Cloverlay wins with wildfire-fighting airplanes

Cloverlay, a $1.3 billion asset manager with a successful niche in esoteric strategies, including investing in airplanes that fight wildfires, is attracting pension funds and other institutions looking for less-correlated portfolio holdings.

One of Cloverlay's successes is wildfire mitigation. Amid volatile weather patterns, the firm has invested in a fleet of planes that douse wildfires around the U.S. and other countries.

Cloverlay funds aim to return 15% annually and offer institutions a point of entry for investments less correlated to stocks and bonds. The manager is keen on small, inefficient transactions outside the scope of traditional private equity.

"There's no Sharpe ratio for what we do," said Jeffery N. Collins, managing partner. "Everything we invest in is very niche positions, but on a portfolio-wide basis it's independent of markets ripping or dropping. It's a slow steady walk upward, instead of being whipsawed by public marks."

The $14.9 billion New Mexico Educational Retirement Board, Santa Fe, invested $150 million in 2019 in a Cloverlay co-investment separately managed account and an additional $150 million the next year. The joint boards of the Fresno (Calif.) City Employees Retirement System and Fire and Police Retirement System, which oversee $3.6 billion, invested $35 million in Cloverlay Fund III last year. About 60% of Cloverlay's investors are pension funds, and another 30% are family offices and advisers.Mr. Collins, Cory Pulfrey and Christopher Rodzewicz founded the Conshohocken, Pa.-based firm in 2015. Today, partners Kendra Corbett and Mr. Collins are running the investment program. Mr. Pulfrey is a partner on the investment team who, prior to co-founding Cloverlay, was the head of 180-person, $35 billion division at Morgan Stanley Investment Management, and head of private equity at Weyerhauser's corporate pension fund.

Wildfire suppression made money in 2022, despite U.S. economic headwinds.

Mr. Collins calls the sector "cycle agnostic," as climate change fuels the business and there are "more and more fires every year."

Over 30 years, he said, wildfires in the U.S. increased at a compound annual growth rate of roughly 6%; the number of acres burned rose from 5 million in 1990 to around 10 million in 2020. Annual spending to fight wildfires grew to $9.3 billion in 2021 from $5.4 billion in 2014, according to the most recent data from the Congressional Research Service and National Interagency Fire Center.

Last year, for instance, "Alaska had a terrible spring fire season in 2022, whereas, California and Arizona had relatively low activity. We can send planes anywhere, even to Australia or Latin America," Mr. Collins said.How does Cloverlay find companies fighting wildfires that need capital?

"It's art and experience," he said. "We've been investors in aviation. Through that we have a sense of different airplane types, and how that ecosystem functions. We look for cracks that haven't attracted a quantum of capital that's competitive. Through those relationships, about four or five years ago, we got into the wildfire space. Through our networks, we honed it down to what we thought was most interesting." Various federal or state agencies, such as the California Department of Forestry and Fire Protection, pay for these airplane fleets.

Cloverlay usually invests as part of a majority equity group owner.

"We have found great success by traveling in small packs with like-minded, nimble investors. Very few show up in all our segments. But when you share notes over a period of years and they do the same, you get invited. We work with co-investors, such as a family office, or endowments," said Mr. Collins.Typical investment totals $15 million to $50 million.

Sovereign wealth funds, pension funds and endowments are examining less-correlated assets against the backdrop of global recessionary pressures and volatile global financial markets.

Saudi Arabia's $620 billion Public Investment Fund expressed interest in investments in media and entertainment, such as Liberty Media's Formula One racing and Vince McMahon's WWE wrestling empire. The sovereign wealth fund already invested in LIV Golf and English soccer team Newcastle United.

That's a trend helping Cloverlay, which has other investments including a single-origin, certified organic cacao farm in Colombia; Federal Communications Commission spectrum licenses; and construction of cold storage facilities in major U.S. supply chain hubs.

"Very few greenfield cold storage facilities are being built," he said.

The firm is also branching out into Broadway theater rights and has been researching the Broadway/theater ecosystem for almost five years. Its investment in the Encore Platform makes money though intellectual property and live performance, Mr. Collins said. The Encore Platform controls exclusive post-Broadway and West End touring rights for a slate of some the most popular shows, such as "Phantom of the Opera: Singapore."

Encore physically produces each show and then participates in the complex revenue waterfall structure for each cycle of each title across regions. The catalog includes dozens of touring rights.

While big names such as BlackRock and Goldman Sachs invest large amounts in entertainment names such as Macro, Cloverlay seeks out the smaller deals.

"In music publishing and live events, there are a handful of names with $1 billion in dry powder. We see the other 75 groups that are more nimble or narrowly focused," Mr. Collins said.