LP demand for renewables fuels Energy Capital’s $1bn continuation fund, Fund V plans

Energy Capital Partners "might be in a position to launch Fund V in the second half of 2021,” founder and senior partner Doug Kimmelman told Buyouts.

Energy Capital Partners, a longtime specialist in renewable power investing, could be one of 2021’s hottest private equity brands as limited partners flock to strategies geared to the energy transition.

Energy Capital was a top fundraiser in 2020, securing $6.8 billion for a fourth flagship and co-investment vehicle, owing in part to growing investor appetite for renewable offerings. “If anything, things have accelerated dramatically since then,” founder and senior partner Doug Kimmelman told Buyouts.

One sign of this is LP interest in a continuation fund being formed around Terra-Gen, a utility-scale developer of wind, geothermal and solar generation assets. Energy Capital acquired the business in 2015. A recently launched single-asset secondaries process would see the firm’s majority stake in Terra-Gen transferred to the pool. The deal may total more than $1 billion, Buyouts reported.

Energy Capital is fielding strong interest in the continuation fund from both new and existing investors, sources told Buyouts. The result could be a “massively oversubscribed” close, the sources said. Kimmelman declined to comment.

LPs are likely to be equally, if not more intrigued by the potential unveiling of Energy Capital’s fifth flagship offering later this year.

With its predecessor nearing full investment, “we might be in a position to launch Fund V in the second half of 2021,” Kimmelman said. He expects to target $4 billion to $5 billion – above Fund IV’s $3.3 billion haul – alongside a co-investment vehicle of undetermined size. Fund IV’s sidecar collected $3.5 billion.

Investors going green

LPs are seizing on the energy transition – the shift from fossil fuel-based systems of energy production and consumption to renewable sources. Influenced by the adoption of environmental, social and governance criteria, many institutions are adjusting their allocation policies.

Changing LP outlooks are reshaping energy private equity. Oil and gas-related fundraising has been in decline since 2014, while capital flowing into strategies with a renewables focus has climbed, especially in the past four years.

The trend is shining a light on Energy Capital. Established in 2005 to acquire, develop and scale power generation, renewable, midstream and environmental infrastructure assets and platforms, the Summit, New Jersey, manager is among a small handful of PE firms with a track record in the space.

Energy Capital has backed 50 companies with investments of $40 billion in enterprise value. They include high-profile names like Calpine, a formerly listed electricity generator from natural gas and geothermal resources. Falling out of favor with public shareholders due to volatile energy prices, Calpine was taken private in 2017 by an Energy Capital-led consortium for $5.6 billion.

Calpine has since been a top portfolio performer, “each year setting a new record in cash flow,” Kimmelman said. In 2020, it also set a record in EBITDA, generating $2.3 billion. These results helped retire about $2 billion to $3 billion of Calpine debt and pay back roughly half of the 2017 investment’s original cost.

Terra-Gen is another portfolio star. It is expected to see major growth by leveraging a pipeline of solar-storage projects, including California’s under-construction Edwards & Sanborn project. Energy Capital, which last month sold 40 percent of Terra-Gen to First State Investments, put the secondaries process in motion to help back the growth, sources said.

Calpine, Terra-Gen and Sunnova, a residential solar provider, last year contributed $1.5 billion in distributions to LPs, Kimmelman said. Since inception, Energy Capital has earned a gross IRR north of 20 percent, sources previously told Buyouts.

Tilt to renewables

Fund IV is 60 percent to 70 percent targeted to renewable power opportunities. Its successor is likely to be “even more tilted” in this direction, Kimmelman said, because “that’s where the demand is.”

“Society is driving the energy transition push,” Kimmelman said, “as consumers and businesses make new choices.” He expects to see “enthusiasm move up a notch” with the clean energy agenda of a Democrat-controlled federal government, translating into “a period of accelerated growth.”

Three over-arching energy transition themes guide Energy Capital’s deal activity, Kimmelman said. One theme is electrification – or the process of replacing systems that use fossil fuels with those that use CO2-reducing electricity.

Energy Capital is especially interested in opportunities linked with electrifying and decarbonizing the transportation industry. The trend to an extent relies on greater market penetration by electric vehicles, facilitated by the development of charging infrastructure. The firm is also eyeing opportunities for increasing electricity capacity to meet significant demand from big-data applications.

Another theme is storage. This, Kimmelman noted, is crucial to addressing the “intermittency” of renewable power sources: “It’s not sunny and it’s not windy all the time.” Without an efficient and cost-effective storage solution – perhaps through emerging battery technologies – renewables “will remain a fringe player in our energy mix.”

Storage is embedded in several companies in Energy Capital’s portfolio. The firm’s first “pure-play” deal, Kimmelman said, was Convergent, the biggest developer of large-scale storage for industrial customers and utilities in the US. It was acquired two years ago.

The third theme is environmental clean-up. This encompasses a range of priorities, from solid waste management, recycling and waste-to-energy to clean-up of coal plants and nuclear decommissioning. The area, plus a focus on renewables beyond solar and wind – such as hydrogen – are mostly overlooked by investors, Kimmelman said.

Kimmelman anticipates opportunities along these lines in this year’s deal environment, about which he is feeling “bullish.” Energy Capital’s investment team vets 150 or more deals each year, he said, and “maybe does five” in sectors where “we have a knowledge advantage.”

Kimmelman has been an energy investor for almost four decades.

Prior to Energy Capital, Kimmelman was with Goldman Sachs for 22 years. Starting out in the investment banking group’s pipeline and utilities unit, he was promoted to partner in 1996. He later helped Goldman Sachs create an electricity platform and build its power generation-focused principal investing business.

Read Buyouts’ 2020 storyThe greening of private equity.