How did a multi-strategy private markets firm become the category-defining climate investor, and in doing so the largest private markets manager of impact capital in the world?
In 2019, Brookfield Asset Management was already a private markets heavyweight. It was second only in size to Blackstone in terms of private real estate fundraising and in infrastructure it was third, according to PEI Group’s rankings. While it was less prominent in the corporate private equity arena (24th according to the PEI 300), it had just inked a transformational deal to acquire Oaktree Capital Capital Management, giving it strong and sizeable foothold in private credit.
At this point in time, the concept of impact investing – in particular the idea that you could generate market rate financial returns by investing behind positive sustainability trends – had started to take its place among mainstream private markets players. Bain Capital, KKR, Partners Group, TPG and Hamilton Lane had all either raised or started raising dedicated impact capital. Blackstone had started assembling a team to do so (although would later nix the idea). LeapFrog Investments, a “native” of the impact investing industry, had just closed a $700 million fund.
Brookfield had been mulling strategies to align with its limited partners’ growing appetite for investment for sustainability. “We had a number of institutional clients and LPs across different sectors, from sovereign wealth to family office, where there was a clear interest in impact- and ESG-aligned strategies,” Natalie Adomait, managing partner and CIO of transition investing at Brookfield Asset Management, tells New Private Markets.
It was around this time that Mark Carney joined the firm, bringing “a significant amount of credibility in decarbonisation and… access to a lot of conversations with both government leaders, but also corporations”, says Adomait. The former central banker and climate activist “could see a lot of the opportunities that were coming in the transition realm”, she continues.
The prospect of a programme focused on generalist private equity impact – one of the early ideas on the table – did not excite Brookfield from a scale perspective.
“If you look at where a lot of the impact strategies had been historically, up to that point they were typically topping out around $2 billion,” says Adomait. “And we were trying to figure out what made the most sense for what fit with Brookfield’s capability set; when we started to scratch the surface on decarbonisation, we saw there was a natural opportunity because actually that’s what Brookfield renewable had been doing for decades.”
The firm had also been working with corporations for a number of years on Scope 2 solutions – supplying renewable energy – and Scope 1 solutions around energy efficiency and decarbonisation, says Adomait: “It felt like a natural fit, both from our strategy and what our investors were demanding on the impact and ESG side.”
Carney brought “a ton a visibility” in terms of the sort of partnership and capital that corporations would need to achieve their net-zero objectives.
In the fund’s initial July 2021 close on $7 billion, which comprised four external investors plus Brookfield, the two largest investors (after Brookfield itself) were Ontario Teachers’ Pension Plan and Temasek. These two institutions have been clear about their desire to invest in combatting the climate crisis.
“We have accelerated our efforts to invest in climate-aligned opportunities, enable carbon negative solutions and encourage decarbonisation efforts in businesses,” a spokesperson for Temasek tells New Private Markets, who said they look to partnerships like the one with Brookfield to “catalyse growth and build scalability”. Temasek has also entered into partnerships with BlackRock on decarbonisation and LeapFrog on emerging markets impact.
OTPP’s chief investment officer Ziad Hindo described the dual objectives of “benefitting the environment and society while also earning attractive risk-adjusted returns to pay pensions”: “This investment is an example of how we can use our scale, engagement and influence to help accelerate the transition to a low-carbon economy.”
“They were ready to commit on a very large scale to help us actually launch the strategy and get it out in the market.”
The remaining two investors were PSP Investments and the Investment Management Corporation of Ontario. “They saw the investment opportunity in the same way that we did,” Adomait says of the four intitial investors, “They were ready to commit on a very large scale to help us actually launch the strategy and get it out in the market.”
These investors sit on the fund’s sustainability advisory council, which is distinct from its LPAC.
The fund ultimately closed on $15 billion in June 2022 with “more than 100” LPs, and Brookfield remaining the largest contributor.
Amid evolving views on sustainability and the recent politicisation of ESG in the US, the language around Brookfield’s fund has not changed. The firm still describes it using the word impact and as having two objectives. “It focuses on dual returns,” says Adomait, “both environmental returns as well as financial risk adjusted returns; this finds its way both into the intentionality but also to the reporting of progress to investors”.
That Brookfield has catapulted itself to the top of the impact-fund tree this year is no surprise – it was already there when we last counted. What is more interesting is how quickly it will build on that position. The firm is currently marketing the second iteration of the transition fund. While there has been no public statement about the size, beyond noting that it will be larger, press speculation has pegged it at $20 billion.
The strategy will not change from Fund 1 to Fund 2. The fund has three main investment themes, says Adomait: business transformation (the acquisition of Origin Energy being an example of this), renewable power generation and storage infrastructure, and sustainable solutions.
Where the two funds might start to look different is in a subset of the business transformation theme focused on “industrial partnerships”, says Adromait. These are large, bilateral initiatives with industrial businesses that need finance to execute on a net-zero plan. An example would be a partnership with a cement company where Brookfield invests in carbon capture infrastructure and then enters into a long-term contract with the partner for carbon capture as a service. Such deals could take the form of joint ventures, minority investments or preferred equity: “whatever fits best with the corporation’s own financial targets,” says Adomait. “It’s really investing in those real assets or projects that they [corporates] require to achieve their net zero plans, without us necessarily taking a large stake at the top,” says Adomait. The nature of these deals means they have taken longer to source and structure than other types of investment. Fund I has signed one such deal, but Adomait expects Fund II to include more as processes get up the on-ramp.
Fittingly for the firm with the largest private markets impact fund in the market, scale continues to be the watchword. Across all three of its investment themes, Adomait predicts larger opportunities for Fund II. “I think probably the big change is that the size of investments that we’re seeing is actually growing. The opportunities we see in the market are going to require larger and larger dollar [amounts] to actually execute on the plan.”