In less than a year since Brookfield Asset Management launched its second global transition fund, the Canadian firm reached a first close on $10 billion and expects to reach a final close in Q3. Brookfield has not disclosed a final target, which is reportedly $20 billion, other than to say that it expects BGTF II to exceed the $15 billion raised by its predecessor.

As for its investment strategy, the new fund will follow along the lines of BGTF I “investing in the expansion of clean energy, the acceleration of sustainable solutions and the transformation of companies operating in carbon-intensive sectors to more sustainable business models”, Brookfield said in a statement. But it will also differ in some ways, Jehangir Vevaina, managing partner in Brookfield’s renewable power & transition group, explains affiliate title Infrastructure Investor.

“We’re seeing some very broad headlines about how ESG is in trouble, but painting everything with the same brush is not a good idea.”

Jehangir Vevaina

“We didn’t invest in hydrogen in the US, for example, or Europe in BGTF I. But in BGTF II, there seems to be more opportunities where we could possibly do it. And the equity cheques are quite large for those projects. Same with biofuels. We invested in Calbio, but we see opportunities to do other investments in biofuels. And for CCUS, the right opportunities in the right places can mean quite substantial cheques.”

Offshore wind might present an opportunity too, now that this asset class looks to be recovering, says Vevaina: “We didn’t see the right entry point for investing in offshore wind during Fund I. But I do think we’re getting to a point where the entry point is available to us again, and when that happens, we absolutely would look at making investments in the space, both in Europe and the US.”

Co-headed by Mark Carney and Connor Teskey, the fund promises to deliver “strong risk-adjusted returns”. Though the GP declined to comment, Teskey was said in an Autumn 2023 interview with the Canadian Globe and Mail newspaper to be “looking for a target return of 12-15 percent” for potential deals.

Slower deployment…

The first close follows the falling through in December of a Brookfield-led consortium’s $10.6 billion bid to take over Australian utility Origin as well as a record $2 billion commitment in November from the UAE’s Altérra climate initiative.

While there is a sense that the Origin deal may not be quite dead yet – and Brookfield has never confirmed that it was – the lack of an opportunity to deploy into that sizable transaction has left the strategy’s first vintage with dry powder, some of which may be used on what would otherwise have been in Fund II’s pipeline.

“We expected Origin to go into BGTF I, and we will look at portfolio construction in terms of which deals go into BGTF I or BGTF II,” says Vevaina. “Our pipeline for BGTF II is as robust as ever.

With BGTF I, we deployed the capital over two years because we found really great opportunities like Westinghouse and Scout Clean Energy. With BGTF II, we’re not on a path to try to deploy it in two years. It will be over the full investment period,” he adds.

…And elusive transformational deals

The $8.2 billion Westinghouse deal completed in November, which saw BGTF I and uranium producer Cameco acquire the nuclear services company from another Brookfield fund – Brookfield Capital Partners IV – could be described as transformational, a key theme within the BGTF strategy. That theme, alongside clean energy generation, sustainable solutions and the decarbonisation of goods and services, more broadly, has proven popular with LPs, as evidenced by BGTF I, which in June 2022, doubled its original target to close on $15 billion.

However, deals that would have seen hard-to-abate industrial companies transition to the new economy have not been easy to come by. Origin was the second-largest such deal – and the second Australian one – that didn’t happen for BGTF I as a $6.3 billion takeover attempt of AGL failed in March 2022.

Overall, the lack of luck Down Under has meant that the flavour of the first fund has been perhaps a little less transformational than anticipated. And so far, the two announced deals for the second fund – a UK onshore renewables developer and a solar development partnership in India – fall into more traditional territory. However, the strategy remains on track, according to Vevaina.

“We love our renewable deals, so when we find good renewable transactions, they absolutely are ones we want in the Fund. But we will also be looking at those business transformation deals. We have a strong global pipeline and several opportunities we are advancing on,” he says.

And some of those investments could be sizable. “A lot of our investors have available the option to co-invest with us, so our capacity could be quite a few or several billion dollars.”

Diversity in ESG investments

Vevaina is keen that investors are not distracted by the ongoing and somewhat US-centric discussion on the merits of ESG.

“We’re seeing some very broad headlines about how ESG is in trouble, but painting everything with the same brush is not a good idea. There are some investment areas in the decarbonisation world that have performed very well and continue to be great opportunities and some that have struggled.”

This distinction matters, as the 12-year fund is heavily skewed on deploying into North America and Europe with Vevaina expecting 70-80 percent of deployment to be in those two regions.

“We’ve had quite a lot of deployments in the US with Fund I. In Fund II, we see Europe playing a larger role,” he says. “The IRA has absolutely driven more investment opportunities to the US. Some of that is priced in now because everyone can calculate what that is, but it certainly enhances pipelines and it’s brought manufacturing back to the US. It’s made e-fuels and hydrogen more interesting, for example.”

He adds: “It’s very important that investors really look to understand what someone means by their transition strategy or their ESG strategy because there’s a huge amount out there and it’s very nuanced in terms of what the investor is doing with that fund. And I think there’s going to be winners and losers through that.”