Are ‘fed-up’ LPs ready to move beyond vanilla renewable strategies?

The growth in wider energy-transition strategies introduces an interesting new dynamic to clean energy investment.

At a panel on our recent Global Investor Offsite comparing approaches to sustainability between investors in Europe and Asia-Pacific, Ronak Patel, a partner at placement agent Campbell Lutyens, remarked that LPs were “quite fed-up” with pure renewable power funds or projects.

A cursory look at this year’s fundraising statistics shows a $4.8 billion close for BlackRock Real Assets’ Global Renewable Power III and a €7 billion close for Copenhagen Infrastructure Partners’ CIP IV vehicle. So you could be forgiven for wondering exactly how “fed-up” investors truly are with continued investment in ‘traditional’ wind and solar projects and relevant platforms.

What Patel was pointing to, however, is not a loss of LP appetite for clean energy investment, but rather a desire to go beyond vanilla power generation and embrace the wider energy transition market, including transmission, distributed energy and clean mobility. In that sense, the need to invest in transmission following the rollout of renewables – which have presented greater risks in recent years as a result of increased merchant power exposure – and the declining returns of vanilla renewable power generation are among the factors pushing LPs and GPs in new directions.

These wider energy-transition funds now make up a substantial element of the clean energy investment space. Some 47 renewables funds are currently in market, with a further 15 dedicated to energy transition investments, according to consultancy bfinance. And it’s not small change that’s being chased either.

A few anecdotal examples: as reported by our newsletter The Pipeline this week, Ares Management is closing in on its $1 billion target for its debut climate infrastructure fund; CIP last week reached an €800 million first close on its maiden energy-transition vehicle, targeting €2.25 billion; and EnCap Investments, a traditional oil and gas player, raised $1.2 billion in May for its Energy Transition Fund I.

There’s an interesting dynamic here to these ‘beyond renewables’ vehicles. CIP is obviously a household name in the renewables space. Foresight Group, another player with its Foresight Energy infrastructure Partners vehicle, is also well-established. However, a number of GPs targeting the wider energy transition are launching products as either their first or early moves into the space.

“One thing we are interested to see play out is much of this will be greenfield,” Patel told Infrastructure Investor. “This will require a very specific skillset from GPs – it’s quite high barriers to entry. These are new pieces of infrastructure being developed. There are large pools of capital being announced to be raised, but I think LPs will really need to dig into the qualifications of the individuals at the GP, [because] there are some different skillsets required. Many GPs won’t have a track record in doing this, because it’s all quite new. Some GPs do, but it’s on a much smaller scale.”

Many LPs will view investment in energy-transition infrastructure as a natural extension of their investments in renewables. A whole new ball game it is not, but neither should it be seen as a straight swap for a lower returning renewables strategy.