Sanjeev and it comes back to our earlier conversation about growth versus early stage, is that though there has been a lot of, quote-unquote, ​“growth rounds” during the period. The reality is that a lot of that capital went into companies that were, as I said, not actually in the growth stage.

They were just very large venture plays. And there is another question there as to whether or not the market has fully moved into delivering growth investing versus speaking about writing larger checks into what remain relatively risky earlier stage opportunities.

Sanjeev: I love the paper. I would encourage everyone to read it. I think before getting into the paper, maybe just talk a little bit of wisdom of crowds for people that may not follow that as a framework.

Frank: So the wisdom of crowds– financial markets in their purest form are often seen as a good example of the wisdom of crowds framework which is a concept where the market works best if four particular conditions are present.

And the four conditions are that there’s diversity of opinion, so lots of different folks with different opinions, which all obviously makes sense. Independence of judgment, so view that as independent underwriting. Decentralization, so that can be many different things, but breadth is useful.

And then an effective mechanism for aggregation. And that comes back together in price formation, for example. So the notion there is that if you can create a market framework where those features are all present, that market should do a better job than any individual participant should be able to on their own or subgroup of the collective, because nobody has perfect information, but we should have little intersections of all the sets effectively to deliver a better outcome.

And that’s what the wisdom of crowds is about, and that’s, I think, a question now as to whether or not we’re really seeing that in the market.

Sanjeev: Yeah, I think you could argue, and this is gonna be a fun hot take between the two of us, I think. ​‘Cause I would argue we have a denominator issue in a lot of these asset-intensive, capital-intensive categories. The bug is the asset and capital intensity of getting these things from X to Y in revenue, EBITDA, megawatts, gigawatts, whatever you want. And I think it could be argued it’s a bug or a feature. And I hear the argument, we kinda have to pick one or two of these and just go, mainly because of the original thing that you identified in the first paper, which is this gap between early stage and infrastructure exists, and so how do you attack it?

Does that argument make sense?

Frank: Yeah. So I will say it does. No. This is a nuanced subject, right? And we also need to be very realistic.

So the first point is that the first thing you said there is obviously you need to get to a certain scale to move a certain vehicle forward. No question. I think what we see, though, is that in today’s market, particularly the fact that you have some very large early-stage funds, that you are faced with a need to almost pick winners earlier than you would like to. And I think my own instinct here, and this is much easier said than done, but my own instinct would be that we would be better off as an overall market structure if some of that capital that was ultimately allocated to these true large early-stage funds, that market spilled over a little bit into what I would describe as smaller growth stage funds or medium-sized growth stage funds, who would come in and intersect with these opportunities at a slightly later point in their gestation.

So allow that early stage capital to explore the spectrum a little bit more broadly, not crowding too much capital too early, and then with some initial progress, perhaps see some of the growth stage come downstream a little bit to pull the promising opportunities up into the growth category rather than the other way around.

The other way around makes it very difficult. I think it’s very challenging, if you have to make a big bet at the true seed stage on what is going to be an exercise that’s going to take several years just to get up and running, let alone, probably a decadal kind of timeframe in order to really scale.

So I think there’s something there, Sanjeev, about just how the capital as a whole is spread and it’s just a feature of today’s market.

Sanjeev: I totally agree it’s being jury-rigged effectively. I think my takeaway a little bit was, if you’re an allocator, if these things produce alpha, then these vehicles frankly need to be much, much bigger so that the loss ratios can absorb that, number one. Number two, absent that, there’s a lot of indexation happening because those big vehicles don’t exist that can absorb loss ratios in the growth side.

And as a result, that indexation almost leads you to like a beta with a sort of a narrow standard deviation because of the 1.7% and the 45% kind of issue. And so my message to the allocator class would be, we need a much bigger boat to absorb the loss that naturally happens in these things.

Or just be aware that you’re effectively creating a beta with a somewhat narrower standard deviation. Does that make sense?

Frank: I think that’s very correct. So your point on the 1.7% of the kind of individual deals soaking up 45% of the early stage capital, really, I think all of that capital should not be, effectively, early stage capital. I think a lot of that capital should actually be coming from let’s call it a late venture growth stage versus an early stage one.

Because you would like those funds then in that growth category to have more mature things that will allow for the absorption of some of these bigger checks with, with the very real chance that they go slightly sideways, and that doesn’t really have, really challenging impact on the performance of those funds.

Sanjeev: And absent those things,

Frank: I can also say one final thing on that, Sanjeev, that’s really important is the crowding of capital behavior that we see is taking place at the wrong time. So coming back to those bigger funds, it would be better to have slightly later stage funds where then you’re having that co-investment coming along because you have taken the edge off that really risky early stage and you have a shot now the alpha-beta ratio is a little bit more benign than it is.

Right now I’ll argue that the real risk ratios are very significant for the overall sector because of this concentration.

Sanjeev: And I think if it’s not an index, the alpha probably comes through with who gets access to the public capital markets, and effectively, you’re handing the baton to them.

Frank: Yes.

Sanjeev: And then it’s a big bet on when are these musical chairs gonna change? And having lived through March 2000, October 2007, August 2022, all of those are peaks in the market in my financial service career.

If you were in April of 2000 or September of ​’22 or November of 20- 2007, you were on your way to the other side of the peak, and you didn’t get the baton handed to you with a large volume of capital to go execute the business plan. Good luck with the musical chairs is the concern.

Frank: In the paper we dive into, the proof of the pudding is in the eating, as they say, right? So we dive into the actual kind of the tangible… So there’s value creation, sure, in terms of, moving businesses through rounds and larger rounds and so on.

But the real question is what sort of liquidity is coming out the other side?

Sanjeev: So value creation versus value realization.

Frank: Completely. And, we remain in a situation, and sure, this is a five-year snapshot, but by the way, we could do the same thing five years previous and same story. So we have a situation where the segment is absorbing three, four times more money at the moment collectively than it is unlocking in value realization.

And by the way, that’s even including, very notable successes, which is great, but it just highlights that we have a lot of work to do in bridging from where that capital allocation seems to be going to a point where we’re able to realize whatever the value outcome is out the other side, whether it’s into the public markets or whether it’s into an M&A transaction or whatever.

Sanjeev: One of my concerns is like even the halo trade that’s levered to the AI story is gonna come under some friction like even some of the most prodigious sort of proselytizers of AI are starting to note that we may be going through a similar high curve trough of disillusionment and then actual value creation.

And if it goes through the trough of disillusionment, even some of the things regarded as halo, if it’s levered to AI, which going back to our start of our conversation, so much of this is still levered to an AI story on the power and compute side, that if at the end of the way those tokens don’t deliver ROIC like immediately or the next year, it starts to unwind fundamentally.

Frank: I think there’s our day job, Sanjeev. Obviously, we’re very keen on being able to take advantage of that at the moment in time on the cycle and so on, and we’re certainly in a moment of time. But I think if we step back a little bit, again, speaking about the overarching challenge, I suppose more of what our careers are dedicated to is like implementing the successful sustainable transition.

We gotta keep the lights on too in between. That’s all important. But I do think like this paper and some of the reflections that it draws out come up in that respect. Because right now we are certainly in our space seeing a halo effect for certain solutions, that kind of really scratch a very urgent itch.

But all around, we all understand when we look at the fundamentals that, these fundamental commodity-producing businesses are just exactly that, and there’s an acceptable yield that they’re gonna produce and what is implementable, what’s defensible, et cetera. So I’m a little bit concerned.

Sanjeev: I think they’re all the day job, if you will, in terms of this paper, but I wanna go a little bit maybe orthogonal with you and random. When you and I first started to get to know each other I was excited that you wrote at the MIT Energy Institute, the shale paper, which I thought was a seminal piece in my growing up in investing in the energy world, ​‘cause that unlocked a whole wave of CapEx booms.

And then you wrote a paper around early stage climate tech and the learnings from that, and then you wrote Missing Middle. Do these papers help you, like when you write them? And going back to that seminal paper on unconventional shale and then to today, what does it allow you to do as an investor, as a company builder? What do these things give you in terms of efficacy as you think about the day job?

Frank: So I think that work is always very helpful in helping you understand how little you really know or how little you can control, right? And I would say that going back to the future of natural gas as a starting point, what that paper really was all about, or was focused on, was obviously what shale would do.

And shale has transformed the energy landscape in the United States, not just in the gas front. Obviously, it’s transformed power, it’s done all sorts of things. But more importantly, it’s rewired the entirety of the kind of global macro energy flows because, at the time, as we pointed out, even if the United States didn’t export gas, the very fact that we could export gas altered all sorts of long-established geopolitical frameworks, market frameworks, for example, like the Japanese crude cocktail used to be the only mechanism via which LNG was traded, 20-year long-term contracts linked to oil prices.

Now there’s a big spot market for LNG, et cetera, et cetera. Now what I also learned was and in that study, we didn’t look into it, but we subsequently looked into it, that a tremendous amount of equity value was destroyed here in the US through the ramp up of the shale boom. Many operators lost a tremendous amount of money because it’s not so straightforward to grab the kind of

Sanjeev: You’re doing the linkage that I was gonna do,

Frank: and hold onto the value.

Sanjeev: Yeah

Frank: And so the learning I reflect on today, Sanjeev, and I think you and I, we talk about this all the time. The learnings there are that, yes, the world has changed, but just because the world has changed doesn’t mean that everything that’s leaning in to target that space is gonna work.

And if anything, you need to be extra careful not to get swept away with it and be very focused on your underwrite to ensure success.

Sanjeev: And that is the art of what we do, I think. It’s like shale was underpinned by secular themes and trends. There was a ton of collective and individual wisdom there that financed it, but not every great business or secular trend leads to a good investment outcome is the through line that I’ve seen repeatedly in my career.

And I think that is the art of this is when is it phenomenal business, underpinned by phenomenal secular forces, but the investment side is much more a cautionary tale, much more an art of timing, art of approach, art of where you pick your zip codes in the neighborhood you participate in.

And I would imagine that’s a through line for you in the unconventional space as well as the clean space.

Frank: No, 100%. And we’ve often spoken about this. It’s also challenging considering we’re often trying to invest in the vanguard. But history will tell you that typically it’s the second or third owner of the asset or solution that can really make money. The world has changed, the markets have changed, the technology is there, but how our timing with relation to being in the equity and unlocking the value, how that plays out is certainly more nuanced.

Sanjeev: Congratulations on another great paper. I think you guys do a great job just being data-driven, and I think it’s an important paper for the public capital community, the capital markets in the public side, obviously for allocators, for company builders, for investors, and I think, there’s real merit in looking at the arc of history and the moment we find ourselves in.

So thank you for publishing it.

Frank: Yeah. Thanks, Sanjeev. I think you mentioned that we like to be data-driven. We’re laying this out. It’s a complicated space. But I think, the more we can as a collective community do to understand some of these trends and think about how we can tweak and course correct gives us a better chance to do the two things that I think we’re all about.

And in no particular order, really help drive a true energy transition, ​’cause that’s necessary, and also, of course create real value for our investors, hopefully folks will like it. And even if they don’t, I hope that it helps to spur some conversation.

Sanjeev: Thank you, Frank.

Frank: Thank you, Sanjeev.

Tonya: To learn more, download the full paper ​“The Illusion of Crowds” from the link in the show notes. Thank you for tuning into the S2G podcast. If you enjoyed this episode, please subscribe, leave us a review, or share it with a friend. For more information or to connect with us, check out s2gin​vest​ments​.com.