Capital Dynamics rides clean energy wave

Capital Dynamics introduced a direct investment strategy in clean energy and infrastructure, its first such foray in the sector, in 2010. A team of senior industry investors leads the group, including David Scaysbrook, a managing director and the head of clean energy and infrastructure. Scaysbrook, who founded the UK power firm Novera Energy in 1997, has been investing in energy-related infrastructure projects for more than 20 years. The fund also includes three other managing directors at Capital Dynamics: Rory Quinlan, Karl Olsoni, and Bob McClenachan.

The 12-person team they lead oversees a mix of clean and low-carbon energy assets that promise to deliver to investors attractive risk-adjusted returns and diversification. The firm introduced a dedicated group after identifying clean energy and infrastructure as an emerging asset class with a lot of investment potential. Specifically, Capital Dynamics is targeting investments in solar operations, biomass plants, wind farms, and hydropower projects.

It has been an especially active time for the firm, which employs 160 people in 10 offices around the world. Capital Dynamics has been marketing its Clean Energy & Infrastructure Fund since late 2012. The fund, which has a $750 million target, is structured for direct investments and ownership of clean energy projects in North America, Europe, Australia and Asia. The aim is to generate returns of 15 to 20 percent. According to Buyouts sister website peHUB.com, the fund was halfway to its target as of last May. The current fundraising numbers could not be determined by press time.

“Clearly, there is a growing and widespread demand for direct investments in clean energy projects that provide long-term cash yield, and we are pleased to offer to investors our team’s unique experience and capabilities in operationally focused, direct investments in clean energy assets,” said Scaysbrook in a prepared statement.

Last September, Capital Dynamics also closed its $282 million Capital Dynamics US Solar Energy LP Fund. Managed by the clean energy and infrastructure team, the pool was earmarked for 40 solar photovoltaic (PV) projects located in five U.S. states, and it has so far generated tax equity and proceeds of over $110 million for its investors. The Solar Energy Fund, which focuses solely on U.S.-based projects, received commitments from investors in the United States, United Kingdom, Germany, Australia, Korea and Japan.

One project from the US Solar Energy LP Fund features an 8 mega-watt PV plant located on the roof of U.S. Foods Inc.’s cold storage warehouse in New Jersey. The plant was constructed by Vanguard Energy Partners LLC. The fund also includes 80 mega-watt PV generation projects under development in California.

Growing competition

Capital Dynamics has to date raised about 30 funds, according to data compiled by Thomson Reuters, and most of the vehicles are structured as funds of funds.

Jade Christen, a Capital Dynamics analyst, declined to discuss the firm’s track record, but the firm has been winning a lot of mandates of late, including private equity commitments from large U.S. pension funds. In February 2014, the $2 billion Oklahoma Firefighters Pension & Retirement System committed $40 million to Capital Dynamics Global Secondaries IV.

In 2010, Capital Dynamics was chosen to run the $296 billion California Public Employees’ Retirement System’s Clean Energy & Technology Fund, a $480 million program. Capital Dynamics took over the mandate from advisory shop Pacific Corporate Group. Through the program CalPERS has backed a number of clean energy funds, including a $19.8 million commitment to Braemar Energy Ventures II in 2007, $39.6 million to Hudson Clean Energy Partners in 2008, and $54.4 million to USRG Power and Biofuels Fund II in 2007.

The firm has also been picking up mandates from Asian and European investors. In 2009, the Government Pension Fund of Thailand hired Capital Dynamics to build its international private equity program. The pension fund at the time had about $10 billion in assets under management and had not invested in private equity outside of Thailand. In 2008, the £10 billion ($17 billion) West Midlands Pension Fund, in Wolverhampton, England, hired the firm to manage a $150 million private equity program earmarked for investments in Asia, Australia and New Zealand.

A wide variety of limited partners invests in clean energy and environmental technology, according to data from Preqin. Public and private pension funds account for 51 percent of such investors, while foundations follow with 14 percent; insurance companies and endowments account for 10 percent and 8 percent, respectively.

Clean energy and infrastructure is an asset class on the radar of many U.S.-based LPs, and private equity plays a big role. According to Preqin, 22 percent of LPs invest in clean energy and infrastructure through allocations to private equity, while 18 percent of firms invest through allocations for infrastructure. Another 18 percent invest through real asset allocations, with 6 percent of LPs invest in the sector through a general alternative investment allocation.

Opportunities for LPs are plentiful, given the large number of firms raising capital in the clean energy space and infrastructure space, including Hudson Clean Energy, Draper Fisher Jurvetson, and Denham Capital. 

“Competition has increased in large deals with more merchant risk—similar to (the risk) of fully operational assets,” Christen told Buyouts in an email, passing on sentiments from John Breckenridge, chief operating officer of the clean energy infrastructure team. “We believe the late-stage development and middle markets are and will continue to be in need of capital.”

Indeed, in a crowded market, Capital Dynamics seems to have found a niche.

“We actually focus on enhanced power infrastructure investments and avoid coal and nuclear power,” wrote Christen. “By entering these projects late in development and only into contracted assets, we believe the risk-adjusted return is better than pure infrastructure. This market can only be accessed by teams with deep development and operational experience. We also focus on the middle market, which is an underserved segment as power funds continue to grow.”

(Correction: The original version of this story has been corrected to note that Jade Christen responded by email to questions and that she was passing on the sentiments of John Breckenridge, chief operating officer of the Capital Dynamics clean energy infrastructure team.)