Craton Equity Fund’s Tom Soto Investing In Small Green Tech Growth Companies

Tom Soto

Tom Soto has over 20 years experience in California working for and leading environmental groups such as the Coalition for Clean Air and the Mono Lake Committee. Building on this experience, Tom is now managing partner of Craton Equity Partners, a new, California-based private equity fund investing in clean technology. VerdeXchange News is pleased to share his views on the profit potential of the clean tech industry.


As a founding partner in Craton Equity Partners, which invests in companies that develop technologies for energy generation, water treatment, and other environmentally responsive activities, what about clean tech captured your imagination and inspired others to invest with you?

I thought there was going to be a growing profitability in this sector, for one, and, two, I saw a growing need for business to address climate change, water quality, and other environmental issues. Because of a failure of past corporate leadership, I felt there was a niche for a company that could address the massive need for technology that mitigates climate-change, water quality impacts, air quality impacts, and so forth.

What are the global, social, economic, and resource trends that are driving the development of clean tech as a viable sector for investment?

The value equation for clean tech is based on growing density in world populations and the demands that density centers will have on a less abundant resource base, especially clean air, clean water and open space. When you combine all that and throw in the other factor of global warming and climate change, there is the potential for an enormous crisis that, unless we’re honest with ourselves, could spell disaster. However, through specific types of investments in technologies that will mitigate those impacts, we help to avoid that catastrophe, and create a healthy return for those who are investing in that space.

Your fund has focused on water remediation, waste conversion, and green building materials. What about these investment opportunities attracts you?

Although we know that sources of renewable energy such as wind and solar are in growing demand, there are other spaces within this sector that are going to be just as valuable, if not more. For example, we know that many urban areas have significant water quality challenges, and with the implementation of additional Clean Water Act standards, there will be even greater pressure to find technological solutions to providing clean, drinkable water for high density centers throughout the country and the world. There are technologies out there that we can bring to Prop 13-strapped communities that don’t have the needed resources. Rate-basing the cost will not entirely solve the problem like cheap remediation technology can.

We also know that there’s an urban landfill crisis. We need to convert waste into useable products, primarily energy, so that it doesn’t go into landfills. The residual might then be used for other purposes like for asphalt or for sandblasting.

Green building materials will be one of the best sectors for getting the biggest bang for your investment buck in terms of energy efficiency and conservation. That means trying to convince folks like the ULI and others that they should invest heavily in green building material in order to assure that buildings in the future will have enough energy to keep themselves heated, to keep themselves chilled, and to keep the electrons going through them. Leaders of the construction industry are starting to experience a large epiphany that in maybe three or four quick steps they will need to adopt LEED certified building standards, U.S. Green Building Council supervision, and green building materials incorporated into their bottom line. Right now, a lot of developers see these things as simple nuisances, but they need to understand that they generate revenue and efficiency gains for their bottom line.

How is much capital is being invested in clean tech presently; and, what is the niche for Craton’s investments?

Generally, money has been moving into this space from two areas: from institutional investors that have traditionally been open to the idea of environmental concerns, for example, Goldman Sachs, Bank of America, and Wells Fargo. The other factor has been the push of CalPERS and CalSTRS, committing one and a half-billion dollars exclusively to this space for private equity and public companies. And those two factors have helped to garner enough momentum for the rest of the financial industry to realize that if they’re not on this bandwagon, they’re going to be left at the curb.

Craton’s focus really is on small-cap businesses: those that are doing less than $15–20 million a year, and that, with $5–15 million of an investment, can move to $70–100 million a year in within five years. Then we look for a natural exit either through a strategic acquisition or through the purchase by a larger strategic partner.

We feel that in terms of job creation, it’s the small-cap and mid-cap businesses that will have an impact, particularly in California. In terms of returns, these are the types of businesses that can give us a 20–25 percent rate of return on the investment. In terms of product development, we already know that the products that they’ve invested in are already proven and commercialized, and therefore the technology risk is behind us and we don’t have to worry about that. 

Share an example of company that fits Craton’s profile of a good investment?

We just invested in a company out of Las Vegas called GigaCrete, which is a company that makes sustainable building materials such as stucco paste and board paneling for housing and buildings that is fire-resistant and ballistics-resistant. This material can be made out of coal-fired power plant clinker ash and, although very proprietary, let’s just say that its environmental characteristics are far ahead of anything that is out there right now. It’s 70 percent lighter than Portland cement, for example, and therefore helps to lower emissions on a per-ton basis, lower travel costs, and lower fuel consumption on a per-ton basis—that’s going to be on the mind of the developer. But, above all, we’re preventing tons of clinker ash from going to a landfill and putting it into homes, office buildings, and soundproofing walls.

What facts are leading the public pension funds, like CalPERS and CalSTRS, to invest in clean tech? What business realities have persuaded them that the market was ripe now for investment?

Well, I think that the pensions really took the lead from CalPERS and CalSTRS, and they did two important things. First they conducted a yearlong investigation into the profitability of the market and found that it would be wise to get in to it. In fact, they saw that they needed to be proactive in creating and defining the market. And when these two pensions sneeze, all the other pensions catch cold.

So they wanted to make sure that they and the other pension fund managers would be inoculated from any problems in the market. At the same time, there was a spate of legislative measures that are now being taken very, very seriously by corporate America. For instance, California, with AB 32, helped us understand that we’re in the perfect storm economically for the emergence of clean tech. This perfect storm is driven by regulatory standards, public opinion, environmental realities, and changes in consumer behavior. These are the types of changes that the folks at PERS and STRS are able to capture, articulate, and translate into an investment committee motion.

When CalPERS, which is about a $250 billion fund at the moment, and CalSTRS, which is $200 billion, take notice, London takes notice. So, I think those are the major contributing factors to seeing this market emerge. And, quite frankly, we had some really smart people in there, like Winston Hickox, the former secretary of CalEPA and former investor, who is one of the wisest sages in the environmental movement from a policy standpoint. He was given environmental czar status at the pensions in California, and he was the one that helped to construct the philosophy around how this was going to be done.

Lastly, your credentials in the environmental world of Southern California and Baja, Mexico are impeccable. Many environmentalists have tried to emulate your involvements. So, please share with our readers your conversion experience—from advocate and consultant, to fund manager and equity investor.

Well, I think the conversion took about ten years. It really began probably around ’93 or ’94, when, while serving as president of the Coalition for Clean Air, we fought the L.A. Country Transportation Commission on their proposal to buy more diesel buses. We believed that to be a violation of the Conformity Provision of the Clean Air Act. The LACTC argued that they didn’t know anyone that could manufacture clean buses.

Fortunately, there was a board member on the LACTC board at the time who I convinced that diesel contributes to poor health, to early death, and is a major factor in cardiopulmonary and asthmatic reactions for young people, especially those who ride buses. To some people, the removal of diesel from the procurement process seemed like unqualified disaster, but to us, in the environmental community, it was probably the single biggest step toward creating enough demand to convince Detroit to deliver cleaner buses to the LACTC and other bus agencies.

Antonio Villaraigosa was the board member who made the motion to remove diesel from the procurement policy. Yvonne Burke, whose husband, of course, went on to become the head of the South Coast Air Quality Management District, seconded the motion. And eventually, the board voted unanimously to cancel the purchase of 265 diesel buses and to diversify the fuel mix to include alternative fuels. That was the beginning of the Dump Diesel campaign. But it sent a signal to Detroit that they need to be more innovative and treat clean air conformity with a lot more respect than they had in the past. As a result, some of those buses were converted to methanol and ethanol.

That was my first chance as an entrepreneur to get more involved in commodity and private equity, and I, along with two other people, established a company called Cabrillo Corporation.

We took advantage of that new motion and were able to secure a contract providing ethanol for almost 500 buses in the MTA fleet. That deal could only be done with IRS tax credit, which was a 53 cent per gallon tax credit, which gave us about a 33 cent net, with a nickel profit, so a total of 38 cents per gallon, which was very generous, but we also knew that ethanol was going to be on its way out as an alternative fuel because of the deterioration characteristics of ethanol at that time. What I really wanted to do was to get natural gas—CNG and LNG—into the bus fleets.

Now, virtually every bus company in the country uses CNG and clean fuels. That was the beginning of my metamorphosis from services to private equity.
I was also taken under the wing of a longtime family friend who had just sold his company, Univision, and started a company called Bastion Capital, which was a private equity fund. He used that company to invest in some water remediation technology companies, so I learned from one of the best in the business on how to do small-cap private equity deals.

Three years ago, it was decided that there was going to be a clean tech investment sector within the public pensions in California, and I thought that this would be one of the few opportunities that someone with my unique background, combined with private equity, could jump into a scrappy little outfit like this and prove to the industry, regulators, politicians, and the marketplace that this could be done.