From Successful Financier to Mitigation Banker: A Profile of Fred Danforth

November 14, 2008

November 14, 2008

After a successful career in private equity investing, Fred Danforth followed his passion for fly fishing into a second career as a wetland and stream mitigation banker. His story and his experience may provide some interesting insights into the future of conservation finance.

EIP Managing Partner Fred Danforth is profiled by The Ecosystem Marketplace: after a successful career in private equity investing, Fred followed his passion for fly fishing into a second career as a wetland and stream mitigation banker.

From Successful Financier to Mitigation Banker: A Profile of Fred Danforth
Ecosystem Marketplace
by Ricardo Bayon

Ask Fred Danforth how he first got involved in mitigation banking and you just may find that his answer boils down to two words: fly fishing. He is one of the rare few who, after a successful career in the world of private finance, decided to follow his passion for fishing, conservation and the outdoors into something completely different.

Danforth’s story begins in the world of traditional finance: first he worked for a variety of banks around the US, including the likes of Citibank in New York. Then, in 1986 he set up his own private equity investment firm, Capital Resources Partners (CRP), based in Boston, Massachusetts. There he served as Managing Partner until 2002 by which time the company had nearly $1 billion dollars under management and was working with a variety of very large institutional investors, including General Motors, the states of Washington, Wisconsin, and Virginia, the Rockefeller Foundation, and the Episcopal Church. By the time he left CRP, Danforth had done what every financier dreams of: he had created his own successful investment company, built it up, and then retired early. He was justifiably proud of what he had accomplished, but he wasn’t satisfied.

“After a career of being fully engaged in a highly competitive environment with the best and brightest of the investment community,” explains Danforth, “I came to a point where the idea of winning and making money at all costs just began to lose its appeal. So I began to gravitate to a different place; to a place where my real interests and passions lay.” In short, he headed for the wilderness and went fishing.

In particular -and like many before him- Danforth became enchanted with Montana’s Blackfoot river, the river made famous by the book and movie “A River Runs Through it”. Having fished on the Blackfoot many times, Danforth became a partner -together with Montana’s iconic fly fishing guide and outfitter, Paul Roos- in the development of a fishing lodge, The North Fork Crossing, on the Blackfoot river. That, it turns out, was the thin edge of a very interesting wedge.

As an investor in a fishing lodge, Danforth soon realized that his investment (i.e. the quality of the fishing) depended, to no small extent, on the quality of the tributary waters feeding into the river. So he began working with various conservation groups and land trusts to help protect and repair the legendary Blackfoot. In this process, one conservation group with whom Danforth was working, The Nature Conservancy (TNC), determined that a priority for the protection of the Blackfoot was conserving one particular tributary known as Nevada Spring Creek.

What makes Nevada Spring Creek so important is the fact that it is born from an emergent artesian spring whose water gushes year around at a constant temperature and with remarkable purity. Once upon a time, this creek, with its cool waters and healthy riparian corridor of willows and cottonwoods, served as an important fishery; feeding haying crews in the Valley and helping give the Blackfoot its renown among US anglers. When TNC became interested in the land, the area surrounding the creek had been seriously impacted by poor grazing practices, so that the water -which emerges from its source at a cool 45 degrees Fahrenheit- was entering Nevada Creek and the Blackfoot river at summertime highs of 80 degrees. There was also siltation, pollution, erosion, as well as many of the other traditional ills that now befall the world’s rivers. In short, when Danforth first encountered Nevada Spring Creek, it was no longer the bustling ecosystem -nor the famed fishing spot- it had once been.

The creek, however, has one thing going for it: From the spring at which it emerges, for 4.2 miles, all the way until it meets up with the broader Nevada Creek, Nevada Spring Creek runs mostly across one piece of property, a 1900-acre piece of land known as the Potts Ranch. The only exception is a small piece of the creek that is controlled and has been restored by Perk Perkins, a dedicated conservationist who also happens to be the CEO of Orvis. This, from a conservation perspective, means that whoever controls Potts Ranch, controls the fate of the creek. There is, in other words, no upstream.

Recognizing this unique hydrological situation, The Nature Conservancy had long had its eye on Potts Ranch. Many times they, along with the Blackfoot Challenge watershed group, had tried to convince the previous owner to help with the conservation and restoration of the damaged river, but to no avail. So when the property finally went on the market, TNC quickly bought it. Then, as is their usual operating procedure, they structured a conservation easement for the land and began looking for a buyer interested in helping with the property’s conservation and restoration. They finally found, in Fred Danforth, a perfect partner.

It was late 2001 when TNC first approached Danforth with the possibility of helping with the conservation and restoration of the Nevada Spring Creek. And it didn’t take much to convince Danforth to get involved. He quickly saw in this creek both a personal and a business opportunity: he could help repair one important tributary of the Blackfoot and, in the process, help re-build a prime fishing spot. This was not only good for the environment, it was good for fishing and good for his lodge on the Blackfoot. So, using his experience and contacts from the world of finance, Danforth rapidly put together a partnership that included fellow Boston venture capitalist, Steve Woodsum, and, in March of 2002, bought Potts Ranch from The Nature Conservancy.

“It just seemed,” he recalls, “like a compelling direction for me.”

There was only one problem: restoring the stream to its once and future glory would require a tremendous amount of biological expertise and a not inconsiderable amount of money. “We soon realized,” recounts Danforth, “that to do what we wanted to do on Nevada Spring Creek, we needed help and we needed investment. In terms of help I decided to look around Montana and the country for the best stream and wetland restoration people I could find; to put together the best possible team to get the job done. On the finance side, as the restoration began, we quickly began exploring the various ways that the costs of the restoration could be offset.”

Danforth explains that he was committed to the project, and that the restoration was going ahead no matter what. But, he adds, given his background in finance, he was interested in seeing if there were other, more creative, ways of financing the work that needed to be done. To this end, he and his colleagues considered all kinds of financial tools: from contributions and donations, all the way to fancy forms of loans and investments. “Eventually,” he says, “we came across the whole notion of wetlands and stream mitigation banking. Something I had never heard of before, nor ever even dreamed existed.” (For a detailed explanation of mitigation banking see Bayon article on Woodpeckers attached.)

Intrigued by the notion of deriving some form of value from conservation, Danforth explored the issue further. “I just started becoming aware of the possibility,” he says, “of using market-based mechanisms to provide some return for the large amount of capital that is required for this kind of conservation and restoration. I found the whole notion of the double bottom-line fascinating.”

Exploring the concept of mitigation banking, Danforth came across, was impressed by, and eventually hired, David Patrick, an ecological expert with many years of experience in mitigation banking. “David,” says Danforth, “is one of the best in this business and when he came aboard, he explained to me some of the values that could be extracted from the land via stream and wetland mitigation banking. This convinced me that this was the way to go. And, as we dug deeper into the subject, I realized that mitigation banking might not only help offset the costs of the restoration, but that, done right, it could even help pay for the land.”

Shortly thereafter, Danforth, Patrick and the rest of the partners began the restoration work. At the same time, they began putting together the business plans and the prospectuses for both a stream mitigation bank and a wetland mitigation bank on the land surrounding Nevada Spring Creek. By September of 2004, the stream mitigation bank prospectus was completed and sent in for approval, while the wetland mitigation bank proposal was expected in early 2005. Initially, the stream mitigation bank will include some 11,000 linear feet of stream restoration credits, though Danforth explains that the total restoration they are doing could be about 20,000 linear feet and will include an upstream basin-fed tributary with additional fisheries benefits. The wetland mitigation bank will include credits for some 250 acres of restored and created wetlands.

Stream mitigation banks, like wetland mitigation banks, work by selling restoration credits to developers and public entities who are legally forced to offset the damage they are causing to wetlands or streams within a given “service area” (as defined by the US Army Corps of Engineers). At present, Danforth admits that he is not entirely sure what kind of demand there will be for the stream and wetland mitigation credits his project is creating, though he is optimistic. “The truth,” he says, “is that there has never been a private, for profit, mitigation bank in the state of Montana. What mitigation is being done in this state is in the Montana DOT [Department of Transportation] reserve program or is ad-hoc, so it is difficult to judge the market. But, given the nature of our service area and the feasibility work we completed, I am confident that we will be providing a valuable service and that we will sell credits.”

Just as importantly, he says, his banks will be providing leadership on the subject in Montana. And that, he adds, gives him a great sense of pride. In fact, Danforth couldn’t be happier or more sanguine about the future. He is so sure that his project will succeed -despite the fact that neither of his mitigation banks have been officially approved (as of Sept. 2004)- that like any good financier, he is already looking two or three steps into the future.

“The idea,” he explains, “is that if we are right, and mitigation banking -together with other forms of innovative conservation finance- can help cover not just the restoration, but also the cost of the land, then we will use the proceeds to invest in other projects to restore and enhance ecosystems.” In fact, Danforth has already brought together David Patrick, Paul Roos and two other partners (John Kowalski and stream restoration expert Don Peters) to create a new company, called Oxbow Land Management, whose role would be to work with other landowners in the US -starting in Montana- to help them do the same thing that Danforth and his colleagues are doing on Nevada Spring Creek; turning conservation and restoration into thriving and viable businesses.

“With Oxbow,” says Danforth, “we hope to take our experience and expertise to other landowners and watersheds throughout the Mountain West where a conservation vision is possible. We hope to help people deal with the capital constraints inherent in conservation and restoration, and to form unique turn-key partnerships that bring the necessary talent and expertise to bear in the creation of value for conservation.”

And the vision goes beyond simple mitigation, Danforth says Oxbow is actively looking at all kinds of innovative financial tools that can help landowners fulfill their conservation vision; from carbon credits and nutrient trading, all the way to recreational opportunities, hunting, fishing, etc.

So, given Danforth’s extensive experience in the world of traditional finance, how does he view this new field of conservation finance? “I am very excited,” he says, “about the possibilities. And, to be frank, I like the fact that, when this works, it can be a tremendous win-win situation for all concerned: investors, the environment, everyone. You don’t have to engage in the kind of cut-throat competition that became all-too familiar to me in the world of private equity finance.” He does feel, however, that his years of experience in traditional finance give him a very important edge; a skill-set that will be extremely useful in helping push forward the goals of innovative conservation finance.

And does he think that his current and past worlds will ever meet? Will conservation finance ever go mainstream enough to interest institutional investors? Danforth says he hasn’t yet made up his mind on this question. “I haven’t fully concluded,” he says, “whether these markets have the potential for investment returns that would be needed to interest an institutional investor.” “Besides,” he adds, “these are very complicated markets, markets that are driven by regulation, markets that need to be explained several times before they are understood.” He notes that traditional investors usually have a serious aversion to complex and regulatory-driven markets, so convincing them to will be hard.

Nevertheless, even on this he is optimistic. He says it will take time and work, but that he believes the day will come when the markets will mature, when someone will be able to show sufficient deal flow and a history of transactions -a track record of producing returns that are repeatable- that these markets will eventually become of interest to a traditional investors. “Mind you,” he says, “it will require a very special kind of investor to get involved in this in the first instance, maybe an institutional investor with the right social underpinnings. And you’d need to make the deal sing; you’d need the right group of people behind it.”

No doubt it will be hard, but if anyone can help bring the world of conservation finance into the mainstream, it is Fred Danforth-a successful financier with a passion for fly-fishing-and the company he’s created, Oxbow Land Management. Already his work on Nevada Spring Creek is bearing fruit: the native vegetation is coming back, the number of fish in the creek have increased by over 400%, siltation and erosion have been virtually eliminated, and the water is flowing out of his land at under 60 degrees Fahrenheit year around, a full 17 degrees, on average, less than when they started. Danforth and his colleagues, in other words, are well on their way to saving the “river that runs through it”.