The US market is yet to turn its attention to the emissions generated by the built environment, according to Jonathan Hoenig, managing partner and CEO of Atlantic Equity Partners. That is why the firm has made decarbonisation a key element of its second fund, which was announced with a $150 million target this month.
Atlantic’s debut fund launched in 2020 to invest in value-add hospitality real estate on the US East Coast. The fund closed on $30 million in 2022, and has delivered asset level IRRs of 28 percent, according to the firm’s website.
When it came to launching fund II, the firm elected to put decarbonisation at the forefront of the strategy while continuing its value-add hospitality focus, Hoenig told New Private Markets. The firm is seeking to write tickets of between $15 million and $30 million for assets that can be retrofitted to reduce their carbon footprint.
A handful of firms have launched brown-to-green real estate funds in recent months, though these have tended to be focused on the European market. Fidelity International, for example, launched a climate impact Fund in August with a mandate to invest in Western European commercial assets that can be refurbished into sustainable workspace. Schroders Capital is seeking to reposition its UK Real Estate Investment Trust to focus on decarbonising existing businesses.
Hoenig puts the US’s relative lack of focus on real estate emissions down to its public policy not encouraging it. He said: “I don’t think we’re seeing that yet in the US and that’s why we want to get ahead of it, because eventually policy will catch up with us.
“Buildings are 40 percent of global emissions. We’re not talking about that in the US. It’s just not in the mainstream. We’re talking about cars being an issue, but really buildings are one of the biggest consumers of energy and fossil fuels.”
Atlantic plans to introduce a variety of measures to their buildings to cut emissions. These include on-site renewable energy regeneration, electrification, increasing heating and cooling efficiency and reducing water. The firm has not yet decided which third-party sustainability standard it will use to ratify its sustainability improvements. It is working with third party technology providers to pre-assess assets and set benchmarks.
Hoenig stressed that environmental improvements will also translate into value creation. He said: “If you have a 60-room hotel and your energy cost is $300,000 a year, which is typical, you can reduce that by even 75 percent through putting in heat pumps, electrifying the kitchens, just getting efficient appliances, efficient lighting, finding where that loss is. If you can get that energy cost down by 75 percent, you’re looking at $220,000 in savings. That’s right to the bottom line.”
In the case of on-site energy generation, it also prevents businesses from being vulnerable to fluctuations in grid energy prices. “If the strategy is implemented the right way, mechanically in the property, you control your energy source for the life of the asset. So, you create that deep value,” Hoenig explained.
Atlantic hopes fund II’s impact focus will help it attract more capital than its first offering. Fund I failed to reach its $50 million target, though its prospects were hampered by hospitality closing during the covid-19 pandemic. Until now, high-net-worth individuals have made up the firm’s LP base, but it hopes to attract institutional capital.
“We’ve had initial interest that’s spiked a lot faster than fund I. It’s contrarian to what people are doing in hospitality, and it’s out front and a little buzzy for what’s going on in the world right now, with the conversation around decarbonising,” Hoenig said.