Kyle Bass Beefs Up Property Bets Targeting Scarce Resources
(Bloomberg) -- Kyle Bass is spending much of his time these days on a very specific corner of the property market.
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Over the past three years, the hedge fund veteran has been buying up land that holds scarce resources and environmentally fragile habitats. In that period, Conservation Equity Management — the private equity firm through which Bass makes the purchases — has allocated over $125 million to such deals. CEM says it’s targeting returns in the “mid-high teens” based on rising property values and money made selling environmental credits.
Now, Bass says there’s enough external investor demand to launch a second venture under the same strategy, only this time he says it will be bigger.
“We’re focusing on mitigating or offsetting physical impacts on the environment,” Bass said in a video interview from his home in Dallas. “And we’re going to make a pretty penny in doing so.”
For Bass, who shot to fame shorting mortgage debt ahead of the global financial crisis of 2008, the investments get him a foothold in a market that so far remains a highly theoretical proposition for most investors, namely the financialization of biodiversity. Covering everything from soil contamination to wetlands management and even insect populations, it’s being billed as the next big frontier in environmental investing.
“We’re bringing the capital markets in to help solve a complex environmental and societal problem,” Bass said. “If we can do that at scale, that’s the holy grail.”
Environmentalists have long argued that addressing climate change — a theme that dominates green investing — can’t be done without protecting biodiversity. A hotter planet means crucial resources like clean water are increasingly under threat, while large swaths of flora and fauna that are essential to human health are at risk of extinction.
Bass has teamed up with veteran forester and conservationist, Terry Anderson, to figure out how best to create and protect habitats for endangered species on the property he buys, and to revive freshwater resources like wetlands and streams.
CEM’s purchases include a 20,000-acre ranch in Texas, which hosts migrations of the threatened monarch butterfly, and Fern Cave, which is home to one of the country’s last remaining gray bat populations. There’s also Chocolate Bay, a 5,400-acre parcel that houses the endangered Eastern Black Rail bird, which, once permitted, will be one of the largest wetland mitigation banks on the Texas Gulf Coast.
Aside from making money on the rising value of the real estate itself, improvements to the environmental quality of the land are key to generating returns. Those improvements are then measured using a government metric, and packaged into tradable units that can be bought by companies required by law to compensate for their environmental impact.
Such mitigation banking credits, as they’re called, vary hugely in price depending on factors such as type, location and the local market. In Iowa, a credit can go for anything from $35 to $105,000 a piece, according to Snyder & Associates, an engineering, planning and design firm. In Florida, meanwhile, Mitigation Banking Inc. has sold credits for around $500,000, Victoria Bruce, the company’s chief executive, told Bloomberg.
“We’re charging the impactors dearly for their impacts,” Bass said. “And we’re going to get net gains on what’s being impacted.”
Additionally, Bass says he’ll generate revenue from selling the land’s timber and water resources. Where the geology is right, he says he also might charge companies to store captured carbon dioxide underground.
“You’re going to see tens of billions of dollars spent” in these markets over the next decade, he said.
His private equity firm has no intention of purchasing land outside the US. And even within America, Bass’s focus is on areas he knows best, namely Florida, Tennessee and Texas, where he expects population growth to strain access to water and land, with the lack of such resources becoming a bottleneck to economic growth.
Conservation finance has traditionally been the domain of governments and philanthropists. In the few existing mitigation banking markets — such as those in the US and England — specialist intermediaries might also get involved. But the lack of mainstream biodiversity investors is emerging as a problem for governments.
Back in 2022, almost 200 nations pledged to mobilize a combined $200 billion a year toward biodiversity protection, a milestone that is unlikely to be reached if private investors don’t get involved. Governments are due to hold their first meeting since that agreement was reached, when the United Nations convenes its biennial biodiversity summit in Colombia in October.
If nature collapses, then “the whole of society will collapse,” Maria Susana Muhamad Gonzalez, Colombia’s environment minister and the president of the UN biodiversity summit, known as COP16, said back in May. That’s why those investing in the energy transition must take biodiversity “into account,” she said.
Meanwhile, some question whether the finance industry has the right incentive structures to meet the moment.
“If revenue becomes the main or sole focus, then ecological aspects can fall to the side,” said Sebastian Theis, a postdoctoral researcher at the University of Toronto. Private capital is welcome, but balancing returns and environmental impact will be key in order to “prevent the rush for returns,” he said.
For now, there are very few financial products dedicated to biodiversity. Among those that have gained traction are so-called debt-for-nature swaps, which allow governments to refinance existing debt at favorable rates and then put the savings toward conservation. Countries that have turned to debt-for-nature swaps include Belize and Gabon, with deals focused on marine protection. There’s also a nascent international market for biodiversity credits, which allow buyers to offset the damage their operations do to the environment by investing in conservation elsewhere.
But such initiatives are far from streamlined.
“It’s unscripted, and that’s why it’s so small,” Bass said. “If and when someone sets a proper architecture for biodiversity, and sovereigns begin to adopt an architecture and regulate it, I think you can have real markets.”
--With assistance from Nishant Kumar.
(Adds details of deals in ninth paragraph.)
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