By: David Barrosse, Capstone CEO and Founder
January 22, 2023 – In 2022, Capstone conducted over 100 projects for corporate and investor clients in which we did three basic things: predict policy, quantify impact, and create strategy. In an earlier commentary, I wrote about the methodologies that Capstone employs to ensure that our predictions are as accurate as they can be. Recently, we have had a significant amount of success for our clients in making tough predictions. In perhaps one of the most consequential predictions of 2022, we correctly predicted that the Inflation Reduction Act (IRA) would pass. What’s more, we made this prediction early in 2022 and continued to guide clients to the high likelihood of it passing even through the darkest days of the bill’s negotiation.
Although we are proud of the systems we have put in place to improve our predictive capabilities, the willingness to make falsifiable predictions is not what makes us unique. There are many firms that, often with great fanfare, publish predictions on trends and coming risks. These publications—often in the form of flashy listicles—are designed to impress, not assist clients in creating strategy.
I think what makes Capstone unique is that we combine predictions about the future policy landscape with detailed analysis of what that future landscape will mean to specific businesses and sectors. In our terms, we quantify impact. Since more than half of our staff are experienced in investment analysis and financial modelling, we are able to tell clients how changes in laws and regulations will impact revenue and profit of the companies we are analyzing. This allows our clients to see that some changes in government policy are immaterial to their strategy, but other changes are potential game-changers.
One example is the impact of the IRA to the production of green hydrogen. In a note written on October 13, 2022, Capstone’s Josh Freeman wrote about the impact of the hydrogen production tax credit (PTC) contained in the IRA. In this note, Josh analyzes the generous nature of the direct pay tax credit. However, Josh goes further to model how other pre-existing renewable fuel subsidy programs can stack on top of the new hydrogen PTC. The California low carbon fuel standard (LCFS) program and the federal renewable fuel standard (RFS) will, under the right conditions, also be available for producers of hydrogen. We estimate the combination of these subsidies to cover 40% of the typical project’s cost. As many of these subsidies are “direct pay” simply for producing green hydrogen, we believe the result will be a boom in production. Josh points out that this will be particularly positive for producers of hydrogen production equipment (e.g., catalyzers) and those who benefit from cheap and plentiful hydrogen (e.g., hydrogen-powered heavy vehicles).
Another example of how we quantify the impact of policy on sectors can be seen in our work focused on California’s attempts to regulate the kidney dialysis industry. Capstone’s Grace Totman has been analyzing dialysis reimbursement policy for several years. In a September 1, 2022 note, she quantifies the specific impacts of a California law designed to prevent the industry from assisting patients in procuring private health insurance. In the note, Grace calculates the specific revenue impact of new California law on each of the two major companies operating in the dialysis space. She goes on to predict that the industry will be successful in its legal challenge of the law, but clients are still able to create strategies knowing the specific downside of the new policy.
There are many more examples of deeper-dive projects that Capstone conducted for corporate clients over the course of several months. One of our project teams quantified the impact of COVID funding on IT spending in twenty specific states. Another of our teams predicted the passage of the Infrastructure Investment and Jobs Act and then went on to quantify exactly which state and local infrastructure projects would be catalyzed by the new bill. This project was particularly useful to our client as they were able to begin their marketing strategies a full year before their competitors. Quantifying the impact is not an easy task. It requires a deep understanding of industry dynamics and significant fluency in financial analysis. From our founding, Capstone has always believed that teams that combine financial experience with policy experience would serve our clients best. This combination is what separates Capstone from those who simply comment on the direction of policy. It is one of the reasons why we believe our firm is unique.
David Barrosse, CEO of Capstone
Read more from David:
The Importance of the Outside View
Why Companies Are Trapped Between Hostile Political Parties
From Bubbles to Politics: A Better Science of Prediction
Read David’s bio here