Technology has improved, costs have plummeted and government subsidies are soaring. Private equity giants are mobilizing billions for energy transition bets. TPG (Nasdaq: TPG) is on the road trying to raise at least $8 billion for its second climate change fund less than two years after raising $7.3 billion.
TPG co-founder Jim Coulter says the rapidly growing climate change market is at a pivotal moment much like the smartphone industry after the 2007 introduction of Apple’s (Nasdaq: AAPL) iPhone.
Coulter, who manages the two TPG Rise Climate funds from San Francisco, made the firm’s climate change case last week to the private markets committee of the Washington State Investment Board. The committee recommended a $400 million commitment to the new fund, TPG Rise Climate Fund II.
“There are moments when the markets change,” Coulter says. “A number of things have changed with climate and it’s a new era in the market.”
One of the biggest changes: Governments worldwide, including the United States through the Inflation Reduction Act, are committing billions to the cause. The U.S. law passed in 2022 provides $370 billion in tax credits, loans and grants for clean energy.
Coulter says artificial intelligence, decarbonization of the world’s economy and “deglobalization” of the world’s supply chains are emerging “major trends” in the climate change market.
Coulter says AI will require new power sources, built with climate change technology.
Further, the pandemic and the unrest in Ukraine highlighted the fragility of international supply lines, launching a move to build supply chains closer to home. Those new facilities, Coulter argues, will be built and supported with climate change technology.
Finally, other sectors beyond the “electrification” movements seen in automobiles and elsewhere are emerging. TPG’s climate funds invest broadly in clean electrons, clean molecules and material and negative emissisions. TPG also requires that for every $100 invested, one metric ton of carbon is removed or avoided.
Coulter says the $2 trillion climate change market is already bigger than the fossil fuel market. He estimates the energy transition market will grow to $6.5 trillion in just a few years.
“The market is growing at an accelerated pace,” he says. “There are going to be a lot of GPs formed. Lots of capital is needed.”
Investors of all sizes are already raising mega-funds of their own dedicated to global climate change, none bigger than the United Arab Emirates’ launching Alterra in 2023 with a commitment of $30 billion. Alterra pledged $1 billion in co-investments to TPG’s new fund.
“We believe the climate transition is an exceptional global growth opportunity and is at an inflection point,” Permira’s Kush Patel said in March when the London firm announced the formation of a climate change investment team.
Patel sees the market growing to $12 trillion by 2030.
KKR (NYSE: KKR) is reportedly raising its first global energy transition fund, targeting $7 billion fund. It made its first move in September when it invested $750 million in U.K. energy storage company Zenobe Energy Ltd
In February, Brookfield Asset Management (NYSE: BN) said it raised $10 billion in the first close of its second global transition fund. Brookfield Global Transition Fund I raised $15 billion in 2022.
Blackstone (NYSE:BX) is seeking to raise more than $4 billion for its fourth energy transition fund and closed a $7.1 billion credit fund to finance solar companies, electric car parts makers and technology to cut carbon emissions.
Morgan Stanley is seeking to raise $1 billion.
TPG Rise Climate I raised $7.27 billion in 2021. The two climate funds are part of TPG’s $18 billion Rise platform, launched in 2016 and aims to make impact investments worldwide.
“It may not be happening fast enough,” Coulter says of the race to transition from fossil fuels. “But it’s happening faster than people expected.”
Coulter says $4.7 billion of the first fund has been deployed. It has had four exits for a combined $709 million and another $200 million exit closing soon. TPG’s dealflow is “enormous” and the firm signs five to six non-disclosure agreements weekly, Coulter says.
Surprisingly, Coulter says, TPG has found success with corporate carve-outs.
The first fund uncovered “five or six” underappreciated and undervalued assets within companies, including solar equipment maker Nextracker (Nasdaq: NXT). The giant electronic maker Flex (Nasdaq: FLEX) agreed to spin out Nextracker as a standalone company. TPG’s investment of $500 million gave Nextracker a $3 billion valuation at the time. Nextracker raised $638 million in an IPO last year.
Coulter says 28 major corporations, including Apple and Google, have invested $1 billion combined in the new fund. Fund II aims for at least $8 billion and as much as $10 billion.
“It’s a complex sector,” Coulter says. “Do not invest with tourists.”
