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Stephen Trauber

Vice Chairman and Global Co-Head of Natural Resources & Clean Energy Transition

Citigroup

August 17, 2021
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Ep 40: Stephen Trauber - Vice Chairman and Global Co-Head of Natural Resources & Clean Energy Transition, Citigroup
00:00 / 01:04

Bret Kugelmass
We are here today with Stephen Trauber, who is the Vice Chairman and Global Co-Head of Natural Resources and Clean Energy Transition at Citigroup. Stephen, welcome to Energy Impact.

Stephen Trauber
Thank you, Bret. It's nice to be here.

Bret Kugelmass
Well, listen, I know that was quite a title. And maybe to kind of simplify it for the audience, you were the Global Head of Energy at Citi since 2010, just to give a sense of who you are. Big deal over there. Let's get into your whole history. I'd love to kind of learn about you from the beginning. Where did you grow up?

Stephen Trauber
Well, that could take the whole hour. I was born in Connecticut. My father worked for General Electric, so we moved around a lot. And I lived on the West Coast for five years, then upstate New York outside of Schenectady for a number of years, then outside of Chicago for a number of years, then into Connecticut and into Boston. I graduated high school in Boston and ultimately found my way to Rice University. I went down to Rice University as a student athlete, played basketball down at Rice and met my wife while I was there. After Rice, I worked for a couple years, at the time, Andersen Consulting, which is now Accenture and then went to- worked there two years before going off to business school in Chicago at Northwestern at the Kellogg Graduate School of Management. While I was there, had a good time, but learned about investment banking and here we are today.

Bret Kugelmass
Okay, so you get the accent from Boston and you get the energy from your dad. That's the basics that I got out of it there.

Stephen Trauber
That's probably true.

Bret Kugelmass
Tell me though, the first time that you started getting involved in energy projects, was that as a consultant, or did you not touch upon that until you got into iBanking?

Stephen Trauber
No, it really was iBanking. I started my career- when I got out of Kellogg, I started my career actually in the M&A group of, at the time, The First Boston Corporation, which has evolved now into Credit Suisse. I was in the M&A group there and worked in M&A projects, but I had made it known to them when I got there that, if an opening or an opportunity in the Texas offices - they have both the Dallas office and the Houston office - opened up, that I'd like to be considered for that position, because my wife was a native Houstonian. And I knew that if I was gonna live in this crazy world of investment banking and work the hours and travel as much as is going to be required that it would be good to put her in a place where she had comfort zone with friends and family. After a couple years, I had the opportunity to move down to Dallas and then ultimately to Houston, when the Credit Suisse consolidated the Houston and Dallas offices. And if you're going to be an investment banker in Houston, you're going to be doing energy, so that's kind of- that's really where I started energy. I was an associate back then in energy and grew up in Houston in the investment banking world. I will say that, when I left New York, they told me I was crazy, that I would never have a career and that all the top bankers lived and worked in New York, and that I was probably hurting my career by moving out, but I think it's worked out.

Bret Kugelmass
Well, let me ask you then. Do you think that you succeeded in spite of that advice? Or do you think that actually kind of being a little bit separate gave you a unique perspective and gave you an edge in some way?

Stephen Trauber
It was a combination of both. I think by being- we were the first really firm to set up the entire energy group in Houston. And one thing you learn when you're in this business is, being closer to your clients is better than being farther away.

Bret Kugelmass
You mean in every business?

Stephen Trauber
In every business, absolutely right. Houston is obviously the worldwide hub of energy. More energy companies are based in Houston than any other city in the world. And so, by being there, I was able to establish myself, get to be known in the energy sector, build client relationships there. Look, it was- some firms, it's harder. When I was at Morgan Stanley, being out of the inner circle of Morgan Stanley was difficult being based in New York. But some firms, they place as much emphasis in the people that are out in the regional offices as they do as those in New York. It's not as New York centric. I was fortunate in many of the firms that I worked at that that was the case and was able to establish really great relationships with the Houston clients, and obviously, those in and around Houston, including Dallas, Oklahoma City, and etc.

Bret Kugelmass
Is that maybe part of the function of the organizations that you were at? Is it like certain organizations reward more based on merit, and because you had access to the customers, that's how merit was graded and you're able to bring in more deals, or is that part of it too?

Stephen Trauber
There's an element of that for sure. At the end of the day, clients are going to pick the bankers they want to work with, and clients are going to want to work with those clients that they feel closest to. Obviously, there's an element of content. You've got to know the business. You've got to be able to deliver the firm. There are things that I work with other colleagues in like capital markets, equity capital markets, debt capital markets. I've got to be able to deliver the firm, even M&A colleagues - most M&A professionals are based in New York at all firms - and so being able to deliver that to my client base was critical. But being able to establish and be the front line of the relationship with clients right there in your own community made a big difference, particularly 20 years ago. I still think it makes a big difference. The closer you are to your clients, the more access you have to them, the closer you're going to get, the better you're going to understand their business, the better you're going to be able to deliver ideas to them. I think that was a big competitive advantage for me. And I think still continues to be, as we're the largest energy team in the world, candidly, but certainly the largest in Houston.

Bret Kugelmass
What does M&A mean in the context of the energy space? Is it- because when I think of M&A, I think, Okay, maybe companies are coming together either to use human resources more efficiently, or maybe in some other cases, like a tech M&A, you're bringing some technology that'll help supercharge your growth or something. I think of energy, is it just physical infrastructure? Could that be M&A, too? What is M&A?

Stephen Trauber
M&A is- energy has got multiple sectors to it, right? We talk about energy as if it's one solid business. In the energy business, there are many different businesses. There's the upstream business, there's the midstream business, which is really the infrastructure side of it. There's the downstream which is also infrastructure, refining and marketing. And there's the oilfield services and equipment side of the business. Generally speaking, that's the energy business, away from what I'll just call power and utilities. Within those businesses, each one of those areas has a unique set of circumstances that define what M&A is and why people engage in M&A. In the upstream business, certainly size and scale, being able to become more efficient, drive out costs. In today's world, in the shale, world today that we live in in the US, being able to have overlapping assets, being able to extend laterals, and drive costs out of the business is critical. One of the big criticisms of energy, and in particular the upstream business, has been the lack of returns that has been generated in the upstream business over the last 10 to 15 years. A big part of that has been because there have been so many small businesses that have been started by private equity firms and otherwise and have had a higher cost of capital, have been small, haven't been able to have the efficiencies and scale, been able to scale up like a lot of the larger companies. We're seeing that undertaken today as we're seeing lots of consolidation ongoing in the business and we'll continue to see that. There's been a huge cry from investors that they want to see better returns. They want to see larger companies drive the cost of capital down, so that you can actually earn in excess of your cost of capital, a novel idea in finance these days. But no, in all seriousness, it is about generating returns in excess of your cost of capital. And to do that, you need to drive your cost of capital down and you need to be able to drive costs up. You generate the rating energy scales, a big factor that drives ratings. Ratings are a big factor that drives the cost of your capital, so these are all factors that are critical in the upstream business.

Bret Kugelmass
That's I was gonna ask next. So, cost of capital - is this mostly just a function of perceived risk?

Stephen Trauber
Certainly, there is certainly an element of perceived risk, both in the cost of equity as well as your cost of debt. No doubt about it. We live in a commodity business, so there's clear volatility. There are ways to stem that volatility, some of that's size and scale, some of that's diversification, not only across spaces, but across commodities - oil, gas, etc. You also have a commodities market you can hedge forward a significant amount of production to limit that, too. But it also, by hedging that going forward, while it takes away some of the volatility, it also takes away some of the upside that investors want to see to protect some of the downside. It really depends upon what's going on with the commodity prices to whether investors like you being hedged or not, and they're very good at criticizing you when the commodity is going against the way that you're hedged. But in any case, there are financial tools that help you stem some of that volatility.

Bret Kugelmass
Yep. So the role that you had at- the role that you had first at, let's say, Morgan Stanley, then to UBS, it seemed like you were already kind of - and then obviously to where you are now - it seemed like you were already kind of like running an energy group. How did that role, though, transition through these different companies, what that meant to run an energy group?

Stephen Trauber
Well, Morgan Stanley and then UBS, quite similar. Obviously, the more senior one gets, the more, I guess the more freedom, if you will, to be able to build that group and generate that group. Obviously, the more successful you are, the more latitude you have to being able to do what it takes. In each of those firms, I was able to continue to grow the business. As we grew the business, we needed to add resources. The more resources we continue to add, the more successful we became. It's a very large universe and through the shale revolution, more and more companies were created - both in the upstream side, the midstream side, the downstream side - and we needed to be able to, if we wanted to be number one in the business, we needed to add resources.

Bret Kugelmass
What does that mean? What does that mean, add resources? Does that mean you just have a bigger pocketbook to play with, or what does that mean?

Stephen Trauber
Kind of two things. Yeah, it certainly means capital. Access to capital is key, so obviously, both at Morgan Stanley and UBS, their balance sheet ability to provide capital to clients is different. And certainly when I moved to Citi, being a big money center and global firm, its access and size of balance sheet and ability to deliver capital off your own balance sheet was much larger. That was one key element of it, but it's also people resources, human resources. As a banker, you cover a certain - just because of the sheer capacity and bandwidth that any one banker has - you can cover a certain number of companies. Well, the more bankers you have, the more companies you cover. If you're not successful as a franchise, the firm is unlikely to give you more resources just to be more successful. But we've proven, both at Morgan Stanley, then ultimately UBS and then at Citi, that our team was very successful and we continue to drive resources. We continue to drive not only the human resources, but the capital resources. We continue to grow the business and it's been a very successful investment that Citi has made over the last 11 years.

Bret Kugelmass
When you came on to Citi, what were they looking for specifically in you? Was it just your track record? And they know that, Hey, listen, if we hire this guy it's a sure thing that this part of the business is going to grow, he's going to do a good job. Or were they looking to institute a very specific change in how they saw playing into the market?

Stephen Trauber
Well, look, I would say a couple of things. I came from UBS and, at the time, UBS - this was just after the financial crisis - and UBS was trying to think about what they needed to be, what they wanted to be long term on a global basis, very large money center bank in Switzerland. And they made some decisions that they wanted to downsize their investment banking business because of the volatility inherent within investment banking and they were going to be much more of a money manager, wealth manager, a very good one at that. But Citi, on the other hand, while they're also a very successful money manager, a core aspect of Citi's business, given their globality, was investment banking. They wanted to be a strong investment banker, an investment banking firm. And if you think about some of the strengths of Citi, being the largest financial services firm in the world, being a very large money center bank, and you think about the energy sector. The energy sector is one of the most global sectors of all sectors there is and it's one of the most capital-intensive sectors there is. When you put those two sectors, those two attributes together, it really fit hand in glove with what Citi was doing. Citi had never really had a very strong or dominant energy franchise historically. And candidly, as a competitor to Citi, I never understood why they weren't so strong, given the fact that they are so global and that they had a very strong balance sheet. But when we came over here, we really wanted to take advantage of that. What they were looking at, for me, was somebody that had a lot of relationships, who had been very successful on a different platform at UBS, and prior to that Morgan Stanley, that had a very strong team. When they first tried to hire me, they wanted to hire me and I indicated I didn't want to leave without the team. We had a very strong team. We had built a very good culture. That team was experienced and had great relationships throughout the energy sector. Ultimately, Ray McGuire, who was running banking at the time, went to the board of directors and asked that they hire the entire team and, ultimately, we brought 11 officers, vice presidents, and above over and then ultimately another nine junior bankers. Within a matter of three months, we had hired 20- the entire UBS energy franchise onto the Citi platform and only continued to grow from there. And we combined it with the Citi bankers that were already there, some of which we still have there today, and it's been a very successful investment. It was truly a hand in glove fit.

Bret Kugelmass
Tell me, what were maybe some of the couple like early deals, let's say those first couple of years that you completed that were emblematic of the change that you wanted to-

Stephen Trauber
Oh lord, you're gonna take me back all that time. I can't remember what deals I was on on which platform. Unfortunately, I've changed platforms too many times.

Bret Kugelmass
What are some of the platforms? I'm sorry.

Stephen Trauber
I mean, look, we've done some great deals. We've done, in the midstream side, for example, when GulfTerra combined with Enterprise, so we did that transaction. We advised Occidental in the Anadarko transaction. Just last week, for example, we advised the HollyFrontier refining sector, refining company, buying Sinclair. And we advised Callon in buying Primexx from Blackstone. We've been successful in in every one of the sectors, fortunately, and we've had a great run in upstream, downstream, midstream, and oilfield services. I think it's one of the reasons that we have been successful, because we have bankers in all of those areas that are highly experienced and worked on a lot of deals across those areas. I'd also say, one of the key attributes you have to have or strengthen the capital market, we a have very strong equity capital markets team that focuses on energy and a very strong leverage finance team in this area, and a very strong M&A practice. All of those-

Bret Kugelmass
Yeah, I want to hear a little bit about that, too. I want to hear how the equity capital and how the leverage finance, aside from the work that you do from advising, how do those teams really dig into deals? And how does it all come together? How do you see it from your perspective?

Stephen Trauber
Look, what we do- I'll try to take it to the basics. We have a number of what we call managing directors and directors - 10 managing directors in Houston, and I think it's six or seven directors, and then a large number of vice presidents, associates and analysts. Our directors are managing directors cover a number of companies. As a banker, I'm charged with going out and building a relationship with any given company and the executive team of that company and working with them and thinking through what they need to do to be successful long term. Obviously, I'm not getting into involved in their operations, but I am helping them think through the strategic landscape, and the financial landscape. For a large number of years, companies needed a lot of equity. They were drilling, drilling, drilling, they were growing rapidly, energy was a fast-growing sector, and they needed a lot of equity. We needed to have our energy team on a platform that had a very strong energy equity platform. Fortunately, Citi is one of the leaders in equity and certainly has become a leader in the energy equity world. We have professionals, managing directors that live in New York and work very closely with our sales distribution area. We have a large salesforce. That salesforce has relationships with the buy side. Those are institutional investors that look to buy equity. When I have a client that needs to issue equity, we'll integrate with our equity capital markets, we'll work together, we'll work with that client and ultimately, the salesforce that'll go out to the institutional buyers - the Fidelitys and the T. Rowes and the Capitals and the Wellingtons of the world, BlackRocks, etc. - and sell that equity to those clients. We have to position the company well. We have to make- if it's an IPO, we have to value of the company, right. If it's already trading out there, we need to help the institutional buyers understand why they're issuing the equity, why they need the equity, what the upside of that equity might be if they buy it today. We have to position that story well with our salesforce and, ultimately, with the end buyer, which is the institutional investor. We work very closely together to be able to do that. It's the same way on the leverage finance side. It may not be equity that somebody needs, they may need more capital in order to fund their drilling program. They may need more capital because they want to make an acquisition of some assets, and so it may not be equity, it may be debt. We work with either the investment grade side of the house, if it's an investment grade company, or the non-investment grade and leverage finance side if it's a non-investment grade company in raising debt, in very much the same way that I talked about the raising equity.

Bret Kugelmass
Yep. So now tell me - I'm gonna throw a little curve at you - we talked a little bit about drilling, field services, upstream, okay, but now we're heading into the clean energy world. How do things look different? How do the relationships change? How do the deals that you're looking at change, and when did clean energy first come on your radar personally?

Stephen Trauber
Well, it's interesting. I like to joke that I spent the last 33 years of my career helping to shape the energy industry, helping to fund it, helping to advise strategic transactions or divestitures in that area. And after 33 years, the firm's come to me now and they want me to clean it all up. But in all candor, look, it's really across industries that climate change is going on. I think nobody debates that these days. There is some climate change. People can debate the merits of how and why and how impactful it will be, but there's no doubt that that's happening. As a result of that, there are a large number of companies, in all sectors, that are looking at their own businesses and trying to figure out how do I reduce my carbon footprint? How do I reduce my greenhouse emissions, including Citi itself? And certainly, hydrocarbon business is is a large emitter of CO2. So it's working on its own business in terms of how do I reduce it as an energy company, and what can I do to change my operations to help reduce that, including Exxon. Exxon obviously had a lot of pressure on them at their annual meeting to make some changes and to commit to certain things that they weren't prepared to commit to. We'll see if any of those pressures force them to make some changes. But they too have been working on, for quite some time, reductions and alteration to their business to lower the carbon emissions and decrease the intensity of the carbon emissions that they have. But throughout all this time, there have been a number of businesses that have been growing in importance in order to do that in the energy world. Renewables started 10, 15 years ago. It was wind and it was solar. Back in those days, because of lack of scale, the newness, the lack of evolution of the technology, it was cost prohibitive, but people were trying to slowly get into that business. People recognized- and back then there were government subsidies that would help offset some of that costs and there were tax credits and other things that would help, hopefully, push that business forward. As a new business growing forward, there were fits and starts. A lot of people made investments in the early days and lost a lot of money, but that business continued to evolve and evolve and today, renewables - both wind and solar - are very cost competitive now, with hydrocarbons, oil and gas, and obviously, with a lot less, significantly a lot less CO2 emissions and greenhouse gases, etc. There are other technologies, whether it be, obviously the evolution of electric vehicles and batteries that charge those, so batteries, energy storage, and fuel cells and hydrogen, and CO2 capture. And in the refining business, it's how do you create things without refining oil? Can you do it with other waste material? There's biofuels, there's renewable natural gas. There are so many different areas now being created and that were generated by entrepreneurs. We see companies- there's not a day that goes by that - and I literally mean this - that I don't find out about another company or two that are new in the business, that are seeking capital or seeking to find out if they can go public or want to hire an advisor to help them think through how I take my business forward. They may need private capital, they may be, later stage may be able to go public. There are literally, we've identified over 3,000 companies that call themselves clean energy transition or climate tech type firm.

Bret Kugelmass
Amazing, it's pretty amazing. Okay, then I'd love to hear how your organization thinks about the earlier stage companies, because when I think about a bank, I think, Okay, they don't take any risk. They're only gonna invest in projects that have been built 100 times the exact same way. But are you guys investigating- do you think the role of a bank actually might have to change over time to help support these more entrepreneurial projects?

Stephen Trauber
I think- look, there are various sources of capital that are out there. Right. You start with the friends and family round that often comes in place, where people are putting money in just to get somebody off the ground, but it quickly evolves into Angel Funds and Round A venture capital. Then there are- it's amazing how much venture capital there is out there today, across everything. I mean, it's been in tech and healthcare and biotech for a long time, but it's been feeding, it's truly been feeding clean energy transition, or climate tech or call it what you want, companies for years. Some of these companies are now in the age and in their life cycle where they're maybe just beyond DC and really thinking about the IPO or maybe they're just pre-IPO and they need that last late round that may be VC, but maybe there's a pre-IPO round that can be put in there. Banks are not in the VC world yet. Although, I will say we have a fund that does a little bit of that. that it's done for a variety of reasons. We want to be involved in in things that are good for the environment and we're looking at things, so we do have a fund that does some of that, Citi Ventures fund, but it's not in a large way. It's a very small element of a lot of things that we're doing. But what we are doing now is we're growing our private placement group. Our private placement group, we just hired a team from Bank of America - we already had a team here, but we supplemented that with a team from Bank of America - that will be in the business of raising capital, which is kind of and post-VC, but pre-IPO.

Stephen Trauber
A company comes to me - and we have several of those right now - they come to us and said, Early back in January, February, March, almost anything could get public. And they had, now we're saying, Guys, wait, you're not quite ready, you need a little bit more commercial contracts, you need to build that first plant that's really of scale. So you need another $100-150 million, that's where we can step in. We can work with them and place that $100-150 million with institutional investors who want to be in early because of the upside that they see in that businesses. Once those commercial contracts are in place, once that first plant's up, that valuation will lift dramatically, and then it will be ready to go public, and there are a lot of funds that want to get in earlier than that.

Bret Kugelmass
I want to hear about this.

Bret Kugelmass
This is a real problem that I've personally seen, both from my previous entrepreneurial background myself and kind of seeing this valley of capital raises, especially for hardware tech companies. It's super hard to get across, especially if it's physical infrastructure and you need to put together $100 million or something, it can be crazy. And so you're saying that you guys now come in and you're able to help put together the money for that. Now, my question for you is, is this still on a project basis, or are these investors that you're finding, is that in the company itself and it's just like filling the gap for like a growth stage company that needs to see revenue might not do?

Stephen Trauber
Its both, but increasingly, it's on the latter. It's the equity that comes into that company that needs to - and it may be structured equity in some form - that needs to bridge them to the IPO. But there are certainly, there are projects out there that are looking for project financing that have a proven technology, that have a great EC contractor, that had offtake agreements, that have supply, raw material supply, and they can raise debt financing. We're in that business as well, and increasingly, that business is growing, as you can imagine, with all these projects, but it's really both stages. It's the project finance, but it's also the corporate level equity, or structured equity. Sometimes it's a convert, sometimes it's straight equity, sometimes it's some other form of structured equity, but it's equity going out to the institutional investors, all the ones that we know, the ones I mentioned earlier,

Bret Kugelmass
And these institutional investors, how much education do you guys have to do to get them up to speed? Because to me, it seems like they're not used to investing in these higher risk companies. Let's say it's one of these new solar thermal laser things, or a new battery company or something, someone that's never built anything. Maybe the technology is proven on laboratory scale, but they've never built anything. Historically, it seems to me these companies have had a lot of trouble convincing the institutional investors to take a chance on them. Is that essentially what you guys do, you craft that story for them?

Stephen Trauber
That's effectively right. We try- and look, there are certainly some investors that are on the less risky, risk off side of that and want to see companies in a little bit later stage when that first facility has been built and is functioning. But there are some, because once you get to that phase, that that risk has been, it's been de-risked, right? And so all of a sudden, the returns go down. When you're willing to invest in something that there's still risk in it, higher risk, higher rewards, and you find there are institutions out there, both long institutional investors as well as hedge funds that are willing to bet on a proven management team, maybe they've done someplace else on a proven technology on something that may have had a small-scale facility and now you want to take it up, and you want to scale that up. That's where very large outsize returns can be generated and there are funds that are being created for that. It's not the entire fund of somebody's portfolio, but it is a part of a fund that people are willing to take some bets.

Bret Kugelmass
And let's get down to the numbers for a second. What types of returns are they looking for in order to bring on-board that higher level of risk? When I think of like traditional private equity, they're looking for 20% returns for something less risky than this. So if you're going more risky, are they looking for 30%? Or is it like 100%?

Stephen Trauber
I think it's 30 to 50 with a hope it's 100.

Bret Kugelmass
Yeah, as opposed to let's say in the venture capital model, which is way higher risk and way higher return. They're looking at like they want 20x returns on their money, but they know that one in 10 of the companies just don't pan out. Is there a way that you quantify risk? I know how you can quantify returns. Okay, it's easy, it's mathematical, but how do you quantify risk, especially when it comes to like a semi new technology?

Stephen Trauber
It's measured in different ways. You really need to look at all of the things I mentioned. You need to look at that technology. You need to look at other similar technologies that have been scaled up. You need to look at the management team. You need to look at the contractors that are building the facility, and assess how much risk you are and how much you're willing to risk that discounted cash flow, if you will, of achieving success. Is that 30% discounted cash flow discount rate, is that higher, and see what kind of ultimate returns you get. But each one of those areas, each one of the elements of getting a facility to scale, or technology commercial, has various elements of risk to it that all of which needs to be assessed.

Bret Kugelmass
And as part of what you guys do, is it that you know the different institutional players and because you've done deals with them before, you kind of do your own analysis ahead of time? You say, Okay, this firm is comfortable with this type of risk, but this one isn't. This one will play a little bit earlier, this one will play a little bit later. Is that knowledge that you guys bring to the table on day one? Or is that part of the process with every technology? You just got to go out there and talk to enough people to see what they think?

Stephen Trauber
No, look, there are very new technologies that we don't have that basis to make that decision, so we'll go out to a broader universe set. But there are some, there are some people that love EV batteries. There are some that love EVs. There are some that love hydrogen, are really focusing on hydrogen, and some that absolutely won't touch it. So there is some of that that allows you to be able to be more efficient, but the private placement process is a very challenging process. You do have to canvass a lot of people. What you're trying to do is go to the most likely suspects early, try to find somebody that is likely to say, Look, I really like this and I can be an anchor order. And oftentimes, when you find high quality institutional investors that are willing to go in early, you often get people that have confidence in them, because they made successful investments in these areas before, they know this well, that will come in behind them. And all of these companies, every institutional investor is learning the technology curve of all of these technologies and all these businesses. Everybody's working, some of them are going to work, some of them are not going to work, right? We know, by definition, there will be failures, just like there was in dot coms. This is, I like to liken clean energy as dot com 2.0. There are going to be winners and losers, and there's going to be some very big winners, and there's gonna be some losers. And it's those people that can understand the technologies and a lot of these technologies are going public through this background. The good news about being public, as opposed to being private in the VC world, the public entities, as an investor, you can get out to trades every single day. So if you don't like the progress they're making, if you're learning more and more about the technology versus maybe a competing technology, you can make those investment decisions every single day and exit. When you're in VC, you're illiquid, you're stuck, you're inside there. I like the fact that a lot of these newer technologies are public and that institutional investors can make these decisions on a daily basis.

Bret Kugelmass
When it comes to this private placement, is there- tell me, is it purely financial players that you're going out to, or are you able to look at a technology and say, Actually, it's not just institutional capital, but there might be some institutional knowledge that someone might be able to bring to the table as well. For instance, let's say that your new energy technology is able to produce higher temperatures, that's the whole thing, you're reflecting the solar, you're getting higher temperatures. Maybe it's a steel company that has some money, that's gonna be investing some money anyway, but they can also see the added advantage, because this can help drive efficiencies in their core business, too? Is that part of the strategy?

Stephen Trauber
You hit the nail on the head, and increasingly, because there have been so many of these opportunities and pipes associated with these DSPACS that the pipe market institutional investors are full, are very full and digesting a lot of the money they put to work already in excess of $50 billion and they just don't have the resources to keep up. These are coming in, like I told you, I get one or two a day. They're getting 10 or 20 a day from all the banks that are coming in asking them for capital, and they just don't have the resources to be able to process it. Increasingly, we're going out to strategics, what I call strategics. Those strategics may either have knowledge in the area that they can deliver, or they may have commercial contracts that they can deliver. For example, if I'm an EV company, wouldn't I love to use an EV and wouldn't I love to get Amazon or UPS or FedEx to be able to prototype my trucks and get them out there? Wouldn't I love for them to make an investment in my company? I mean, what a validation and what can we do to set up a commercial contract where I can deliver you 1,000 trucks and you can go out there. And so, increasingly, there are a lot of strategics. In fact, we did one - I don't know if it's announced, so I'm not going to name it - but there was a battery company and there was an energy company that made a nice investment into this battery company. It was announced either over the weekend or committed to just recently, because they want to move and diversify their business into this area. We've seen Baker Hughes do some of those. We've seen certainly Shell and BP and, increasingly, Exxon and Chevron make these sorts of investments where they can, well, it's more than just a financial investment. There are commercial contracts to it, there's something that can enhance their own business. Increasingly, being able to get capital from these large capital providers who have a lot of capital- and the cost of capital is a whole lot cheaper than the institutional cost of capital. They're looking for double digit kind of rates of return in the 12 to 15% sort of capital. Now, obviously, they'd like it to be better, since these are higher risk entities, but certainly they've got plenty of capital to be able to deploy into areas that they think could make a difference, either in their own business, or ultimately, something that can scale up and that can be a great financial investment.

Bret Kugelmass
What's the deal size that we're talking about here? What makes it worthwhile for these private placements or for your firm in general to get involved?

Stephen Trauber
For Citi, I would think $50 million would be on the small side. There are a lot of people in private placement firms that are doing 10, 20 $50 million type deals, that would be on the small side for us. But $50 to 250 is kind of I think the range that these things could be, 250 would be a sizable- I mean, we're doing PIPES, what we call pipes, private investments in public securities, and we're going in- earlier in the year, they're going to four or $500 million or more in some cases. Today's marketplace, because of the factors that I highlighted about it being a very congested market, having put out over $50 billion dollars of that capital already, these deals are typically much closer to the 150 to $250 million dollar range. But, with regards to strategic capital coming in, so that strategics are looking at putting anywhere from 10, could be three or 4 million, but often five or 10 million, up to maybe 50 million. 50 million would be a sizable investment in some of these. Sometimes a big company may put a lot more if it's something that they really have belief in. It would be easy for Exxon or Chevron or any of these companies to put a couple 100 million dollars if they truly believed, if it was a hydrogen technology, or a carbon capture technology that they really wanted to be in. But normally the middle of the fairway are typically in the 10 to $15 million sort of ranges.

Bret Kugelmass
Let's talk about your team and some of your internal processes. How much of what you guys do is reactive versus proactive? How much scouting do you do looking into where you think the future market is going to be five years from now?

Stephen Trauber
It's a great question, and it's why we formed the Clean Energy Transition group within Citi, which is the fourth leg of our stool under Natural Resources and Clean Energy Transition. A lot of those businesses were coming through the power group or the energy group, some of the chemical group, particularly start talking ag tech in some of these other areas. There was some industry overlap with industrials or technology if it was something in the micro grid that dealt with software and things like that. But our bankers are being reactive. There are a lot of these things, they're just they're coming in faster than we can actually plan for them. So we formed this group so that we could be much more proactive. Right now, all of a sudden, we're learning about these businesses when they're at VC firms. We are visiting, and we're building relationships with VC firms across the world. We're getting in, we're understanding from the VC firms, what are the most mature of your companies? What are the ones that are successful and are going to be looking for that post-VC capital or going public next, so that we can be in there early, we can be talking to those portfolio companies? We're trying to be much more proactive to those private companies. Obviously, there's been a number of companies that have gone public. Now there's a number of larger companies where, because we've built this group, we're now assigning coverage, direct day to day coverage, of those public companies that exist out there, but I said, there are 3,000 companies out there. We're not going to get to them all, but by using our network of relationships with VC firms and private equity firms, client referrals. We get a lot of client referrals with business. We're doing relationships we've been able to establish and say, Here are three other firms you need to go visit, because they're kind of in the same stage as us and we're getting out in front of them. We like to call the hunting stage, because we have to go out and literally hunt for these companies.

Bret Kugelmass
Yeah, that's the fun part. What are you looking for you when you meet with these firms? Are you looking to educate yourselves on technology? Are you looking to educate yourself on the business model? And what are you seeing? Let's say just throughout the last year, what surprised you most when you when you go out hunting?

Stephen Trauber
Number one is, so the answer to your first question is yes and yes. It's understanding the technologies and understanding where in their life cycle that technology is, understanding the business model - is it a lease model, is it a sale model? How does the model work? Who's your end customer, so everything about that technology. Where they are in that evolution? What's similar to it? Who do they compete with, who they see that's already out there ahead of them? Who do they see coming on to them? And really trying to understand that evolution and where they sit,. How much capital has been put into it? How much capital are they going to need? Oftentimes, they don't know how much capital. At the beginning of 2021 with the SPAC market open, you were able to fund the next five years of capital and, candidly, investors wanted you to take the capital risk off the table for them. They didn't want you to have to keep going back and hope that there was going to be a good capital markets. They wanted to put that capital upfront, so a lot of these companies were merging with banks that had three, four or $500 million of capital, raising it to two or $300 million, $400 million PIPE and all sudden sitting in their balance sheet was $800 million. And that was supposed to fund the ramp up and acceleration of that technology and the commercialization of that business, some of which didn't have revenues to '25, '26. That market's changed some since then.

Bret Kugelmass
Okay, that was the next thing I was gonna ask. What's the reaction so far to capital coming in that way? Are people still bullish on that strategy? What is- because I have heard, okay, this happened for a couple of years, now it's changing. What's driving the change? Is it just kind of more-

Stephen Trauber
I think there are a number of factors that changed. Number one, the number of opportunities that people have, so now you're getting to be a little bit more selective, number one, so you can take those companies that will maybe have a little bit less risk, a little bit more maturity to them and invest in those. Number two, there have been some real lessons learned in the business. Number three, there's been an evolution of technology, so technologies that were early stage and looked to be great, all of a sudden here comes to evolution round number two, round number three, and these things look to have a superior competitive advantage, so all of a sudden you'll learn that way. There have been some failures in the marketplace. What we try to tell all of our clients that are looking to go public, it's great to have these hockey stick projections and to say you're going to be able to ramp up in this hockey stick form, but the day you go public, your investors, your shareholders are going to expect you to meet these projections. So while you want to say you're going to ramp up a couple 100% in the first year and another 100% in the second year, etc, etc, you gotta meet those projections. And if you don't meet those projections, investors are very unforgiving. They are going to sell you and they're not going to come back. Our message to them is under promise and over deliver. You want to have a long term sustainable company, under promise and over deliver, and keep doing that on a sustained period, and your valuation will continue to grow very well. Institutional investors will gravitate towards you, because they know that you'll continue to perform.

Bret Kugelmass
And why does it have to be done in the public market? Why can't- because like, up until, let's say, three years ago, what I was hearing so much of was, companies are able to stay private longer than ever. Uber stayed private longer than ever. How come we can't marry the best of both worlds? You get access to institutional capital, but off the public markets and that way you can, you don't have that pressure?

Stephen Trauber
It's a trade off in terms of size of capital. There's a lot more capital in the public markets than there is in the private, although the private market continues to draw a lot of capital. More and more capital is flowing into VC, so there will be more available clearly. Number two, it's cost of capital. The cost of capital in the VC world is very expensive, versus the public markets, which is less expensive. And so people want to get out there and get it oftentimes as much as they can and be able to do it at the lowest cost they can. And that's why people will oftentimes, as soon as they can, try to start to move toward the debt side of the balance. Once they start to have revenues and profits, they don't want to keep selling equity. They want to sell a lower cost of capital, which is debt. They want to either be able to do that with the banks and through credit facilities and term loans, or through the institutional market. That's an evolution also that will take place later in one's life cycle.

Bret Kugelmass
What other areas - let's say clean energy transition just more broadly - what are you looking at, let's say five years from now - let's not talk about mechanisms like SPACs or PIPEs or anything like that. Let's talk about sectors and what's really going to be making a difference, where you see people's heads at in terms of what ESG really means? Where do you see the most growth happening let's say five years from now?

Stephen Trauber
I like to think that we are going to evolve both carbon capture and the hydrogen businesses into something that is cost effective. Today, not even close to being cost effective, but I would have said the same thing 10 to 15 years ago about renewable wind and solar. If we can continue to find ways to invest, at some point maybe there are even government incentives like there were for wind and solar to continue to be able to invest and make these a little bit more cost effective. I do think that there is a growing institutional market and, candidly, the retail investor that wants to see these technologies develop, so that we can move away from hydrocarbons, that we can have less CO2 and greenhouse emissions, and we're doing better things for the environment. That's why a lot of this capital is actually coming into the marketplace today. They want to earn a return for sure, but they also want to do something good for the environment at the same time. Sometimes there's a trade off between those two. And I think that those are the two areas we're going to see develop a lot over the next five years, and hopefully technology evolves, hopefully scale occurs, and then that the cost curve continues to come down, so that both those areas can be effective means of being able to generate energy in a cost effective means. Obviously, the whole issue on battery and battery storage and battery life, that's going to be critical. As things are moving more and more, we've seen the Biden administration really pushing forward hard on the EV thing. We're seeing that across the world, the push toward EV. And to have effective EV, you have to go backward, integrate all the way to the minerals. You need, depending upon what that mineral ultimately is, but lithium and manganese and cobalt, etc. and ultimately, maybe there will be other sorts of batteries that serve the world better and provide longer life, etc., but that's going to take real resources to develop. Those are the areas I think we're going to see investments for a long time to come.

Bret Kugelmass
Pretty interesting. Let me pick your brain on one other one that we spent a lot of time looking into, just because, on a first principles basis, if it's done right, it could be a game changer, and that's nuclear or advanced nuclear energy. Has your group looked at that or have you formed a thesis on that yet?

Stephen Trauber
I agree with you. I think there's obviously a negative perception around nuclear, historically, right? And there are major advances in nuclear technology that ought to make energy derived from nuclear a lot safer and a lot lower cost, but that needs to continue to get out into the public forum. We need public acceptance of that. That's not there yet, in any form that I can see, but we do believe that nuclear has to be part of the equation to replace hydrocarbons over the long term, and we think it will be, but we're gonna have to continue to evolve that technology as well and get over the negative public perception of nuclear, because there is a very large negative perception.

Bret Kugelmass
Yeah, I'm on the same page as you there. Okay, well we're about running out of time. This has been an amazing wide-ranging conversation, but I want to give you the floor for any last point that you want to get across to our audience.

Stephen Trauber
Only thing I would say is embrace clean energy transition. Embrace reduction of carbon emissions, it's happening. The Paris accord is real. And I think you're gonna continue to see this being a topic du jour in news agencies. Get familiar with it, because it is going to be something that's going to be water cooler talk. It's going to be talked at cocktail parties, so having a familiarity around it is important. Think about the investment. If you're a personal investor, think about the opportunities you might have in early stage technologies. We're going to need a lot of technologies. There are going to be a lot. There are, like I said, there are 3,000 companies. We didn't even talk about ag tech, which may be one of the largest. There are over 1,000 companies in agricultural technology, helping derive what we're doing from a food and nutritional perspective. I mean, it's very large and wide-sweeping, and I really do think it's going to be one of the prevailing themes that is talked about on a global basis, repeatedly, for the next several decades. We didn't mention that it's over a trillion dollars going into it today. It's expected to be five to 6 trillion in just less than five years. That is a lot of capital going into clean energy technologies and it's something that, it's going to take something like that to evolve the world. I mean, it involves a lot. Everything we do - turning on your lights, the clothes you wear, getting in your cars - everything we do from the minute we wake up till the time we go to sleep involves some sort of form of energy, which is more likely than not today hydrocarbon. That is what the world is trying to replace. We are not going to replace hydrocarbons. It'll just become a smaller percentage of what we do and hopefully the hydrocarbons we produce will be produced with lower carbon emissions. That's the holy grail, or being able to capture those carbons that are emitted to carbon capture and sequestration. And that's the holy grail, but I do think that it's gonna be a combination of all of that and it's going to be pretty exciting as we continue to move through this, what we call, the clean energy transition.

Bret Kugelmass
Stephen Trauber, everybody.

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