In May, Miami-based fund manager I Squared Capital completed its acquisition of Atlantic Power Corp, a company operating a fleet of fossil fuel and hydro power plants in the deregulated US power market.
The transaction was a take-private of a company that operates in an unloved sector, whose share price was languishing at around $2. Atlantic Power had priced its 2004 initial public offering at $10 a share.
I Squared offered a 48% premium and bought the company for $3.03 a share in cash.
Besides being uncool, the power plants also faced commercial problems. Although they sold their power under long-term contracts, several of those are due to expire soon, meaning that amid a time of volatile power prices, new contracts may not be as favourable.
Since buying the company, I Squared has sold off the hydro plants — the greenest assets in the portfolio — and refinanced the remaining power plants in the leveraged loan market.
What it plans to do with them next is a mystery. Larry Kellerman, a managing director at I Squared in Miami, told GlobalCapital by email that it had only just begun to deploy its game plan, which it is keeping to itself.
But perhaps that level of secrecy, which is afforded by private equity ownership, is just what is needed to help fossil fuel companies make a long and arduous green transition.
Atlantic Power had certainly showed no signs of grappling with the energy transition or transforming its business model under the intense glare of the public markets. Instead, as its assets had grown less desirable, it simply lost access to one of its most important sources of funding, the stock market.
Public failings
Trying to make the energy transition while in the public market is hard work, despite much being made recently of activist investors' abilities to shift the strategies of large public companies away from their dirty past and towards a climate-friendly future.
One of the poster children for that movement is Engine No. 1, a small hedge fund that took on Exxon Mobil and won three seats on the company’s board, having persuaded institutional investors such as BlackRock, Vanguard and State Street to support its protest.
All well and good, but it should be noted that the reduction of greenhouse gas emissions has not been a traditional aim of activist investors.
In 2018, when Atlantic Power was still public, a hedge fund called Mangrove Partners came up with a plan to use excess generation from the company’s plants to power Bitcoin or other cryptocurrency mining rigs. The firm disclosed in an SEC filing that it had discussed the idea with the company’s management.
“The company would take a cautious view of counterparty credit risk for any such business,” Atlantic Power noted in a dry statement at the time.
Whether Mangrove or the company had also considered the sustainability issues of the plan was left to the imagination. In any case, nothing came of it.
And there is evidence to suggest that investors more broadly do not support such transitions by the public companies they own. In 2015, David Crane, who was the CEO of another US power company, NRG Energy, was rewarded for his efforts to transform it into a renewable power leader with a plummeting share price and the loss of his job.
“One of the biggest issues we had from an investor perspective was that the renewables side — even though we were the first or second largest renewables company in the United States at the time — never mattered to investors at all,” said Crane at an event the following year. “It was just an annoyance and just made the investment proposition more complex.”
In the wake of his dismissal, NRG underwent a drastic restructuring that included the disposal of its renewable energy development subsidiary and its controlling stake in wind and solar investment vehicle NRG Yield. Perhaps tellingly, the renewable energy development business was bought by a private equity fund manager, Global Infrastructure Partners.
The dirty work
These days, finding capital to invest in renewable energy or electric vehicles is the easy part. The real challenge is turning around assets and companies like Atlantic Power that were built for a fossil fuel economy.
That is where private equity can make a huge difference.
The radical transformation of a business is a long-term undertaking, and not one which typically yields progress in easily digestible, quarterly chunks. As such, it is unlikely to be a task that is suited to a public company, which faces almost daily demands to convince investors that it is on the right path.
Of course, private equity firms and their portfolio companies have stakeholders, too — regulators, limited partners, creditors and rating agencies, to name just a few. But they have much more room to manoeuvre as they seek to put their visions into effect.
The only caveat is that, for all this to work, private equity-owned companies need to be trusted to make the right decisions despite falling under less scrutiny.
Privately held companies may not be judged on their climate impact as immediately as their public peers, but they will be judged eventually.
Those companies need to get this transition right for their own sake, as wells as the planet's. Under the protective wing of the PE industry is an excellent place for them to do it.
