Over $150 billion has been invested in climate tech venture capital over the last decade, with $40 billion of transactions occurring in 2022 alone. Many climate tech companies and technologies have matured over this period and are now gearing up for asset deployment. In this next phase of climate tech investing, financing solutions must evolve as climate technologies mature and companies shift their focus to execution and scale.
Transitioning to a more resilient and responsible economy will require significant investments in capital-intensive and asset-oriented businesses. Some may view this as a friction to scale; however, we see an opportunity to ringfence risk, create value for investors, and provide a much-needed market solution.
S2G launched our Special Opportunities strategy in 2022 to address a need for alternative capital solutions that complement venture and private equity. The $300 million Special Opportunities fund provides tailored capital solutions for portfolio companies in the form of credit, project finance, or hybrid investment structures. We have the ability to take creative views of collateral, and in particular cases, the fund can help launch new companies. Over the past year, the Special Opportunities team has begun investing in companies working hard to accelerate the deployment of climate solutions.
Through the management of a historical real assets and credit portfolio and the new Special Opportunities fund, S2G and Builders Vision, have experience investing across several themes, as listed below.
Next Generation Infrastructure
Trillions of dollars have been invested to build out renewable energy infrastructure over the last decade, with a record $495 billion invested globally in renewable energy in 2022. This influx was made possible by the relatively de-risked nature of the technology (solar, wind, and now batteries) and by power purchase agreements that reassured investors of future cash flows. Though many other clean technologies have been similarly derisked, including controlled environment agriculture (CEA), electric vehicles and charging, and cold storage, contracting structures tend to be shorter or more complex. By focusing on next-generation infrastructure, S2G hopes to prove out investments in these markets and highlight their value propositions to ultimately catalyze capital from traditional infrastructure investors down the road.
Via our historical real assets and credit portfolio, S2G and Builders Vision have invested in energy and non-energy next-generation infrastructure. For example, we supported early-stage renewable energy development in the US through partnerships with renewable developers who have gone on to raise capital from leading global investors such as The Carlyle Group and Ares Capital. In food and agriculture, we are helping scale CEA by working on the initial project build-out for a large vertical farming operator.
Similarly, the new Special Opportunities fund is looking at infrastructure investments across markets. The fund has partnered with Nova Clean Energy to help advance early-stage wind, solar, and storage project development in the US. Nova Clean Energy is the North American-focused renewable energy development platform of Bluestar Energy Capital. The company takes a long-term view of the evolution of US energy markets by investing in the large-scale projects needed to further the energy transition.
To advance maritime infrastructure decarbonization, the fund has invested in Purus Marine, a company that supports the maritime industry’s transition to zero-carbon by providing low-carbon maritime transportation and infrastructure systems. Through a corporate investment in Purus Marine, S2G has exposure to a host of low-carbon maritime assets with medium- to long-term contracts with blue-chip customers and governments worldwide.
As discussed in our article Investing in Natural Assets: Seeking Alpha in a World in Transition, the energy, agriculture, forestry and oceans sectors are transitioning towards systems that are less extractive and more regenerative as a result of increased risk factors and the acceleration of innovation. We are entering an age where natural assets can provide more risk-adjusted and higher margin improvements in total factor productivity.
Through the Special Opportunities fund, S2G has the ability to support conservation and nature-based solutions by investing in land and natural resources. The fund also enables S2G to own assets that can be deployment engines for technology companies with long customer adoption cycles. For example, we’ve partnered with Clear Frontier to help create sustainable supply for the CPG market, which is increasingly demanding regenerative, organic, and traceable products. Clear Frontier develops long-term partnerships with domestic family farms as they transition to organic, offering them long-term leasing structures. By derisking the organic transition period for farmers, Clear Frontier is supporting increased land stewardship alongside farmer profitability and helping to fill the supply-demand gap for organic products.
Now more than ever, an economy-wide industrial transition is needed to achieve global decarbonization goals. The Special Opportunities fund partners with companies that help incumbents decarbonize large supply chains.
We recently invested in Circulus, a low-density polyethylene recycler that converts plastic waste into post-consumer resins for commercial and industrial applications, enabling the circular economy and making Consumer Packaged Goods company supply chains more environmentally responsible. By converting post-consumer plastics into their highest and best use, Circulus is helping ensure they stay out of landfills, incinerators, and oceans while helping to advance the gray-to-green transition.
We’ve also invested in Common Energy, a community solar aggregator that helps customers transition from buying their power from the conventional grid to cleaner solar power based in their communities.
CapEx to OpEx
Companies that are asset focused generally have higher capital expenditures and require more investment to scale. Instead of using their expensive corporate equity dollars to build out CapEx in-house, companies can benefit from financing CapEx off their balance sheets, turning it into financing costs. This oftentimes means that the asset value is separated for investors, but it can create capital efficiencies for companies as they grow.
Our investment in Service 1st Financial speaks to this theme. Service 1st makes energy-efficient home comfort systems more widely accessible by providing an all-inclusive Home Comfort-as-a-Service leasing program for residential system replacements. To deploy its business successfully, Service 1st has established strategic partnerships with leading sustainability-centric HVAC and plumbing equipment manufacturers and reputable contractor success groups. While raising its Series B equity round, Service 1st considered how to best finance the home comfort equipment, such as heat pumps and HVAC systems, needed for its leasing program. S2G helped capitalize a Special Purpose Vehicle (“SPV”) with debt so that Service 1st could make its CapEx purchases off its balance sheet and preserve equity for other use cases. Simultaneously, the Special Opportunities fund also made a minority corporate equity investment in the Series B round.
We are excited to offer tailored and creative financing solutions to meet the unique needs of climate tech companies as they scale. We hope that our approach will increase co-investment and deal flow for the maturing climate tech sector, accelerating the reduction of greenhouse gas emissions.