Ex-BlackRock, Stonepeak MDs plot mid-market energy transition strategy

Transition Equity Partners will take on 'scale-up risk' as it looks to develop earlier-stage businesses, the firm's three partners tell us.

After its formation in 2020 by former BlackRock infrastructure managing director Pat Eilers, Transition Equity Partners has hired its latest partner in Michael Allison, a renewables specialist and senior managing director since 2016 at Stonepeak. Allison also joins Craig Payne, another former BlackRock managing director, who became a TEP partner in March.

“What I’ve observed is that a lot of successful funds just grow themselves out of the middle market. I saw many interesting companies in need of capital that we couldn’t invest in. That’s why the opportunity to join TEP was so exciting – there was a niche for a firm to come in and do these PE-style, middle market deals in the infrastructure space,” Allison told Infrastructure Investor.

He elaborated: “We want to back to developing companies, earlier-stage businesses, more growth-equity opportunities and projects that the core, core-plus, and value-add infrastructure investors can invest in later on. We’re not taking technology risk, but rather we’re taking on scale-up risk to produce products for infrastructure end markets.”

Payne provided further colour on what those companies might look like. “We think of our strategy in three different buckets. First is renewable energy infrastructure, which is where [we three partners] have a long history going back 20 years. Second is what we call transitional energy infrastructure, or natural gas-related assets.” The firm’s natural gas-related assets would include midstream assets, downstream assets and gas-fired facilities.

Payne continued: “The third bucket would be sustainable and digital technologies that help alleviate intermittency with renewable power sources and/or decarbonise the natural gas sector.” The technologies in question would comprise battery storage, carbon capture and sequestration and more.

“We try to avoid saying we do energy. We’re doing energy infrastructure – we’re not doing upstream; we’re not doing oil and gas drilling and production”, he concluded.

According to Eilers, a former NFL player in the 1990s, the portfolio breakdown between the three buckets will be the following: “It will be around 35 percent renewable energy infrastructure, 30 percent sustainable and digital technology and another 35 percent transitional energy infrastructure.” The Chicago-based firm is likely to concentrate all or the vast majority of its investments in the US.

Transitioning to market

According to Payne, the next steps for TEP would be to raise a fund. “We would like to raise a blind pool of capital. We’re going to start pre-marketing this fall and our goal is to have a first closing in the first half of next year,” he said.

His outlook on the process is positive. “We think we’ll attract a diverse set of investors,” he added. “Some will view us as an infrastructure investment and others will put us in their PE bucket.”

Payne declined to state what size the inaugural fund would be aiming for, although a source indicated to Infrastructure Investor that such a vehicle could begin to target between $500 million and $1 billion.

TEP is currently investing on a deal-by-deal basis and has made one investment, via an SPV, in a Series C preferred stock of LNG development and carbon capture company NextDecade.

The firm’s first investment being in natural gas is telling, as the transition fuel is embedded in the firm’s ESG policy, according to Eilers.

“Our ESG goals, in addition to generating renewable, sustainable and decarbonised infrastructure, include providing electrical reliability and energy security,” he explained, noting that renewables alone cannot generate a reliable and secure power supply.