It’s Private Equity, But Not as You Know it; Gold Standard, Arnie, DiCaprio Watch On (1)

–Finance sector shift to sustainability continues?
–Subnational finance in emerging nations gets support

By Mathew Carr

Jan. 26, 2021 — LONDON: Can the private equity model help save the climate? We’re about to find out.

The $750 million Global Subnational Climate Fund is investing in clean-energy, land management and waste projects in states and cities in 42 emerging countries. See this 71 page proposal, approved late last year by the Green Climate Fund based in South Korea: https://www.greenclimate.fund/sites/default/files/document/funding-proposal-fp152.pdf

The subnational fund is not private equity because there’s a taxpayer element, but it’s overseen by Pegasus Capital Advisors LP, a green and healthcare investor based in Stamford, up the Connecticut Turnpike from New York City.

Private equity firms are usually loosely regulated groups infamous for using too much debt and squeezing workers. They sometimes buy companies that are struggling or have growth potential and repackage them, speed up their growth, and maybe make them work better. Then, they sell them, take them public, or find some other way to offload them.

A collaborative shark is less sharkish? Damien Hirst, Newport Street Gallery, London. “People are afraid of change, so you create a kind of belief for them through repetition. It’s like breathing. I’ve always been drawn to series and pairs. A unique thing is quite a frightening object”: Hirst

In Pegasus’s case, its fund will be tied by more strings than a private equity firm would usually be. It’s expanding the definition of private equity to embrace United Nations sustainable development goals in countries from Brazil to Senagal. It’s also opening itself up to public scrutiny and collaboration with non-profits and environmental-standards bodies.

GCF website snip

The greenfield-investment fund is designed to help show emerging nations that finance is available for climate-friendly investments, helping to spur them to embrace action that cuts heat-trapping emissions as part of the Paris climate deal. All countries are meant to tighten emission limits every five years, including this year.

The fund is unlike the traditional take on private equity because it’s not focussed on huge deals, where small percentage changes can cause profits to surge. It’s meant to cover medium-sized projects from $5 million to $75 million that can otherwise fall through the finance cracks. Overall, it could spur $5 billion of projects, with the GCF providing $150 million of risk-cutting seed equity, according to a documentation review.

Subnationals – states and cities – are where a substantial portion of the climate action has taken place, for instance in the U.S., despite President Trump’s resistance.

See this: https://carrzee.org/2021/01/24/while-trumps-exit-from-the-paris-climate-deal-was-reckless-chinas-net-zero-target-for-2060-is-not-soon-enough-kerry/

And even some of China’s cities are apparently taking the lead: https://carrzee.org/2021/01/26/shanghai-strives-to-hit-carbon-dioxide-peak-before-2025-as-china-ramps-up-ambition-biden-tackles-oil-gas/

But the lack of investment has limited emission cuts, especially in developing countries with higher political risks.

While the projects in the subnational fund are meant to cut CO2 and improve lives for 20 years or so, the fund itself is not necessarily going to retain the solar plants, lighting installments and recycling facilities it might help build for that length of time — the key period of the required global climate shift, according to General Counsel Brian Friedman of Pegasus.

“It’s more of a private equity model … we’re not going to hold them for 20 years and sell,” he said via video call. “We will hold the assets for as long as makes sense to develop them. It could be three years, it could be 20 years. Most will be somewhere in between.”

While the fund itself is equity based, its investments will probably have some debt at the project level, Friedman said.

“Once the project is operational, it should start throwing off cash that can be used to pay down debt. That can refinance the debt and ultimately achieve an exit for the equity owners of the asset” — that is, the fund and its partners.

The fund is backed by R20 – Regions of Climate Action, a not-for-profit international organization founded in 2011 by former Governor of California, Arnold Schwarzenegger. R20 is in turn backed by actor Leonardo DiCaprio’s foundation.

The Gold Standard, a climate certification firm, will be checking to make sure the climate benefits are credible – there’s not an immediate intention to focus on carbon credits, but generating some of those is not being ruled out. Implementation of the projects will be assisted by the International Union for the Conservation of Nature.

The program has other checks and balances. Documents and direct government contacts are provided on the GCF website, making parties more accountable. The GCF, created amid the UN climate talks to spur finance from rich countries to emerging ones in transparent ways, also has redress and integrity processes.

Corruption can be a problem in some developing countries, so Pegasus — a divine winged horse in Greek mythology — will have some unique hurdles to fly/jump over.

https://www.greenclimate.fund/project/fp152#details

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The fund could be used as a template, assuming challenges can be met.

“Right now this is the Global Subnational Climate Fund, but we might want to do an Africa sub-national fund, a South America fund or we may want to do it focussed on a particular sector — waste, water, renewable energy,” Friedman said.

Unlike private equity, Pegasus will be giving away at least some of its secret sauce.

The projects themselves may become blueprints that can be replicated in the relevant nation and beyond, said David Albertani, a program director at R20, which will help build government regulatory capacity to oversee projects and regulate emissions in each country.

“One of the criteria is the repeatability of the criteria we choose. We will make blueprints and case studies out of the most successful projects. We are going to share the lessons learned, and make sure that countries can do the same kind of projects and fast forward the transition,” Albertani said.

(Updates Wednesday with context of the importance of subnational climate action; more to come)

NOTES:

Pegasus website: http://www.pcalp.com/

R20: https://regions20.org/about-us-2/

Gold Standard: https://www.goldstandard.org/

IUCN: https://www.iucn.org/resources/conservation-tools/iucn-red-list-threatened-species

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