Greenbacker uses investor capital to affect a measurable impact on the climate – a rarity in the “sustainable investing” industry, which generally prioritizes marketing over outcomes.
Investing in a Sustainable World
Greenbacker and their flagship fund (GREC) invest in clean energy. The firm sources investments privately, meaning the companies they support get to use those investments for working capital and product development.
In this way, Greenbacker actually injects new capital into the sustainable economy, setting GREC apart from the typical “green” fund that simply bets on companies and sectors in the abstract.
Despite the broader “ESG investing” landscape being on track to grow into a $50 trillion market by 2025, the Wall Street Journal recently noted that genuine impact investing opportunities are, sadly, quite rare. That’s because “ESG” only considers environmental, social, and governance risks to financial performance, and ignores how investment outcomes impact our carbon footprint.
Don’t believe us? Take it from the CEO of the world’s most prominent ESG rating agency.
Greenbacker doesn’t abuse this misconception. Instead, it’s refreshingly built to deploy capital in ways that measurably reduce our society’s climate footprint.
GREC Provides an Antidote to Greenwashing
Most funds’ claims to “green” bona fides don’t go much deeper than their branding strategies.
Even funds with truly sustainable portfolio holdings generally don’t impact the environment.
Mutual funds and ETFs, for example, just swap stocks and bonds with other investors. Yes, the funds can invest in securities issued by, say, SunPower or Enphase, but SunPower and Enphase can’t use those investment dollars for sustainable initiatives. The dollars paid to acquire those securities go to the investor that sold the shares, not to the company.
A theoretical argument is occasionally made that the demand for investing in those securities can lower the cost of capital for those firms, but that is a tertiary point with de minims impact at best – there is little to no credible data linking the “cost of capital argument” to greenhouse emissions, and we don’t believe in giving sustainable investment awards to ESG funds who can’t report on impact.
If a fund somehow does impact the environment (see: some “green bonds”), investors pay for it through poorer investment performance or higher fees – popularly referred to as paying a “greenium.”
Instead, Greenbacker puts capital to work in private sustainable infrastructure projects that create a true impact on our carbon footprint. GREC offers access to individual investors – not just institutions and the ultra-wealthy, who previously had near-exclusive claims to these private equity-type investments.
Does this make Greenbacker’s GREC the best way to invest for impact? Perhaps for some, but anyone considering an investment should read the fine print first.
While Greenbacker is to be applauded for lowering the investment barriers raised by typical private equity firms (think million-dollar upfront minimum investments and multi-year cash lockups), their GREC still requires verification of a $70,000 annual income and a $70,000 net worth, or a net worth of $250,000. There are stipulations specific to thirteen different states as well.
The minimum initial investment for GREC is $2,000 (or $2,500 in New York). It’s certainly more “democratized” than private equity, but not quite democratic.
GREC also offers 8 share classes, and depending on the share class, GREC investors can pay up to 9.75% (7% upfront sales load + 2.75% dealer manager fee) just to start investing in their fund – even before the rest of the fee structure starts to apply.
Restricting who’s allowed to invest and changing fee structures based on share class leaves much to be desired in terms of democratization.
This is especially true considering other genuine impact funds that have no minimum income or net worth requirements, allow accounts to be opened with as little as $500, and do not grant preferential treatment to larger investors.
GREC invests in credit – but they also finance and operate solar projects to collect revenue from power sales, and make equity investments in private companies. They’re concentrated on a smaller pool of projects and dependent on a smaller group of borrowers and power customers. Their capital can take a long time to deploy, and their equity investments sacrifice some current income in hopes of achieving longer-term capital appreciation.
These arrangements can be expensive – and those expenses are passed through to GREC’s investors.
If investors are attracted to the current income component of the fund’s investment objective, then a pure-play focus on private credit would offer a more straightforward path to success.
GREC’s fund structure requires that investors file the onerous Schedule K-1 for tax reporting. If you haven’t dealt with a K-1 yourself, well, let’s just say most people who file K-1s hire professionals to deal with them.
Alternatively, there are investment options that report on the Form 1099-DIV. It’s simple and straightforward: you can file it on TurboTax Deluxe in 5 minutes, for under 40 bucks (we have no affiliation with TurboTax).
GREC’s manager Greenbacker Capital and its affiliates charge up to 9.75% just to start investing. Once you’re in, the manager collects 100% of net investment income between 6.00% and 12.5% of net assets, and 20% of any additional income beyond that.
That’s not all – those fees are in addition to the fund’s net expense ratio, which sits between 2.90% and 3.48% depending on share class and AUM. That expense ratio considers operational expenses (including fees to the management team) and does not include those upfront sales charges.
GREC’s fee structure is common but hardly the rule for funds that offer exposure to private credit. Especially with inflation approaching 8% as of February 2022, investors should consider investment products that allow them to keep more of their returns, and try to avoid upfront sales loads, commissions, and performance fees.
GREC’s current distribution yield is a seemingly respectable 6.57%, but for the quarter ending 9/30/2021 100% of the distribution was return of principal.
Return of principal (aka “return of capital”) isn’t necessarily a bad thing, but it means investors are just getting their money back – and possibly taking on unexpected tax liability – rather than collecting investment income or realizing long-term capital gains.
It’s important to look past the distribution rate on a fund’s website, understand the source of distributions, and consider whether it aligns with your investment goals.
Net Asset Value
Net asset value per share – or “NAV,” for short – determines the price at which investors buy shares from each fund, and subsequently redeem them to realize a gain or loss.
GREC declares NAV quarterly via its SEC filings and uses models to extrapolate a monthly share value.
Those gaps can lead to end-of-quarter surprises compared to a fund that declares NAV daily. Each investor should decide how many surprises they can tolerate in an income investment designed for low market correlation.
Subscriptions and Account Access
Greenbacker requires prospective investors to find GREC’s latest prospectus amid nearly 300 other documents it has filed with the SEC (searching “prospectus” leaves 38 results to parse), scroll through 125 pages of fund materials, parse 31 pages’ worth of investor instructions and forms to find the one that applies to the state they live in and the product they want to invest in, print it out, use a pen to complete it, scan and fax or physically mail it to the fund’s administrator, find the right location of either a transfer agent or custodian that works with Greenbacker, and either wire or physically mail a check depending on several pages’ worth of guidelines.
In the words of GREC’s prospectus, “Please follow these instructions carefully. Failure to do so could result in the rejection of your subscription.”
This hardly represents the “digital transformation” so commonly mentioned in financial marketing materials. In 2022, investors can reasonably demand a streamlined digital onboarding experience that reflects a fund’s appreciation for those who trust it with their capital.
Greenbacker does seek to do well by doing good, leveraging capital with the intention of creating positive outcomes for both the planet and investors alike.
However, in terms of fees, accessibility, transparency, and convenience, there are more deliberate investor-friendly options for those who want to earn yield by investing in sustainable initiatives over the long term.
In order to attract enough capital to impact climate change, impact investment products need to be at least as worthwhile as vanilla funds with similar investment objectives. We hope this analysis provides a useful framework for anyone looking to invest for real impact.