Monday, 23 January 2017
Last updated 11 min ago
Nov 11 2005 | 8:05pm ET
By Deirdre Brennan
With the cost of fuel at the pumps hovering around $60 a barrel and fears that the war in Iraq and the recent spate of hurricanes may keep prices high in the near-term, analysts are taking a closer look at alternative energy, predicting the sector will see strong, sustainable growth in the coming years.
David Kurzman, a former alternative energy analyst and founder of New York hedge fund Kurzman Partners, thinks that this sector is ripe for growth, and is readying to launch his second fund, The Kurzman Clean Tech Fund, early next year.
"The Kurzman Clean Tech Fund is an idea that I toyed with back in June and that I've resurrected now because I think the time is right," he says. His new fund will focus on investing in alternative energy companies and complementary companies that use clean technologies, such as manufacturing, filtration and transportation firms.
"I'm going to really try to balance the investments though, not just on the sole, high-play, high-risk volatility, but also some industry leaders in clean tech."
According to Kurzman, the objective of his new fund is to make long-term, value-oriented investments that generate after-fee returns in excess of the S&P 500 Index. To this end, he will only invest in businesses that generate significant and growing free-cash flow, and he plans to use little to no leverage to achieve returns.
"In fact, I haven't used any leverage to date," he says, referring to his first fund, the Kurzman Partners fund, which had an average annual total return of 17% after fees for the period ending June 30. "I am not intending this to be a market neutral strategy. Nobody is paying me to short an index for them, they can go and do that themselves. What they are paying me for is to find really fantastic companies with even better management."
The minimum investment in the clean tech fund will be $250-$500 thousand, and Kurzman is considering a two-year lockup. "I want people to understand that they can't just put the money in and take it out." Kurzman is seeking $500 million in commitments before he officially launches the fund.
Clean & Green
So what specifically is clean technology? According to Kurzman, "It is any kind of product or service that is going to improve use of energy, water and raw materials, while minimizing the human impact on the environment."
While there are a number of other asset management firms that invest in clean technologies and alternative energy, Kurzman says that they often pay too much for a stock simply because the company they are buying into is green, not because it is a good investment.
"We are all trying to do the same thing. We're trying to minimize our impact on the environment…I think that's an admirable thing, but a lot of investors chase after that and are willing to pay obscene valuations for effectively what are biotech-like valuations," he says, referring to the incredible potential margins in that sector.
"I consider myself a rational investor in clean technologies. I'm not going to pay for technologies just because there is a tailwind around them," explains Kurzman. "I look for things that have staying power, because I hope to stay in these names for a very long period, which for some people is 12 months, but for me it's more like 5 to 10 years."
Strategy: Net-Long Bias
Kurzman doesn't restrict himself to using certain strategies, but both his current fund and his soon-to-be launched clean tech fund will employ a net-long bias. "But I do short," he chuckles. "Right now I have exactly one short and about 19 longs." He says that he lets market conditions and his ability to find new ideas influence how net long he is. "I'm not going to say some arbitrary number, that's not investing, that's gambling."
Kurzman sums up his investment philosophy as taking a private equity mentality and using it in public equity investing. "And because I'm willing to hold these stocks for very long times —my favorite period is forever —I can take advantage of the volatility," he says. "I like volatility, whereas most hedge fund managers try to hedge it out, I don't. [Volatility] gives me opportunities to buy low and sell high."
Another tactic Kurzman isn't afraid of employing is holding cash. "I always try to keep some dry powder," he says. "Back in September I was about 10-15% cash. Today I'm about 25% cash. I'm just not finding enough good ideas."
Unlike most hedge fund managers, who consider risk something that you take, Kurzman waxes philosophic on the issue.
"Some people say risk management should be about hedge this, the actions that you take. I think risk management is as much about the actions that you don't take."
"I like to joke that I will wait and wait and wait for a clear shot on goal. And the analogy I use is that I'm taking a penalty kick, a straight on penalty kick at the goal, and the goalie is off getting a latte."
He admits, however, that there are some opportunities that he "missed" out on because he was not willing to bend his investment requirements. One example is Blackboard, an educational software company which had over $80 million in cash at the time he looked at it.
"They were a $12 dollar stock, they were throwing off free excess cash flow, but they weren't quite cheap enough, I wanted them at $10," he says. Today their stock is at $27 per share.
"A lot of people would say that I missed it, but because it didn't meet my criteria, I don't feel like I missed a thing. I'm very conscious of not losing money, so if I miss some opportunities, that's fine with me."
Kurzman sums up his approach. "I don't look at slow-growth, no-growth, shrinking companies. I do look at profitable companies. I don't just buy anything, I'm highly selective. I don't buy at unreasonable valuations. It's the things you don't do."