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Matt Miller, Managing Director, Grey Rock Investment Partners

Institutional Investor • 21 September 2023

Alpha Edge Recognition - Outstanding LP-GP Partnerships

This year, Allocator Intel is recognizing leaders in the allocator community, acknowledged by their peers, for exceptional leadership in the key areas of portfolio construction in the Alpha Edge Recognition Awards.
Matt Miller, CFA, nominated for Outstanding LP-GP Partnerships, has built Grey Rock Investment Partners for the long haul. Since co-founding the $1.5 billion, Dallas-based private-equity firm in November 2013, he has refined the firm’s evolving thesis on energy and the energy transition. The firm’s Net Zero Opportunities Fund focuses on CarbonCapture, Electrification and Methane Abatement investments. 
Matt is a graduate of the University of Virginia, where he received his Bachelor of Science with Distinction in Commerce. During his time as a business analyst at McKinsey & Co. and as Vice President at Bluescape Group, he oversaw sourcing and due diligence in private equity and energy, which he continues to focus on at Grey Rock.
The following is edited for length and clarity.

Can you share an overview of what your portfolio looks like today?

In our Net Zero Opportunities Fund, we have four portfolio companies currently. We have two developers focused on carbon capture, Vault and CarbonCycle, which constitute an estimated 70% of our capital. After the passage of the IRA, we have found returns in Carbon Capture to be very compelling. In addition, we have an electrification company, Conduit, and a methane abatement company, Rebellion. At the end of the day, we are focused on making investments where we see the best risk-reward profile for our LPs while having an outsized carbon impact – in essence, we are trying to “do good while we do well.” 
We are working to decarbonize industry in our investments – some may not like the idea of “helping emitters get better” and want to opt for a world that rips up the energy ecosystem by the roots. We think it’s a bit short sighted to make enemies of industrial firms. I like to say, “If hospitals are for sick people, then the church is for sinners.” You go to a hospital to get fixed, so it logically follows that you shouldn’t worry that you see sinners in the pews on Sunday mornings because that’s right where you want them! They are there to get fixed. The same logic applies to large firms that emit carbon dioxide like Exxon, Koch, Dow, Valero, Southern Company and the like. You’re better off working together to decarbonize their core business and having them on your side. Work to be as centrist as you can.
If you look at our portfolio, we are effectively a hybrid of PE, real assets and infra: we focus on making PE style investments with a portfolio company structure (but are not buyouts focused), and our companies are each making investments that impact the carbon molecule with physical kit, so we are kind of like infra and real assets but with higher return targets.

Do you have any policies around ESG?

Let’s bifurcate “ESG” and talk mainly about the “E”: Our partners tend to be focused on the “E” and hire us to answer the question: What are the ways we can have a large impact on carbon but still deliver private equity returns? 
It’s a challenge for LPs because everything that crosses your desk has an ESG angle to it in some form or fashion. You name it, real assets, debt funds, PE, venture -- it’s across the spectrum. It’s a challenging time for LPs to separate the wheat from the chaff, so we view part of our role is to help guide them through an ecosystem that is challenging for outsiders. We also coach that the goal of the transition is actually an “emissions transition” not necessarily an “energy transition,” if that makes sense. 
Grey Rock helps to separate energy myths and realities, so we can grab the lowest hanging fruit for carbon impact. We love the dreamers out there, but some of the coolest ideas you have ever heard tend to fail the test of energy density. For example, investors like to compare batteries to computers saying, “If Moore’s law worked for computers, I bet it works for batteries.” That just isn’t true: Mark Mills pointed out that taken to its logical conclusion, a battery that improved in line with Moore’s law would imply than an A380 jumbo jet could fly across the Atlantic on a battery the size of a textbook. 

What have been the biggest changes?

I would describe the Inflation Reduction Act as nothing less than a tactical nuclear weapon for the transition. CO2 has historically been a non-priced externality in econ parlance, and now the United States government has stepped in to set a carbon price in various ways through the IRA. The law had a very positive impact on carbon-capture economics. We significantly increased our allocation to carbon capture after the price increased to $85/ton under the IRA. The tax credit is known as “45Q,” a funny name for a serious program. I always like to point out the tax credit was created under the George W. Bush administration and increased under Donald Trump before Biden’s increase, so 45Q and Carbon Capture are truly bipartisan. 

What are some of the factors influencing you?

At the end of the day, I’m your fiduciary, so if you hand me $1, my goal is to hand you back $3, $4, or $5. Why do I bring this up? As an investor, I am focused on “full-cycle returns.” If you pay too much to acquire a business or enter a deal, that’s where most investors trip up. To use a real estate analogy, it’s very obvious that Fifth Avenue real estate is great, but how much do you pay to acquire a building on Fifth Avenue? Some are learning this lesson the hard way currently. 
Energy tends to be an investment arena not well suited for tourists. It’s a very difficult space, and there’s a lot of, ahem, characters, shall we say? It’s really difficult to know who’s telling you the truth if you don’t understand energy realities grounded in physics. In that regard, I do worry that some investors may pay dearly for trusting an investment thesis that is too good to be true.  

When looking at strategic partnerships in asset managers, what are some of the key areas you’re focused on in determining that?

First and foremost, I think it’s a combination of, “Does the team have a sound business? Are they focused on a market that you want to invest in? If you love the business, then do you have to pay too much to have control of that team and its business? It may not be worth it.”
The second piece is skill set and alignment: Is this team aligned with our partners and investors? Do they have the capacity to grow their organization and business in a well-reasoned way? We like our teams to grow like Chick-fil-A, not Subway. There’s a way to do this whereby you have buy-in at every level of an organization, and you can grow it organically. That all starts with hiring the right person for the right chair at the right time – simple to say but difficult to practice for many. 

What investment opportunities and what do you see for the next 12 to 18 months?

We love where our portfolio is at, so we are focused on execution. Carbon Capture is a space that is rapidly gaining momentum, and we believe our teams at Vault and Carbon Cycle are at the right nexus for the opportunity set. Our electrification company, Conduit, has broken ground on its first two projects – and our team at Rebellion is working hard to plug old wells, which are leaking methane into the atmosphere. We keep an eye on a lot of other areas of the transition, but that is really where we like the risk-reward balance currently. 

What are some of the challenges that you anticipate?

Capital is a life blood, and it’s a tough environment out there. There is a recession on the horizon if the inverted yield curve is to be believed. Coupled with the denominator effect, competing for LP mindshare is difficult. They face a lot, so I empathize with them on the fact that there’s only 24 hours in the day and everyone wants their time. That’s a challenge we have as a firm: competing for that mindshare. I worry that we don’t have adequate fire power for the opportunity in carbon capture.

What would you say is your office’s greatest accomplishment since you joined?

In our business, it’s a people business, and we want people here for the long haul. One of the things we’ve done well is hire people who are aligned, sticky, and super talented. We have found that our case study method has been successful in finding team members at the fund level and for our portfolio companies.
I use the example of lawyers: Every lawyer is going to “sound great” because they’re educated and tend to be personable. How do we pick a good one? We give them a legal doc and say, “Mark it up.” It gives us a data-backed view into how they think and work; it helps us to eliminate bias and find the right team member. Sometimes that UGA law grad is actually better than the Harvard grad – no offense to the folks in Cambridge!

What do you do in your spare time?

I’m a husband and dad first: We have kids that are 1 and 3 years old. My wife and I are enjoying watching them grow and doing the best we can for them. I love to read, play some golf, and travel.
Even though I went to UVA, I root for the Georgia Bulldogs as a football team. I didn’t even go there, but I grew up in Athens. I suppose you can take the boy out of Athens, but not the Athens out of the boy.

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