David Foley, Blackstone

Blackstone, which in recent years has shifted energy investing from the oilpatch to decarbonisation, secured just over $1 billion for a new flagship fund.

With the initial commitment, Blackstone Energy Transition Partners IV, formerly Blackstone Energy Partners IV, inched closer to a $6 billion-plus target and cap, published earlier this month in Form D filings.

The vehicle is expected to hit the target/cap by the summer of 2023, sources told affiliate publication Buyouts. Blackstone declined to comment.

With Fund IV’s rollout, the private equity giant joins a growing population of sponsors, both big and small, in the market with dedicated energy transition offerings.

The trend is being spurred by LP demand for opportunities in harmony with their net-zero and sustainability policies. A 2022 LGT Capital Partners survey found 40 percent of LP respondents plan to introduce allocations to investments aligned with UN Sustainable Development Goals, while twenty-two percent already have such allocations.

Another influence is the view that secular growth drivers are behind investing in climate-related opportunities. Tailwinds are being stimulated by government regulations and subsidies, including the multi-billion-dollar incentives created for renewable power by the Biden Administration’s Inflation Reduction Act and the European Commission’s REPowerEU.

It is perhaps because of these factors that energy transition funds are demonstrating some staying power in this year’s tougher environment.

If Blackstone’s latest flagship reaches its goal, it will reaffirm the firm’s position as one of the largest investors in this nascent, if fast-evolving, space. Others of size include TPG, which in April closed an inaugural climate fund at $7.3 billion, and Brookfield, which in June wrapped up a debut energy transition fund at $15 billion.

Embracing transition

Blackstone’s energy group stopped doing new deals in upstream oil and gas in 2017. It has since eschewed investing in hydrocarbons, opting instead for decarbonisation themes, which since 2019 have accounted for about $16 billion of investments across various funds.

The exception is midstream energy, owing to the key role it will play in expediting a low-carbon future.

The 2020-vintage Blackstone Energy Partners III is predominantly climate-oriented, favouring sectors like clean power generation, electric transmission, critical energy infrastructure, energy efficiency, energy technology and services, decarbonized transport and natural resources.

Fund III deployed its $4.4 billion pool at a rapid pace, so far committing or investing $3.8 billion and making 13 investments, among them Esdec, a Dutch rooftop solar mounting systems provider backed in a co-control deal last month. At the end of September, the vehicle was earning a 38 percent net IRR.

This points to the energy transition’s “large addressable market”, David Foley, global head of Blackstone Energy Transition Partners, told Buyouts. One of the measures is McKinsey and Company’s estimate of the $3.5 trillion of extra spending per year needed to achieve net-zero emissions by 2050.

Overcoming challenges

Blackstone’s plan, Foley said, is to “cherry pick” opportunities in the market, emphasizing investing that helps tackle root challenges to fulfilling the promise of renewables.

“A lot of the capital invested in the energy transition is going into simple renewable power generation assets like solar and wind,” he said. “While this is important, just adding renewables to the grid doesn’t necessarily mean you can shutdown and remove existing sources of power, such as coal and gas.”

Blackstone will focus on “finding ways to invest behind the growth trend and get a better return on capital”, Foley said. A major theme will be battery storage, which he calls “the holy grail” of renewables, because of its potential to move these emerging power sources “from intermittent to on-demand”. Another is access to transmission: “You have to invest in the grid.”

It is anticipated that Fund IV will target dealflow in the same sectors as its predecessor. Also, like Fund III, the mix of deals will likely reflect control acquisitions, buy-and-build growth equity, and the development and construction of critical energy infrastructure.

While energy transition investing is “not totally insulated” from uncertainty and volatility in the economy, Foley said, it retains momentum due to “strong tailwinds”. He expects enhanced government spending in the area to “more broadly accelerate deployment”, though Blackstone itself is not conditioning deal activity according to incentives on offer.

Foley joined Blackstone in 1995 from AEA Investors and has led the firm’s energy strategy for more than two decades. He today oversees a dedicated global team of 30 professionals.