Blackstone credit fund to fuel large-scale energy transition investments

Asset manager Blackstone Inc.'s $7.1 billion energy transition credit fund will combine the scale and flexibility of private capital with cash flow-rich "hard" assets like power plants, carbon capture facilities and electric vehicle factories, said Robert Horn, global head of Blackstone Credit's Sustainable Resources Group.

The recently closed Blackstone Green Private Credit Fund III LP, which Blackstone said Aug. 10 was the largest private credit fund ever raised to fund the energy transition, reflects the $2 trillion private credit market's rapid growth as well as booming demand for natural gas and renewable energy project finance, according to Horn.

The fund has a "very broad mandate" and a "global investor base comprised of insurance companies, pensions, sovereign wealth funds, endowments," he noted in an interview.

"You will see a number of deals come through" in sectors like carbon capture, residential solar, environmental engineering and LNG infrastructure, Horn continued.

An Aug. 2 S&P Global Commodity Insights Climate and Cleantech report found that private debt accounted for 22% of a group of 49 energy transition project loans issued from September 2022 through June 2023, indicating a significant and growing role for private lending in helping to finance the energy transition.

Though banks face higher interest rates and tightened lending standards, Horn emphasized that the fund is not trying to supplant them.

"It's less so about replacing banks as it is partnering with banks and complementing what the banks do," he said. "The banks are very effective at investment-grade project finance. They will finance your typical renewable project ... and in some cases private capital can compete with that."

But banks have historically stayed away from other types of transactions.

"When you think about everything from funding M&A of a utility service business, funding an acquisition and roll-up of a more service-oriented business, funding big auto factories, funding junior credit in renewable projects, funding big growth opportunities for companies, those are not things that the banks typically want to do and so you have a real role for private capital," Horn said.

Additionally, the Blackstone fund will be able to buy and sell the debt and securities associated with loan deals, according to the Commodity Insights report.

"Private lenders are able to repackage, securitize and place energy transition debt with ESG funds and institutional investors with decarbonization commitments," report authors Peter Gardett and Conway Irwin wrote. "The existence of a natural buyer for those securities that is also often comparable with private debt market structures means that funds willing to analyze non-traditional risks have an opportunity to make inroads into what has traditionally been a bank lending business."

Numerous new and extended tax credits established by the Inflation Reduction Act (IRA) will further reinforce the need for funds like Blackstone's to satisfy a tidal wave of demand for financing, Horn said.

"You might fund 30% of a project with tax credits, [and] hopefully the IRA makes those tax credits easier to monetize," he said. "You will need 70% of that capital to come from private markets, so it's effectively a call on our capital. The more incentives they put into the market, the more project capital will be needed."

Blackstone's credit and insurance segment has $295 billion in assets under management. The asset manager has said it sees a $100 billion investment opportunity over the next decade for the energy transition.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.