How the IRA is playing out: ‘Supercharged’ activity, but funding hurdles to jump

Although IRA funding is catalysing major climate projects in the US, investors should be cognisant of hurdles when pricing IRA funding into development and returns models.

The US’s Inflation Reduction Act is catalysing many climate change mitigation projects, but securing funding and incentives from it may not be as easy for fund managers and developers as expected. For climate strategies that rely on IRA funds to complete projects or to derive returns, investors shared some red and green flags for identifying the best opportunities during New Private Markets’ Impact Investor North American Summit last month.

IRA: Catalysing climate investing

“The IRA has supercharged the activity in this [climate projects] sector,” said Robert Schultz, a partner with Capricorn Group, an impact-focused outsourced chief investment officer for family offices. Passed in 2022, the act makes an estimated $369 billion of federal capital available over the next 10 years for loans, subsidies, incentives and rebates for projects and companies in the US mitigating climate change and facilitating the energy transition. This funding can stimulate the development and scaling of such climate projects and generate additional income – catalysing private institutional capital to these projects.

Asset owners “have been investing without expecting any incentives before the IRA”, Régine Clément, president and chief executive of the CREO Syndicate – an association of family offices. “At the same time, it’s been really interesting to see how quickly our families have reacted to the IRA in terms of future investments. We’re seeing a very dramatic diversification of the climate portfolio within [family offices’] portfolios. [We see] a lot more accelerated investment in geothermal, long-duration storage, advanced nuclear, CCUS manufacturing. This has played out among our direct investors and fund LPs.”

Many families in the CREO Syndicate acquired their wealth from industrial businesses; Clement was speaking about these families’ investments to develop operations within their original businesses as well as for wealth preservation.

Clement referenced a CREO family investing in a mid-cap lithium ion battery business: “They’re raising $2 billion to build a plant in Indiana. They expect between $500 and $800 million funding from DOELPO for that project. Without the IRA, they wouldn’t have been developing this project. On the built environment, we have several families who are applying for construction loans from green banks that have been subsidised by the IRA. On solar manufacturing, we had an [investor] that was about to pull the plug on a manufacturing plant in Asia and very quickly turned around when the IRA was passed to build in the US. It was a very rapid decision to change.”

Bear in mind…

Securing IRA funds for such projects is not a straightforward task. There are issues and hurdles investors should be cognisant of when pricing this funding into their project development timelines and returns models.

Around half of the GPs that Capricorn has invested in “have engaged with some kind of intermediary in Washington DC”, said Schultz. “The ones that engaged in the beginning in Washington have had far more success in getting federal money. It’s difficult to navigate that. You need someone with expertise to facilitate and manage it. You can’t just pick up the phone and [ask for funding].”

The administrative capabilities of federal agencies providing this funding cannot keep pace with the demand from managers and developers, investors said at the conference. “If the government is going to deploy $369 billion, one of the challenges is that we need more people working in government who could work with businesses to actually get that done. Talent is a huge friction point,” said Clément.

The upcoming US election could impact the availability of funds promised by the IRA. “What we’re hearing from our contacts in government is ‘deploy, deploy, deploy [IRA funds] before the election,’” said Clément.

Repealing the IRA entirely would likely require a Republican majority in the House, the Senate and the Oval Office – an improbable scenario. But a new administration could reduce the resources and capabilities of federal agencies that deploy IRA funds and permits for projects, a lawyer told New Private Markets on the sidelines of the conference. This could slow the rate of deployment of IRA funds.