KKR’s inaugural climate strategy is ‘industrials with an infra approach’

Last week, Charlie Gailliot joined KKR’s infrastructure platform as partner and co-head of global climate – 10 months after Emmanuel Lagarrigue and Neil Arora moved in from Schneider Electric and Macquarie Asset Management, respectively, to take on the same titles. Gailliot last served as a partner with Goldman Sach‘s energy and industrials private equity verticals.

The trio will head up KKR’s climate strategy. Though the firm would not comment on fundraising, a vehicle called the KKR Global Climate Fund was registered in Luxembourg at the end of July and is expected to kick off fundraising soon. Affiliate title Infrastructure Investor understands that this fund is directly related to the strategy, as one LP confirmed that the vehicle was recently marketed to them, with a target not yet settled upon by KKR. Infrastructure Investor also understands that KKR is already looking at its first asset for the strategy, to be acquired with capital from its balance sheet.

One thing for certain is that the firm isn’t looking to raise mere pocket change for a sideline strategy. “The investment opportunities are several hundreds of millions of dollars in size, and the largest ones might rival $1 billion,” Raj Agrawal, KKR’s global head of infrastructure, told Infrastructure Investor.

Also known is that the strategy won’t be expecting typical infrastructure-like returns. “Beyond renewables, you can count on two hands how old the energy transition investing universe is. Investing in electric vehicles, utility scale storage, et cetera is nascent and still developing, and with that, will carry more risk. But because we’re still coming from our infrastructure mindset – because we’re not doing growth equity; we’re not doing venture capital – we don’t foresee venture equity-like returns,” Gailliot explained.

Returns won’t be the only thing distinguishing the strategy from typical infrastructure funds. For instance, KKR won’t be investing in bread-and-butter renewable energy assets via the platform, as the industry as a whole is too mature for the strategy’s mandate.

“There’s an acceleration needed. If you look at where the capital is deployed today, it’s mostly renewables – more than half of the capital deployed in climate today. [But renewables solve] 25 percent of the problem. Even if tomorrow, we make the grid completely green and power generation completely green, that’s not [completely] solving the problem. You still have to decarbonise transportation, food and agriculture and hard to abate sectors like steel and aviation, and more,” Lagarrigue commented.

Such an investment strategy also distinguishes the platform from existing energy transition strategies, too – hence the name. “We intentionally went with the term ‘climate’ for the strategy instead of ‘energy transition’ because we think it’s broader,” explained Agrawal.

“We’re talking about platforms that need to be built, that need to be scaled, that need to develop commercial expertise; that’s just a different proposition than buying an operating renewables platform,” added Gailliot.

He explained that climate investments have historically had a “barbell approach” from private markets – with one end investing in mature and lower-risk renewable energy, and the other investing in early-stage climate technologies.

“There’s a sweet spot in the middle of the barbell which is really characterised by the development and scaling of assets of the physical economy, and that’s a less well-traveled space,” Gailliot said.

KKR will seek investment opportunities across OECD countries. North American and European assets will each comprise approximately 40 percent of the portfolio, while Asian assets will make up the remaining 20 percent.

The strategy’s investment thesis will be split into three: the first is deploying existing solutions, such as battery storage – technologies that are proven, but need capital to scale.

The second is scaling new or burgeoning industries, such as fleet electrification, EV charging and businesses across the battery value chain.

The third is brown-to-green opportunities, helping industries to decarbonise, with steel production and agriculture, for instance, falling into this bucket. The firm will incorporate additional impact metrics into the strategy’s reports, with third-party auditors looking at assets’ decarbonisation efforts.

The large focus on industrial assets will be aided in part by Lagarrigue’s multi-decade-long tenure in the industrial sector, where he most recently served as the chief innovation officer of Schneider Electric.

“Industrial assets are actually the infrastructure of tomorrow, and we approach them with an infrastructure mindset – think about the whole value chain and the supply chain,” he said.

Industrials as infrastructure

A focus on industrials seems at first glance to be more PE-like than infrastructure – why, then, not house the strategy in the firm’s private equity wing, where its impact fund series already sits? The main reason is that the strategy will focus on real assets first and foremost, according to Agrawal.

“Our definition [of infrastructure] from the get-go was to have yield protection of capital in all that we do. We leaned towards contracted renewables, contracted conventional energy, contracted power, digital infrastructure, contracted fibre, contracted towers, data centres and asset leasing,” he said.

He added that this “dogmatic” approach will be present in the climate strategy, even if it’s riskier than the firm’s typical infrastructure investments. “We’re going to have hard assets, great counterparties, good contracts. All those elements will be in place in what we do in climate,” Agrawal said. “But climate is such a high-growth [area] with very new business models in some cases. There’s some inherent unpredictability.”

Despite its infrastructure ethos, there will still be room for private equity-style elements within the vertical.

“[At KKR] there’s a very strong collaborative spirit. So yes, we’re incubating this climate strategy from our infrastructure platform because we want to apply an infrastructure mindset to what we do. But we are also benefiting from the very long and very deep experience of KKR, especially in industrials,” Lagarrigue explained.

While KKR believes the strategy may be unique now, the firm doesn’t expect it to remain so.

“If there’s a $200 trillion opportunity to invest in the energy transition globally through 2050, that’s going to attract a lot of capital. We’re not so naive to think that everyone else will look the other way and there will only be people who continue to specialise in renewables and people who continue to specialise in venture capital and technology. This middle sector will attract capital; it should attract capital. As people who want to see this addressed, we want it to attract capital to work on the climate solutions of tomorrow,” said Gailliot.