In conversation with... Pieter-Jan Mermans, Junction Growth Investors

[00:00:03.340] - Jon Slowe

Welcome to Talking New Energy, a podcast from LCP Delta. I'm Jon Slowe.

[00:00:09.190] - Sandra Trittin

And I'm Sandra Trittin. And together we are exploring how the energy transition is unfolding across Europe through conversations with guests from the leading edge of the transition.

[00:00:19.050] - Phillip Twiddy

Hello, Sandra. How are you?

[00:00:20.430] - Sandra Trittin

Hi, Phillip. How are you doing? I'm fine.

[00:00:23.410] - Phillip Twiddy

I'm good as well. Thank you very much.

[00:00:25.570] - Sandra Trittin

So, I'm really looking forward to today's episode because we are... We're looking closer at the different worlds within the energy transition. So, we have innovative start-ups, we have scale-ups, there are utilities and large energy companies to drive the change, and of course, flows of large amounts of capital that are needed for doing so. And so, today we have the privilege to talk with someone who has all these three perspectives. He is founding a company, growing one of the early-stage aggregators, selling it later on to Centrica, and working as an executive committee member at the Centrica business solutions. And afterwards, he was setting up and is now running Junction Growth Investors, a fund that invests into growth equity in energy transition scale-ups. So, Phillip, how is it if you see that trajectory and that pathway of our guests? Have you seen that more often out of your experience in the industry?

[00:01:27.090] - Phillip Twiddy

No, I don't think we have actually, Sandra. I think what we What we do quite commonly see is individuals founding companies, taking them through the start-up stage, the scale-up stage, and then maybe exiting. That might well involve working for a period on the board of the acquiring company. But I haven't generally seen individuals who have then moved into the investor space. It's a fascinating move. I think that gives us a great opportunity to welcome today's guest. Pieter-Jan, welcome to the podcast. If I could say hello to you and just ask you if you could give a quick elevator pitch for yourself and for Junction Growth Investors.

[00:02:12.320] - Pieter-Jan Mermans

Yeah, sure. Hi, Sandra. Hi, Phil. So, first of all, thanks for the invitation. Really excited to be here. Maybe let's go ahead in two steps, a quick factual introduction to Junction, and then thereafter, we can talk a little bit about what sets us apart from the larger climate tech space. So, let's start with the fact Junction is a late stage and growth equity fund, and we are focused solely on the topic of the energy transition. What does that mean? It means that we actually do not invest in large infrastructure projects. We do not invest in front-of-metre battery farms, nor do we invest in wind farms, solar farms, etc. We rather invest in scale-ups and SMEs that enable the transition with hardware, software or services or any combination of these three. We're obviously conscious that the topic of energy transition and decarbonisation is really broad. We selected a couple of verticals within that on which we have particular focus, and we'll probably come back to that later in the podcast. Today, we have approximately €110 million of assets under management. That's a mixture of companies we have invested in as well as cash on the bank.

[00:03:48.320] - Pieter-Jan Mermans

We're still fundraising. The deadline for that is the end of July 2024. Our investors are a couple of major European banks, insurance companies, companies, sovereign wealth funds, family offices, and entrepreneurs. The investment tickets we do are between €5 and €15 million. That's quickly on the fact. Then very rapidly on the differentiators. Two or three elements were a team of founders that come from the sector of the energy transition and renewable energy itself for the past 15-20 years. That means either entrepreneurs who have started companies in this space themselves or investors, private equity investors, late-stage venture capitalists that have done nothing else than energy tech and energy transition. There are not many climate tech funds with founders with that background. Secondly, we're in it for the long-term. We don't really like to do quick flips, and we believe there are actually not a lot of quick flips to do in this space. And third, we walk the talk CROC, meaning that we're a green fund, and we're allowed to say so because we're saying that under the umbrella of the European Directive for Financial Investors, the so-called SFDR, Sustainable Finance Directive, under which we are an Article 9 fund.

[00:05:17.550] - Pieter-Jan Mermans

That's very technical slang. For once, not energy technical, but financial technical, to state that we can label ourselves as a green fund. That concretely means that we ourselves are also incentivised beyond, obviously, delivering financial return on reducing greenhouse gas emissions. We have expressed KPIs against which we need to deliver. If we fail to deliver against those, then our variable incentive declines. That's it in a nutshell.

[00:05:48.260] - Sandra Trittin

Wow, that sounds really exciting. Just one question, Pieter-Jan, that always sticks into my mind, what did make you starting Junction Growth? After your entrepreneurial path, all of the experiences that you had, now you're sitting more or less on the opposite side of the table. What did make you going on the other side, let's say?

[00:06:10.650] - Pieter-Jan Mermans

I'm happy to refer probably first to a podcast that you published recently with Daniele Andreoli from Enel and my former co-founder, Jan-Willem Rombouts, who is now at Beebop, with which Jan-Willem, specifically, I started REstore. That's entrepreneurial background you referred to. So, aggregator indeed, labelled by Guidehouse as one of the global market leaders in virtual power plant software. So that was 2010 till 2017, at which point we sold the business to Centrica, the British Electric Gas Utility, and where I then joined the executive committee of Centrica Business Solutions, one of the three business units. So, I left Centrica by the end of 2020. Actually, bumped into to a couple of the co-founders at Junction, and we quickly converged on two reasons to launch Junction. One was to funnel capital to climate change mitigation and climate change adaptation, and the other one was to help companies reach critical mass. I'd like to double click probably rapidly on that. With regard to funnelling money to climate change mitigation, I'd like to say that we are, as founders of Junction, real believers in the sense that we're convinced that decarbonisation goes hand in hand with making money and making returns.

[00:07:33.970] - Pieter-Jan Mermans

There are often sound bites in the market that are quite different, and especially within big corporate, decarbonisation is oftentimes seen as an additional element of pressure on making a profit. However, we have a past track record of delivering, say, anywhere between 10% and 30% of IRR, internal rate of return, to our investors when we created companies between 2010 and 2020, and those were green energy companies, so really making that link between starting that type of businesses and creating shareholder value. We obviously hope to continue to do so in the future with Junction. That's one. Then the second point is about critical mass. As I said, we really focus on scaling and industrialising new technology, new enabling technology in the transition. And from our past, we see that quite rapidly, if you want to start such a company, you have a couple of tens of people who are developing product or fine-tuning product, whether that be hardware or software. So, if you're 30, 40 people, rapidly, you're a block of 5 million euros or whatever, 4.5 million pounds of operational expenditures, which are fixed costs. At the start, when you start these companies, you would hope that you can build that down over time.

[00:09:00.040] - Pieter-Jan Mermans

But the reality is that 10 years later, those 40 to 50 people are still working and delivering value. And so, what is the challenge? The challenge is to reach 10 to 20 million euros of revenue to offset that fixed cost. That's on the technical side. On the more societal side, we like to build a couple of champions with Junction. So, taking companies from late-stage scale to champion scale, we believe, will be helpful to climate change mitigation. Definitely, we need thousands of early-stage companies, but for sure, to meet the green deal targets and the decarbonisation targets globally, we will need a couple of big champions and Junction hopes to help build those?

[00:09:46.230] - Sandra Trittin

And there I would have an immediate question again, sorry. Because if you're saying you're looking for the champions to be built, it's a bit like also making a bet, taking a decision on which company. Out of your past experience, is there any specific learning that you could take or that you would consider in, let's say, taking the decision on which company to go for?

[00:10:12.960] - Pieter-Jan Mermans

Yeah, good question, Sandra. I'm afraid we don't have the crystal ball, and we definitely not have a formula where we can have as an input a couple of data points, and then as an output, the company we have to invest in. Now, what I learned personally, from the past 10 years, there are two points that I'd like to share here. One is that the concept of pain is a real hook for start-ups to build revenue. Back in the days at REstore, we often talked about that amongst the members of the management team. It may be a surprising statement, but what we saw is that to the extent that potential clients face real issues under extreme pressure, that is where a start-up needs to be to deliver revenue, to build the first chunks of revenue. In our case, in the past with REstore, we were both in the UK and in Belgium, and those were the two countries to be to start building demand-side management revenue. That's one element, and I see that element continues to come back still in this decade, 2022, 2030. Secondly, looking back at 2017, when we sold the company to centric average gas.

[00:11:31.850] - Pieter-Jan Mermans

Today, still, we believe that utilities can play a significant role in this decentralised and decarbonised landscape. What I'm not saying is that it is the only option, but we believe that there is room for technology vendors selling to such utilities. We believe that utilities have lots of volume in the sense that they serve many consumers and that they will make the step from commodity to being supply, supply of gas and electricity to more digitised products. Next to that, there will be other relevant trends, of course, but that's definitely one. The challenge within utilities, from my experience, is really that there are many people which are used to be in big businesses, which are used to manage big businesses as opposed to build big businesses. For sure, there is still a challenge there, which is how to move at pace, how to put the client at the centre of everything you do, etc.

[00:12:31.910] - Phillip Twiddy

Could I ask you, Pieter-Jan? At the start, we were talking about your unique perspective that you've got that from a start-up scale-up perspective, a major utility, a now investor. One of the things I'm wondering about is whether from that experience of growing REstore and then moving it on to or exiting it and moving on to a Why did you then choose to go into the investment? Is that because you saw a gap in the market that you found that a difficult stage to get through? Or is that something that you needed to do in order to scale-up quickly and get to mass scale?

[00:13:15.060] - Pieter-Jan Mermans

Good question, Phil. I think I have a personal answer and a more institutional answer from the Junction side. The personal one is that after having been for 10 years deep into the trenches of flexibility and deep into building a company, for me, there was a next stage in my career, in my personal ambition to get a little bit more an overview of the different players and the different technologies within the energy transition at large and within decarbonisation. Definitely within Junction, that's what I have much more today than where I was in the middle of the weeds in 2016 at REstore. Again, that's not judgmental. That's more like going from face to face in my personal life. Secondly, within Junction, when I talk with Bruno, Dirk, Vincent, which are the founders of Junction, this ambition to help founders and entrepreneurs and CEOs within scale-ups and SMEs to reach the next phase of critical math is really a joint ambition that was very much present prior to the launch of Junction and that continues to be there. That's why we have come together, I'd say.

[00:14:39.120] - Phillip Twiddy

Okay. If you could give one piece of advice to the scale-ups and SMEs that you're looking to invest in, what do you think would really help them to access capital that they need to become critical mass?

[00:14:56.190] - Pieter-Jan Mermans

That's an interesting one. My tips would be value is not created by financial engineering. I've never been a believer in that, and I will not become a believer in that, I think, in the future. We have seen quite some inflation around valuations between, say, 2019 and 2022. It's good that that stage is behind us, I believe, from a societal perspective. Also, energy tech is a very small world. Short-term thinking doesn't really work in this space, my opinion. My recommendation would be to founders and CEOs that are involved in capital rounds and raising capital. It would be to set goals right at the start of the capital increase or the day thereafter for the next 18 to 24 months. Very clear quantified goals. Then go after that and see whether you can deliver against them when the money is gone. What we see from time to time are people which raise money, spend it a little bit all over the place, and then make up a story when the money is burned the day prior to the next capital raise. And that's definitely not the type of companies we would invest in. So, my recommendation would be to stay away from that.

[00:16:26.990] - Phillip Twiddy

Do you like to see them having a track record of doing what they said they were going to do with capital that they've already achieved.

[00:16:35.130] - Pieter-Jan Mermans

Exactly. Say what you'll do and do what you say. Very simple, a little bit old fashioned, probably. But I've delivered against that, I believe, and I thought it worked well.

[00:16:46.360] - Sandra Trittin

Yeah, that's really great. One other question in Pieter-Jan, going back to Junction Growth, right? You mentioned already that you have decided to focus on certain of verticals or areas in the energy transition space, for example, the grid-enhancing technologies, but also some others. Could you probably give us a short overview of these and why you have chosen them?

[00:17:15.140] - Pieter-Jan Mermans

Sure. Maybe talk first about grid-enhancing technologies. Definitely one of the verticals that we have earmarked. That, as such, might be surprising to the audience because there have been many car wreckages amongst start-ups between 2010 and 2020 in this particular vertical? So, what changed is the right question here. And we believe that there are a couple of concrete events that we can refer to and that I'd like to use to make things as tangible as possible. So first, let's look at the bill we all receive at home from the utilities. What we see there is that the cost of sun and wind power has gone down. The cost curve has been systematically going down over the past years, and those technologies become more and more competitive. But on the other hand, on that bill, what we see is that the grid tares are going up. So, both transmission system operators and distribution system operators in a couple of countries in Europe have asked their regulators to be able to invest more, to be able to increase the capacity of their grids. So that's the first reason for us to invest in these technologies. The second one is I'd like to refer to Tenet in the Netherlands who announced last year that in many provinces, many areas in Holland, there is no connexion capacity left for industry at present, which I find quite a surprising announcement to make.

[00:18:56.480] - Pieter-Jan Mermans

A third example also in Holland, and for the avoidance of doubt, we're not based in Holland, but they're just good examples. There is a DSO with the name of Stedin, who announced on the 27th of February this year that they would propose to prohibit charging electric cars between 6:00 PM and 8:00 PM at a national scale or at the scale of their distribution grid. What are these examples about? They are about stress. They're probably about the pain I referred to earlier in the podcast. They're not about unsurmountable technical problems. They have triggered us to spend a lot of time on technologies that enhance grid throughput capacity or that help create grid connexion capacity. One example maybe of a company we recently invested in is a company called Ampacimon, which is the global market leader in dynamic line rating. What they do is they develop sensors and software sensors which are clipped on transmission lines, which measure the temperature of those transmission lines and detect congestion. They help network operating centres at transmission system operators to decide to increase the capacity of particular lines, highways, say, of electricity transport beyond the maximum capacity that is imposed on those copper lines by the manufacturer of those lines.

[00:20:40.130] - Pieter-Jan Mermans

Those lines often come with a max capacity. But when the temperature is okay, when there is a lot of wind, when there is a lot of cooling, you can actually go beyond max capacity transport, much more electricity. That's the type of advice in real-time that Ampacimon offers to transmission grid operators across Europe, United States, Canada, and increasingly in Asia.

[00:21:04.660] - Sandra Trittin

Yeah, but this is really exciting because it comes back to that point that you mentioned, that pain point. There's a concrete pain point that people can really feel and see and realise, and then you're all of a sudden in the right spot.

[00:21:19.470] - Pieter-Jan Mermans

Absolutely.

[00:21:21.080] - Phillip Twiddy

Can I ask you; I don't know whether you have any sight of things like the Network Innovation Funds, etc. So, competitions that government and regulators set out with the idea. And why I think about this is that I see a number of innovation projects which look at this area. How do you then get involved? Are you looking at those projects that are quite early stage, quite experimental, perhaps, and then looking to see which of those are likely to be winners and how you can help those companies?

[00:21:58.830] - Pieter-Jan Mermans

Yeah, good point Phil. I think you referred to a series of programmes that, for example, have been launched by Ofgem in the UK, both oriented towards the transmission system operator, national grid, as well as the distribution system operators. It's fair to say that that has been really instrumental and really stimulated with operators, in particular, distribution grid operators also in the UK, to start experimenting with technology. When I was at Centrica, we were involved in such a programme called the Local Energy Market, which was a programme cross-value chain involving a couple of distribution system operators. Really familiar with that. I would say I saw with my own eyes how crucial this was to drag the entire industry, technology suppliers or vendors on the one-hand side and grid operators on the other-hand side into proof of concepts, et cetera, et cetera. If I zoom out, and when I compare that to the United States, I do think that European companies have gotten many more chances from such DSOs and TSOs to innovate and sell and innovate and sell in short cycles as opposed to American companies. When I flew into the United States for a REstore for the first time around 2015, I thought that we would be dead.

[00:23:25.200] - Pieter-Jan Mermans

We would bump into many, many competitors that would soon enter the European market that would outcompete REstore, and the reverse was true. That's the general picture. The example of Ampacimon, we have followed that for many years. It was actually a company that I knew from back in the days. It's a company that was launched around 2007 or 2008 that I knew from, say, around 2014. I had been following them for quite a long time.

[00:23:54.910] - Phillip Twiddy

You mentioned that you usually invest for the long-term. There's no quick flips. Whereas when you mentioned the network innovation, et cetera, then it's quite a quick cycle. I guess you're helping to overcome that issue with stop-start nature and allowing people to develop fully. Is that what you're aiming for?

[00:24:17.190] - Pieter-Jan Mermans

Yeah. What I meant to say is that you have to have your eyes on both dimensions, a bifocal situation where on the one-hand side, you don't want to embark on A trajectory where you develop for four years in the hope that in the fifth year, you're going to make big money. That means that you have to cut the product in trenches, release bits of product, sell forward, probably also, I... We sell a product that may not be completely developed yet and keep those cycles short. That's one. However, secondly, the penetration of the transition as such, given that many of these end markets, wholesale markets, for example, are regulated markets, in our opinion, it's going to take chunks of 5-10 years. You should know that the private equity industry and the VC industry, when they set up funds, legal structures of funds, those terms are often 8-10 year terms. When people invest in software, they may have three years between the date of the investment and the date of the exit. We believe that that type of profile is not fit for purpose.

[00:25:33.220] - Phillip Twiddy

Sandra, do you have any other questions, or should we get the crystal ball out?

[00:25:36.830] - Sandra Trittin

I would say let's take the crystal ball.

[00:25:40.580] - Phillip Twiddy

Okay. Today, we're going to get out the Talking New Energy crystal ball, and we're going to set it to a slightly different time frame of looking back from 2032. 2030 feels a bit too close. Hopefully, 2032 gives us a little bit more time to enable the capital to flow into the energy markets and for you personally to look back at some of the successful companies that you've invested in. I'd like you to try and pick out some of the successful trends that you will have seen in in 2022 that's helped you to become successful and helped other companies to become successful.

[00:26:21.340] - Pieter-Jan Mermans

I'll take a European lens here, not because I have a particular bias, Phil, but because I know that situation best and like to refer to the latest version of the Green Deal that set a whopping 42.5% target, meaning that 42.5% of all energy consumed should be renewable by 2030. We're talking here about electricity, gas, gasoline, etc. That's really a lot of energy that still needs to be converted to renewable. When you ask about the crystal ball, the first question is, are we going to get there? And there is reason to be optimistic in the sense that, for example, the move away from Russian gas really very fast, actually in maybe 12 to 18 months. So, if we can do that, we can also do other big things. But even if we undershoot against that 42% target, my personal philosophy is that the journey matters as much as the destination as such. So that's a first element. Secondly, an expression of hope on my side. I hope that both individuals and companies will have embraced decarbonisation by that date. I see it, we see it with injunction as a tremendous opportunity and not so much as another set of rules and loss that is imposed on us.

[00:27:47.460] - Pieter-Jan Mermans

We think that for business, there is a real Rockefeller opportunity out there. For individuals, plenty of new career opportunities in Europe and an opportunity for a life with more comfort and more quality. I hope that people will embrace that by 2030, 2032.

[00:28:08.030] - Phillip Twiddy

Brilliant. Thank you very much, Pieter-Jan.

[00:28:10.450] - Sandra Trittin

Great that you stay so optimistic, Pieter-Jan. That's good to hear. That's great. So then thank you very much for the conversation today. I could personally go on another 40, 50, 60 minutes, to be honest, but I think we have to wrap it up. So, thank you, Pieter-Jan, for joining us for the great discussion. And any of our listeners happy to reach out to you over LinkedIn or contact you to pinpoint on any further questions or discussion points. And then I'm looking to Philip. So now that was a great discussion. What are your key takeaways or what do you take from that session?

[00:29:00.370] - Phillip Twiddy

Well, firstly, thank you very much, Sandra, and thank you very much, Pieter-Jan, for joining us. I think my key takeaways from today is probably, firstly, your last point about the level of ambition that we need and the level of capital that we need to flow into the energy transition. Sometimes daunting. I think I was really, really pleased with the view that I took away from what you said, that set the goal, make it ambitious, don't beat ourselves up if we don't quite make it, but make sure we're going on the right track. I think I was also really interested in the model that Pieter-Jan has set up. I think he talked about having a set of co-founders that are based on entrepreneurs and investors. I think that's got to be extremely helpful for getting the right mindset into both of the industries, both the investment and the energy industry, which is going to be necessary to get that capital flowing. I think lastly, I took away a piece of advice for the scale-ups so that they set themselves goals for what they're going to achieve with round of capital that they've got, make sure they deliver those things and put themselves in the right frame so they can to continue that growth and to get critical mass quickly.

[00:30:33.480] - Phillip Twiddy

And how about you, Sandra?

[00:30:36.530] - Sandra Trittin

I mainly took from it that now it's really about connecting the dots, connecting the money into the markets, into the technologies, and to get it done, and that this can be really done well with people who have the experience, also from both sides, which I think is really valuable because it's much more supportive also to scale-ups, for example, on one side to bring them further, but on the other side, also on the investor side, to give the understanding on what is really going on in an early stage or growth stage or scale-up stage company. And whereas Pieter-Jan, when we met for the first time, which is more than 10 years, probably now ago, it was really a lot about proving technology and showing what can be done and finding the money in the market somewhere. I think now we see there is the money and there is the technology, but now it's really about distributing it in the right way, connecting it together, and then getting on the execution path.

[00:31:52.120] - Phillip Twiddy

There's capital, looking for projects, and there's projects looking for capital, and it's how to make the two come together.

[00:31:59.660] - Sandra Trittin

Exactly. Exactly. So, thank you very much for today's session. It was a real pleasure also with you, Phillip. I really enjoyed it, and I hope the listeners enjoyed it as well. If you have any further questions, as mentioned, reach out to us, and we are looking forward to hear you with the next episode. Thank you very much.

[00:32:21.890] - Phillip Twiddy

Thank you very much, Pieter.

[00:32:22.980] - Pieter-Jan Mermans

Thank you.

[00:32:24.560] - Sandra Trittin

Thanks for tuning in. We are excited to bring you captivating conversations from the leading edge of Europe's energy transitions. If you got suggestions for topics or guests for future episodes, please let us know.

[00:32:36.380] - Pieter-Jan Mermans

If you're enjoying the podcast, then please do rate it and share it with colleagues. For show notes, transcripts, and more, please visit lcpdelta.com.