The Inflation Reduction Act, the wide-ranging economic reform recently approved by the US Senate, will drive “an interesting discussion on investment opportunities in the climate space”, said TPG founding partner Jim Coulter.
The Act uses tax breaks to stimulate investment in areas help the US decarbonise rather than focus on punishing emitters. The bill is “almost 100 percent incentives”, said Coulter. “It’s a carrot bill, driven to drive investment. And obviously, that serves us well.”
TPG Rise Climate is a $7.3 billion fund, the largest single vehicle within the firm’s impact division, TPG Rise. It held a final close in April this year and was, for a short while, the largest climate-focused private fund in the market to hold a final close. Brookfield Asset Management subsequently closed its Global Transition Fund on $15 billion two months later.
The Inflation Reduction Act contains a number of significant climate-related measures, including tax credits to help consumers buy electric cars and to drive production of energy from renewable sources.
Coulter, who leads the climate investing activity for TPG, was speaking on the company’s second quarter earnings call. He said the impact of the bill on TPG’s investment activity should be threefold.
First is the effect on its existing portfolio, which was mostly deployed on the basis that no such incentives would be in place “and it has a very positive effect on the deployment”, said Coulter.
Second and “more important”, said Coulter, was the multiplying effect that dramatically increased investment into climate-related assets would have on returns. He cited research from REPEAT noting that the Act should stimulate $3 trillion of investment in the climate space.
“Personally, I think if that investment is going to happen, you probably have to at least double your money,” he said. “So, that’s a very substantial potential profit pool for investments, and that should open the aperture of deals that will make sense for us given our high hurdle.”
The final effect of the Act relates to the global position of the US. “The US tends to drive technological advancement around the world,” Coulter said. “So, driving changes in the US market, I think, is going to increase our aperture globally.”
“It is not well-talked about yet, but looking forward… for deployment in the climate space this should have a very interesting effect.”
Coulter also discussed the possibility of expanding the private equity-centric climate strategy into adjacent asset classes. “It’s very clear to me that the $150 trillion expected global investing in climate transition is going to spread across traditional asset classes,” he said, noting “clear opportunities” in infrastructure and private credit.
“This is early days in a very large area, and we’re making sure that we’re considering all of the adjacencies while also being prudent in capital deployment pace,” he said. As of the end of June, $1.8 billion of the Rise Climate Fund had been invested, according the firm’s results statement.