Denham Capital Sees Bounty In Wasted Energy

Denham Capital plans to pour $1.5 billion into the energy-efficiency sector by backing a company that recycles heat otherwise wasted by factories into new power generation.

Starting with a $300 million equity infusion for the first year, Denham Capital, based in Boston, plans to round up co-investors to commit an eventual $500 million to projects undertaken by a new platform investment company formed in conjunction with Recycled Energy Development, a Chicago-based startup founded by energy-recycling industry veterans Thomas and Sean Casten. Denham Capital and the Castens will jointly own the company that will develop the energy-recycling projects; within four to five years, RED Holdings, as the new company is known, expects to deploy $1.5 billion into projects thanks to $1 billion in additional leverage.

Buyout-backed industrial companies are going to be a primary focus for RED projects because LBO firms are frequently anxious to increase the cash output from their new acquisitions, according to Thomas Casten.

RED operates by installing equipment at industrial companies to capture wasted heat from smokestacks and other sources, and then recycles it to generate new power. The installation, costing an average of $30 million per site, typically makes factories 2.5x more energy efficient, according to Casten. RED then sells the electricity back to the company at below-market rates, sharing in gains from the company’s energy reductions and slicing off some of the profits gained from selling excess power back to the grid. RED also will pay book value for a company’s energy output, giving the industrial company instant working capital.

RED has a number of deals already in the pipeline and expects to close one of those in December, Casten said. The company plans to do nine to 10 projects per year, deploying the $1.5 billion over four to five years.

According to RED studies, there’s a $350 billion market for energy recycling projects, so “the opportunity is enormous,” Casten said. Recovery of waste heat has been largely held back by conventional wisdom and outdated regulations, but these are shifting in light of the growing concern over climate change and higher energy prices, he said. Corporations are actively expressing interest in partnerships with RED in anticipation of stricter waste regulations, Casten said.

Casten has extensive experience with recycled energy as the founder and former CEO of Trigen Energy Corporation and Primary Energy Recycling Ventures. His son, Sean, has worked as a consultant to energy companies and as CEO of Turbosteam, a RED subsidiary.

Denham Capital has made more than 11 investments in its first year of operation, investing in energy and commodities businesses and assets, said Tim Armstrong, director of investor relations. The firm spun out of hedge fund parent Sowood Capital in December 2006, taking with it the $2.3 billion buyout fund formerly under Sowood Capital’s management. Sowood Capital, formed by former investment officers at the Harvard University endowment, shut down over the summer, a casualty of the subprime debt market.—E.G.