Letter #257: Reuben Munger (2024)
Baupost Partner & Vision Ridge Founder | The Outlook for EV Fleets
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Reuben Munger is the Founder and Managing Partner of Vision Ridge Partners. Previously, he was the CEO of Bright Automotive. Before founding Vision Ridge, Reuben was a Partner at Baupost. Reuben started his career as an investment banker with James D. Wolfensohn.
Today’s letter is the transcript of an interview with Reuben Munger on the outlook for EV Fleets. In this interview, Reuben introduces his firm Vision Ridge, where he is finding the most attractive investment opportunities for EV fleets in 2024, what are some of the biggest challenges to scaling EV fleet infrastructure and how those challenges are being addressed, if he is seeing new interests from institutions investing in the EV fleet market and if investors are more open to the sector than previously. He then shares what he thinks the long term impacts the IRA will have on investment activity in EV sector buildout, if the pace and scale of investments will change in the future, what EV opportunities he’s finding in Europe, his investment in Highland Electric, the role private sector partnerships play in the development and maintenance of EV fleets, what advancements he foresees in the EV fleet, charging technology market in the next 5-10 years, and closes with his outlook for EV fleets, EV charging, and the industry at large.
I hope you enjoy this conversation as much as I did! This was a particularly fun interview because the interview is focused on a singular sector (EV Fleets) rather than a wide-ranging, high-level, philosophical conversation sprinkled with select anecdotes.
[Transcript and any errors are mine.]
Related Resources:
Baupost Group
Sustainability Investors
Host: So this is Kali Persall, Editor of Institutional Investing in Infrastructure. Joining me is Reuben Munger of Vision Ridge Partners, and we'll be talking about opportunities in the electric vehicle industry, particularly in regard to EV fleets. Reuben, can you give us a quick introduction, just share a little bit about your role at Vision Ridge and yourself.
Reuben Munger: It's great to be here. As you said, I'm Reuben Munger. I'm the Founder and Managing Partner at Vision Ridge. We've been managing institutional capital in sustainable real assets for over a decade, and manage over $3bn, looking at energy, transportation, agriculture--so really, a broad based look at things. We have a North American bias but look at situations globally, and try to build the infrastructure of the future.
Host: Fantastic. So, given your experience at Vision Ridge, where are you finding the most attractive investment opportunities for EV fleets today?
Reuben Munger: We've been looking at EV fleets in one way or another since the firm's founding in 2008, and invested in our first EV fleet in 2012. The opportunity set is growing rapidly, and you're seeing--I think our most interesting case is in Highland Electric Fleets, which is the leader in electric school busses here in North America. But what you have is you have battery costs that are back on a decline curve. So the cost of electric vehicles is going down. Oil and Gas prices are relatively high. And so the sort of opportunity for savings is really there, while obviously having lower emissions taking advantage of some of the incentives from from the IRA and infrastructure bill. So you have sort of a mix of Economic and Policy conditions sort of coinciding to where this is sort of the strongest point of fleet acceleration in the decade plus we've been looking at it.
Host: Great. So what are you seeing as some of the biggest challenges to scaling EV fleet infrastructure? And how are these challenges being addressed?
Reuben Munger: One of the keys to almost all things electric these days has been various pieces of supply chain. The EV industry was slowed down as battery costs spiked during COVID. We've seen that come back down pretty quickly. Their batteries are benefiting from both oversupply in China as well as a lot of manufacturing capacity being added here in North America on the back of the Inflation Reduction Act. So the supply side on the vehicles has been accelerating. Depending on the category, some products are still harder to get, or volumes need to pick up. And so you see that in heavy duty, where people are waiting for prices to come down a bit and manufacturers to lean in. School busses is an example that's really sort of passed by and enough volume is flowing through the system that I think the next step is for manufacturers to look a little bit harder at their margins. But that's really moving okay. The next set of issues, though, are really around transformers and kind of on site switch gear. So the lead times and just basic electrical equipment is quite long. And so as you think about when and how you can deploy, you have to think way ahead. Then after the equipment, often the distribution grid is also constrained. So we see a lot of opportunity and interconnection for large power, and you'll hear about that for connecting a big solar project. Well, the same issue is in the opposite where, if you need to bring real power to a site in a community, that can take, now, years, depending on where you are. And so the process is just much harder than buying a new vehicle. And so you need to be thoughtful and bring foresight to the transition. And therefore it'll take a couple of years to kind of work through a system. And that's why you're seeing acceleration now on things that happened maybe last year. And as businesses look to grow--we're thinking about the 2025 school year as an example, so that's not this September, but it's next September--is where the business is working, and that's the kind of time frames you need to operate on for system change.
Host: Yeah, sure. So you talked a bit about growth, and some of those opportunities. Are you seeing new interests coming from institutions investing in the EV fleet market? And in your opinion, are investors more open to the sector today than previously?
Reuben Munger: So, the investors and institutional infrastructure investors have really taken to the renewable transition. However, there's sort of almost a saturation in some areas where pipelines are full of opportunities to invest in solar or what have you. And I think EV fleets, when done well, are that kind of next area of opportunity. And so there's a lot of interest. There's a lot of learning going on. But it isn't a place where 20 people have done it. It's more a question of when and how are people going to come to a conversation. When we first invested in Norwegian ferries sticking on electric transportation, we were sort of one of the first global investors to go to Norway and buy these ferries that were going electric. And now all four of the major players are owned by global infrastructure investors. So it's that transition that takes place.
Host: No, that's good to hear. And you talked about the IRA earlier, that's driving a lot of interest in the space. It's carried a number of tax credits for EV charging and related infrastructure. So in your view, what long term impacts will the IRA have on investment activity in EV sector build out? And do you think the pace and scale of investments will change in the future?
Reuben Munger: So, the IRA has brought a couple of different things to the EV transition. I mentioned the battery factories as an example. And so you're increasing capacity, which is going to then drive costs, which is a critical function, as well as just really good products. When good products are in the market, that tends to drive penetration. On the charging side, and then on the other parts of the tax credit, the market is really starting to just emerge, where the whole tax equity market is thinking about the implications of transferability and how that works in simple things like solar and wind. And so the EV tax credit market for charging equipment is evolving, but those are sort of smaller dollar, slightly more complicated transactions. And then on the on the vehicle side--so there's also a heavy duty tax credit as an example, that's non transferable. And so the monetization of that is more complex, and it's a case where that's a $40,000 tax credit on a $300,000 vehicle versus in solar, that's a 35 or 40% ITC. As the percent of the total, it's much, much higher. And so I think people are working through the issues in this change, and at the same time, the market's growing, and so it's valuable. It's very helpful. We've spent a lot of time on how you can optimize your cost of capital using these tax credits, but they are complicated, and when you step back, I think as everyone works through, How does it work in solar? Okay, great. Got that done. How's it gonna work in wind? Okay, that's done. Boom. EV charging is next, and then you get all the way to the vehicles. But inevitably, it's finding more optimized cost of financing. And that's key to, effectively, this transition of lower cost of ownership opportunities but that have higher upfront costs than a diesel bus or a diesel truck or what have you. So that transition takes time. And then as the financing mechanisms are sorted out, you'll then see acceleration pick up, because people understand the buying behavior and contracts and the way that works. And that's happened in these other sectors already.
Host: Yeah, that's a good way to look at it. And so, the IRA is, of course, based in the US. But I understand Vision Ridge recently opened an office in London. So I'm curious what EV opportunities you're finding in Europe.
Reuben Munger: It's interesting. When the IRA was announced, there was a lot of talk about how that was US protectionism. But what had actually already happened was, effectively, Europe had had its own IRA. But the issue was that each country was doing it a little bit differently. And so in aggregate, it was also incredibly significant commitment by the Europeans towards energy transition and incentives. From an EV perspective, some of the pieces of the market are very similar, and others are different. So you have different patterns of transport. You certainly don't have the long haul class eight issues that we have where we have a business that's looking at how do you get an electric vehicle from from the Port of Long Beach to El Paso, Texas? That's a long way in a European context. And so there are a lot of opportunities. The grid is different. The grid constraints, though, are similar. How do you bring a lot of charging to a single location? How do you electrify and meet emissions needs? How do you move goods most efficiently? So there's been real progress in electric busses in England, as an example. And we're looking at other situations that we think could accelerate there in Europe under just a different set of incentive regimes. But that's sort of consistent with like, Why did we open in London? Is there's a ton of echoing opportunities across the Atlantic both ways.
Host: So you mentioned electric busses, and on that topic, I know Vision Ridge has invested in Highland Electric. Can you just tell me a little bit about that relationship and share your views on the role private sector partnerships play in the development and maintenance of EV fleets?
Reuben Munger: Absolutely. I think Highland is a critical partner to all of their school district customers. In the school district market, there's a group of schools who've chosen to outsource all of the operations of their busses, and that's drivers and everything else. And there are companies that do that. But 70% of the market operates their own bus fleet. And yet this path to electrification means you need to think about grants, you need to think about new technology, you need to think about charging systems, you need to work with your utility, you need to work with tax equity, and on and on and on. And so what seems like a small change that is actually bringing better emissions lower, better air quality for kids, and quieter or smoother rides--it's just not that simple. And so a group like Highland is able to take the expertise of being the largest vehicle to grid operator in any number of utility markets, and capture that as an opportunity for the school district, and balance the cost over a 10 year contract, and deliver kind of the quality, using software systems and other things to make sure vehicles are charged. And there's just a stack of things in the transition that require both expertise and capital to balance to make it sort of as good as it can be. School busses are down sometimes. If the door breaks, the door breaks. But the charging side of it, that's different. Those are the risks that a place like Highland takes on the opportunity, manages it, and makes it as seamless as it can be for a fleet operator who has to make sure that they have the drivers to get the busses out and get the kids to school on time. They have a stack of things that are important to them. And so it's where that public private partnership is really valuable, because you can scale that learning and scale the manufacturer engagement, and scale the technology choices and all of those things across thousands of busses instead of any given fleet of a hundred busses.
Host: It's clear the EV charging industry is multi faceted, and there's a lot of stakeholders involved, and it seems poised for a lot of development. So with that in mind, what advancements do you foresee in EV fleet, in charging technology in the next, say, 5-10 years.
Reuben Munger: So I think you have a couple of key things. First is that lithium driven battery cost curve. It had been on an important decline curve for over a decade. It was interrupted with COVID briefly, and it's back on the decline curve. And that's sort of fundamentally important to the cost equation. And so it's kind of at a price that makes economic sense. You then also have to think about how big are the batteries? You can kind of pick energy density, cost--so size, and range, And those things intersect and let you get better and better product over the next sort of five years. And then it's how fast can you charge? We used to own EVgo. When we bought EVgo, the fastest charger was 50 kilowatts, but the fastest charge that any EV could take was 30. And now, people are charging at 10 times that speed. But importantly, for things like heavy duty, a one megawatt standard is coming out. So you're going to go from 50 kilowatts all the way up to a megawatt--and that's 20x faster in terms of charge rate. And so that's really, really important. Just like when we bought ferries in Norway, you were even bigger than that. And sometimes we had five megawatt charging. And so there's how does the grid deal with it? But that speed changes the kind of the current issues that people look at it saying, Oh, this doesn't work for this use case. Well, in three years, it may work very well. And so how do you look at that, and how do you plan for the future in a way that adapts? Things that are just incrementally getting better? You're not requiring some new magic technology, you're just looking at the roadmaps of what's happening on charge speed, what's happening on battery costs. And therefore, what does that do for a number of both commercial and other use cases that could quickly become more and more economic. And that then stacks on itself and scales.
Host: Yeah. So we covered a lot today, from opportunities to challenges, the IRA and some opportunities in Europe as well. Do you have any final thoughts, Reuben, to leave off with regarding your outlook for EV fleets, or EV charging, or the industry at large?
Reuben Munger: I think it's interesting that the macro conversation often gets distracted by particularly bad, light duty--meaning passenger vehicle sales at a few specific manufacturers. And that starts to drive the narrative. And yet, when you look at both emissions dollars and sort of scale of change, a lot's happening in some of the larger vehicle categories. A lot's happening in the underlying batteries. And so when you start to put together the pieces, the world can still look quite different three to five years from now. And that's what we think of as as investors--what you're doing today is wonderful, but what's going to happen in three or three to five years where, for us, a very large pool of capital can come in and take on a project that we've built from--the first--take Highland--the first 300 vehicle contract--to a company that's managing a few thousand vehicles but is deploying 3000-4000 vehicles per year. That's an opportunity for someone else to own a business like that, but those changes are stacking up and compounding. And we see that across a number of verticals. And some of them are right at the tipping point. We have a new investment in electrified fleets as well that we made recently, and are looking at more things, whether they're in Europe or here, just because that opportunity set is coming, and it keeps coming, and then just takes a couple of years to scale. So it's a pretty exciting time.
Host: Great. Well, that's a good message to leave off with, and thanks so much for sharing your thoughts.
Reuben Munger: Absolutely. It's been great to be here. Thanks so much.
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