Beware the private capital climate-fund gold rush
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Nate Berner and Paul Augustine are managing partners of Bering Advisors
One of the most eye-catching outcomes of last month’s COP 28 was the UAE’s announcement of Altérra, a $30bn commitment to fund various climate-related investments.
Altérra launches at what may prove to be an inflection point for private climate funds: investible dry powder is at or near all-time highs, with Sightline Climate estimating in September that $33bn was ready to deploy. The pace of successful and prospective fundraising for incremental private climate funds is surpassing previous torrid periods by a wide margin.
These market conditions call to mind a previous episode of private capital funding societal technological overhaul, as fuelled by a historic allocation from a Gulf kingdom: SoftBank Vision Funds I and II.
Fingers crossed for a better outcome this time.
Altérra’s stated goal is to catalyse $250bn of investment for “climate change action” by 2030. To this end it is providing significant capital to several new private climate funds, which have been multiplying of late. Five of the largest managers of private capital have announced new equity or debt private climate capital funds in recent months.
In addition to these mega private climate funds, at least 20 smaller managers are seeking, in aggregate, at least $15bn, primarily for renewables. There has also been a frenzy of activity among earlier stage climate-related investing; podcasters and bloggers are becoming climate VCs.
Whether the target AUMs can be reached will in large part be a function of the pace and scale of deployment of early-stage risk capital.
Altérra seems keen to fund the construction of renewables in Africa and India and rural electrification in Latam, but significant capital has to be spent upfront. Getting these projects to the point where they are sufficiently de-risked to attract large pools of institutional capital will be costly.
The same dynamic is at play with climate VCs nursing along start-ups that would theoretically be ready for PE ownership eventually. Higher interest rates have raised the bar for deployment of this risky upfront capital.
From a technology perspective, several of the sectors that could be attractive for private climate capital are currently challenged. Few investors have a good track record deploying large amounts of capital in EVs and alternative proteins. Climate software is a niche, since no one needs a dozen competing platforms. Other areas, like green hydrogen and carbon capture and storage, show promise but carry significant regulatory and technological risks and may have modest or even negative climate impact.
Renewables is a relative bright spot and a case study for how a climate subsector can go from small and fringey to large and mainstream. Haakon Gresvig, a managing director at Probitas Partners, an alternative investment placement and advisory firm, says:
Realised track records are starting to emerge within renewable energy infrastructure, which produce an ongoing yield and have downside protection via long term contracts. A lot of the initial scepticism around dependence on subsidies has abated (eg, PV solar in Europe) since cost of production has become competitive with traditional energy.
While we have seen the economics of solar, wind, battery storage, and EVs improve markedly, to achieve global net zero emissions by the second half of the century, more risk capital must be allocated towards other critical areas like industrial and building decarbonisation, which account for large portions of overall emissions.
The Saudi Public Investment Fund’s $45bn commitment to Softbank’s Vision Fund I in 2017 was just the start. As part of the same investment wave, Sequoia raised $8bn (of which it said $6bn came from new clients) and there were multibillion-dollar launches from Andreessen Horowitz, TCV and Tiger Global. A certain amount of the bets that followed were ill-considered. The high-profile failures of many of these funds had a substantial chilling effect on the tech VC ecosystem.
Just as the potential scale of societal transformation by the kind of technology that the Vision Fund cohort backed was massive, the need for capital to overhaul the carbon economy is also massive. Altérra and the current crop of managers attempting to raise and deploy this capital would do well to learn from the excesses of the Vision era and recall Francis Ford Coppola’s reflections on filming Apocalypse Now: “we were in the jungle, there were too many of us, we had access to too much money, too much equipment, and little by little we went insane.”