Ara Partners is looking for opportunities in the renewable fuels space. The firm’s strategy involves acquiring existing in-the-ground infrastructure that is essential for the growth of low-carbon fuels, partner Churchill George Yong told affiliate title PE Hub.
Recently, the firm acquired Lincoln Terminal Holdings, a provider of renewable fuel logistics and infrastructure, based in Greenville, South Carolina.
The Lincoln investment is the first for Ara’s infrastructure strategy, which is co-headed by Yong, who joined the firm early this year, and former BlackRock alumnus Teresa O’Flynn, who came onboard last month. According to affiliate title New Private Markets, Ara is targeting $300 million for its first infrastructure fund, which will target climate and decarbonisation globally.
With a focus in the Southeast and Mid-Atlantic regions, Lincoln owns and operates five strategic rail transloading and storage facilities.
The most common biofuels include ethanol, biodiesel, renewable diesel, sustainable aviation fuel, among others. Production capacity of renewable diesel and other biofuels peaked from 863 million gallons in January 2021 to 2,134 million gallons in July 2022, representing an increase of 148 percent, data from US Energy Information Administration show.
“What is symbolic about this transaction and why it is a great example of what we are doing in our infrastructure strategy is that we are acquiring existing in-the-ground infrastructure that is very well positioned to shape and promote the growth of the low-carbon economy by way of low carbon fuels,” Yong said.
Looking ahead, the firm is also aiming to reposition Lincoln’s rail terminals and other infrastructure, which is used for conventional renewable fuels today, to handle advanced biofuels, such as renewable diesel and sustainable aviation fuel, that are expected to grow in North America. “The type of logistics facilities that Lincoln owns and operates are exactly the types of facilities that will be delivering those newer products to the end market,” Yong said.
Ara also draws confidence in the growth of advanced biofuels from the gigantic Inflation Reduction Act legislation, which is expected to jump-start a variety of renewable fuel projects. Yong also noted that “there is significant corporate support from large creditworthy counterparties, such as large airlines or large refiners who are making a push toward growing the renewable fuel space because of their own shareholder-driven sustainability mandates”.
Yong likened the Lincoln investment to the utility business model, which he said is resilient in challenging economic conditions. “The underlying business is similar to a utility, given the demand-pull characteristics of fuel markets, which makes it highly resilient across multiple macroeconomic environments.”
This is a business that is already profitable in the existing renewable fuels ecosystem, Yong said, adding that as the low-carbon economy grows, Lincoln stands to benefit from the adoption of advanced biofuels over the next decade. “This transaction has strong infrastructure characteristics, such as stable cashflow and creditworthy counterparties, but it also enjoys significant growth potential via development of additional last-mile logistics facilities for renewable fuels.”
The firm is banking on its expertise. “Having construction and project management capabilities through our in-house Ara Portfolio Services group is another big resource that we can bring to management teams like Lincoln, and that really differentiates our offering from others in the market. That is important because it allows us to be hands-on and supportive in the execution of project development and construction within any given company in our portfolio.”
Being the first investment in the infrastructure strategy for Ara, Yong said the expectation is that the firm expand the infrastructure offering and position Ara as a “one-stop shop that can handle both the private equity opportunity that decarbonisation brings and also the massive infrastructure opportunity that it brings”.
Although traditional energy is enjoying a big boom especially because of the supply squeeze in Europe, many PE firms are betting big on the renewable energy space. “This decarbonisation movement is truly the biggest generational opportunity for the infrastructure asset class that will be in front of us over the next couple of decades,” Yong said.