North Sky: Why building sustainability in low-income communities is a ‘no-brainer’

North Sky Capital has closed two funds focused on developing sustainable infrastructure in low-income communities in the US, raising a total of $200 million.

The Minneapolis-based impact manager said the Infrastructure Investment Fund has raised $120 million from an investor base comprised of family offices and wealthy individuals. The firm’s National Impact Fund has collected $80 million from government-funded economic development programmes.

Both funds are part of North Sky’s Low Income Communities Investment Initiative, which the firm launched in 2019 to utilise federal and state incentives seeking to attract private capital to underfunded neighbourhoods, towns and counties.

North Sky invests around $20 million per deal to help buildout clean energy, waste and water infrastructure, efficient manufacturing, and sustainable agriculture. The firm has made four investments so far, two from each fund.

IIF, North Sky’s third sustainable infrastructure vehicle, is the firm’s first Qualified Opportunity Fund. The registration allows North Sky to invest in “opportunity zones,” government-designated poor communities where individuals can deploy their capital gains as private investments in exchange for a 10-year hold period and tax-free asset appreciations.

IIF’s first two deals include Project Golden Bear, a California facility producing renewable natural gas from waste methane, and a community solar developer building 130MW of clean power in Colorado, Maine and Minnesota.

The NIF fund uses a similar financing mechanism. North Sky raises state and federal New Markets Tax Credits targeting developments in underinvested states.

In Kansas, North Sky is financing Seaboard Energy, a waste-to-energy project repurposing an ethanol processor to convert pork and beef fat into renewable diesel fuel. The Coastal Growers project in Alabama is benefiting around 100 small farmers with the construction of infrastructure to process and store 200,000 tonnes of peanuts.

Despite similar strategies, North Sky is unlikely to ever blend capital from the “parallel vehicles,” which are structured as open-end funds, according to Andrew Harris, a principal for the firm’s sustainable infrastructure strategies. North Sky is targeting 15 percent to 20 percent gross returns for IIF and NIF, the same as the firm’s broader infrastructure strategy, Harris told New Private Markets in an interview.

“We wanted to make sure that nothing we do [with IIF and NIF] is any different from what we do with our regular way funds,” he said. “Our cost of capital is the same cost of capital that we have from our flagship funds. From an underwriting perspective, the deals still need to pencil to the same expected return.”

Noting the amount of capital flooding the impact investing landscape, Harris said North Sky, with its “very differentiated” strategy, feels insulated from the potential of increasing deal competition. For example, only one other firm, Greenbacker Capital Management, is known to have a dedicated fund investing in infrastructure opportunity zones.

“We have a myriad of exit pathways represented by players across markets,” Harris said. “We’re creating the [assets] everybody else wants to buy.”

It is not taking North Sky long to deploy this round of fundraising for its Low Income Communities Investment Initiative. Harris said the firm invested $70 million for the first four deals and expects to close in the coming months on another four, representing around $100 million. Fundraising is likely to start again later this year, alongside North Sky’s ongoing effort to raise $350 million for its fourth sustainable infrastructure vehicle.

With roots tracing back to Piper Jaffray Private Capital, North Sky also manages private equity funds investing in impact secondaries deals, buying positions in clean tech venture capital funds. The firm is led by Scott Barrington, North Sky’s chief executive and managing director.

Harris said that North Sky’s sustainable infrastructure and low-income communities strategy came about in part as a response to investor demand, as well as the firm’s 22 years of experience as an impact manager. But there is a more personal motivation as well, he added, with many of North Sky’s staff growing up in “old industrial towns” throughout the Midwest.

“Many of them hail from communities that have been left behind,” Harris said. “Recognising the opportunities on the ground, in the real economy, to deploy these projects in low-income communities when nobody else is doing it, that was a no-brainer for us.”