Energy Capital Partners raises $1.2 billion fund to extend Terra-Gen ownership

(Reuters) - Energy Capital Partners (ECP) raised a $1.2 billion fund that it used to buy a 50% stake in U.S. renewable power and storage developer Terra-Gen from another of its funds, the private equity firm told Reuters on Thursday.

FILE PHOTO: Wind turbines spin during a winter storm near Palm Springs, California, U.S., March 10, 2021. REUTERS/Mike Blake/File Photo

The deal pays out investors in the fund Energy Capital Partners III, after the buyout firm invested in Terra-Gen in 2015. It also allows ECP to continue earning fees for managing the stake in the new fund.

For Terra-Gen, the fund provides capital to support developing new projects, something that ECP III would not have been able to do as its cash was already fully deployed.

“Fund 3 didn’t have the capital to keep up with all their growth, so this brings in new capital and also makes money for the original investors,” ECP Founder Doug Kimmelman said in an interview.

Dubbed “continuation funds,” these capital pools have become increasingly popular in the last few months as private equity firms use them to keep investing in companies they believe will grow further while also allowing investors to cash out from their fund investments.

Kimmelman said about 20% of ECP III investors joined the continuation fund. He added that units of Blackstone Group Inc and Goldman Sachs Group, as well as Partners Group Holding and Hamilton Lane Inc were among the new investors that joined.

Having originally acquired all of Terra-Gen in 2015 for an undisclosed amount, ECP sold half its holding last year to Sydney-based First Sentier Investors.

The continuation fund bought its 50% stake at the same $1.2 billion valuation as the Australian asset manager last year, Kimmelman said. ECP III investors will make a “good profit,” but Kimmelman declined to say how much. The continuation fund is targeting a high-teens return, he added.

While ECP III had until 2024 to offload its remaining position, the continuation fund gives Terra-Gen extra time and money to complete a slew of projects coming online in the next couple of years, making it a more valuable exit for ECP, Kimmelman said.

The projects include the Edwards & Sanborn solar and storage scheme in California, billed as the world’s largest project combining the two elements.

ECP is unlikely to hold the Terra-Gen stake for the full life of the continuation fund, which has an initial five-year horizon, Kimmelman said.

Founded in 2007, Terra-Gen is one of the largest renewable energy developers in the United States, operating more than 1,600 megawatts of wind, solar, and geothermal facilities in states including California, Colorado, and Texas.

Reporting by David French and Chibuike Oguh in New York; Editing by Marguerita Choy