Carlyle makes the case for natural gas: Returns, energy security and happy LPs

Gas power has a significant greenhouse gas footprint, but many transition fund managers are embracing natural gas.

The Carlyle Group is a fan of natural gas, according to deputy global head of infrastructure credit Manish Taneja.

“You’ve got to have that energy stability, energy security,” he said, speaking at this week’s Infrastructure Investor North America Forum. “That’s why we call it energy transformation, not energy transition.”

And this transformation cannot be rushed, he added. Over the next 10 years, “renewables go up [in demand], coal’s coming down, but gas is staying constant”.

He said: “A lot of investors and institutions are shying away from gas,” but some have revised their views since the war in Ukraine sparked an energy crisis in Europe. “I’ll give you an example. Two years ago, nobody wanted to talk about gas. I had a German LP in a one-on-one meeting challenging on us, ‘Why are you talking about gas?’ Well, we met with the same LP last year and their tone had completely changed.

“Are all LPs embracing [LNG]? No. But they all understand that it has a critical role to play. Even the Germans are embracing gas.”

But Caisse de dépôt et placement du Québec‘s Florestan Ferroux, infrastructure financing senior director, was unconvinced. Joining Taneja on the panel, Ferroux said: “We want to transition away from fossil fuels away from gas, coal oil all of it.”

Carlyle’s infrastructure debt business has been investing in LNG assets in Europe “pre-Ukraine”, said Taneja, and has increased its exposure since the outbreak of war.

“There’s a pretty good return to be had within midstream. You can get incremental returns with LNG,” said Taneja.

The sustainability credentials of natural gas are divisive. Gas power has a significant carbon footprint, albeit not as severe as burning coal. Methane leaks linked to gas extraction account for 39 percent of global methane emissions a greenhouse gas that is 28 times more impactful for global warming than carbon dioxide.

Nevertheless, many energy transition funds include natural gas strategies. Blackstone has taken a similar position to Carlyle: its $7.1 billion Green Private Credit III has “continued to invest in energy infrastructure like LNG, which has a role in supplementing other fuels across the world,” Rob Horn, head of the sustainable resources group that manages the fund, told New Private Markets over the summer. Climate Investments (formerly known as OGCI Climate Investments) 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.

“We like gas,” Carlyle’s Taneja said.