Green trees in forest

Partners Group has allocated between 10 and 30 percent of its new Royalties fund to carbon credit generation projects and other energy transition opportunities, New Private Markets has learned.

These investments into carbon credit generation will typically be into large-scale, cashflow-generating projects, rather than assets under exploration or development. Other energy transition areas the Royalties fund may invest in include green metals, and there will “likely” be an exposure to natural gas, but oil and gas are off the table, a source familiar with the fund told NPM.

The evergreen Royalties fund is being pitched as a “stable, yielding, uncorrelated” strategy, generating “steady returns across cycles”, the source said. It will also be invested across sectors such as pharmaceuticals, entertainment, sports and brands and will be open to LP commitments by 2025, affiliate title Private Equity International reports.

Partners Group’s energy transition allocation will be a riskier and more volatile part of its royalties portfolio, since voluntary carbon markets and carbon pricing are much newer than royalties strategies for pharmaceuticals and intellectual property assets. But Partners Group sees attractive, “blue chip” opportunities among its target carbon credit generation projects, the source said.

“For example, we may fund a reforestation project where we receive a share of the carbon credits as and when they are generated over a 10- to 30-year time period,” managing director Stephen Otter, who leads the Royalties fund, told NPM.

The firm will also endeavour to protect against downside risk by pooling the energy transition assets among royalties assets with longer track records.

“It’s a nascent sector that still needs to mature. The price of carbon is not as well established as, say, the Henry Hub gas price and it’s not yet truly hedgeable,” Otter continued. “We therefore plan to provide investors with exposure to carbon royalties in a heavily structured way, which we believe is critical to ensure capital is protected as much as possible irrespective of what happens to the price of carbon.”