Blackstone closes $7.1bn credit fund to balance transition and energy access

Blackstone Green Private Credit III – the biggest energy transition credit fund to date – has an appetite for fossil fuel investments such as LNG, straddling energy transition and affordability goals.

Blackstone has closed its transition-focused credit fund, Green Private Credit III, on its $7.1 billion hard-cap. This makes it the “largest energy transition private credit fund ever raised”, according to a statement from the firm.

The fund sits within the Sustainable Resources group of Blackstone’s credit business. It is the successor to the firm’s GSO Energy Partners II, which was mostly focused on debt investments for traditional, fossil fuel-based energy assets and companies. The second fund had targeted $5 billion but closed in 2019 on $4.5 billion. “Private capital is essential to fund this transformation in our economy,” Rob Horn, head of the sustainable resources group, told New Private Markets ahead of the fund’s final close. “Increasingly, we are seeing larger companies, including investment grade companies, turn to private markets for [transition] funding.”

Green Credit III, launched in January 2022, represents more of an evolution than a pivot in Blackstone’s energy credit strategy. The firm has leaned much more into energy transition and other environmental themes for this fund, but investments in renewables had also formed a substantial portion of the previous fund in this strategy. Moreover, the firm continues to be interested in natural gas and “traditional energy” investments, a source familiar with the fund told New Private Markets earlier this year.

“We’ve continued to invest in energy infrastructure like LNG which has a role in supplementing other fuels across the world,” said Horn. Horn cited energy access and affordability as another factor in the firm’s continued investments in LNG: “Those assets were quite important to people during the supply volatility of the past couple years. It became more clear in the market that a transition takes time and requires a balanced system.” Blackstone declined to comment on whether it had ruled out oil industry assets.

Blackstone is not alone in banging the natural gas drum. Transition-focused fund managers such as Climate Investments (the fund management business of the Oil and Gas Climate Initiative, a coalition of 12 energy corporations) struck a natural gas deal last year, albeit with a carbon capture and storage component, and Actis allocated about $1.8 billion from its fifth energy fund to natural gas in emerging markets.

Amid energy shortages last autumn, Stonepeak reported that LPs had softened their opposition to natural gas, viewing the fuel as critical in protecting energy supplies. Stonepeak managing director Carolyn Pearce said: “As energy access became a priority the last year or so, we’ve seen investors who, five months ago, were saying ‘We don’t want any exposure to gas’, [now] giving us the license to own gas.”

Nevertheless, natural gas assets are likely to form a small part of Blackstone Green Credit III’s portfolio. “Our investment universe includes residential solar and commercial solar, utility scale renewables, supply chain investments, electric vehicle infrastructure, environmental consulting,” and other sectors such as waste and agriculture, Horn told NPM. Horn cited residential solar and energy efficiency in homes as particularly interesting: “This is a growing theme in Europe, where energy security is paramount,” he said.

“We are not investing in the new technologies or taking commercial market risk,” Horn told NPM. “Our focus is on investing in proven businesses and using the scale and resources of Blackstone to enable growth and invest in large projects.” Horn describes the strategy as “good neighbourhoods”: investing in “companies that are growing faster than the economy with higher margins, often with hard assets. That is a big factor that reduces investment risk”.

This appetite for backing companies with higher profit margins means renewable energy generation companies are no longer very attractive for this strategy, a source familiar with the fund told NPM. But the fund is seeing opportunities in the ‘picks and shovels’ of renewable energy generation – companies servicing these hard assets – which are often seeing strong profit margins.

LPs in the fund include the New York State Common Retirement Fund, which committed $350 million, Tennessee Consolidated Retirement System ($150 million), Florida Retirement System Trust Fund ($150 million), Border to Coast Pensions Partnership ($144 million), State of Michigan Retirement Systems ($100 million), Houston Firefighters’ Relief and Retirement Fund ($75 million) and the State of Wisconsin Investment Board ($50 million).