Q&A - Cordiant Capital: Diversifying the energy mix

News of Cordiant Capital's plans to buy HydrogenOne Capital broke at the height of the Christmas season [December 2024].

The acquisition, agreed for an undisclosed sum, will see the two come together under a new moniker, Cordiant HydrogenOne.

The HydrogenOne Capital portfolio is comprised of a range of companies that operate across the hydrogen sector:

• Bramble Energy - A UK-based fuel cell and portable power solutions company
• Cranfield Aerospace Solutions - A UK-based passenger flight innovator
• Elcogen - A solid oxide fuel cell and electrolyser manufacturer
• HH2E - A German green hydrogen project developer 
• HiiROC - UK-based thermal plasma electrolysis developer
• Swift Hydrogen - A developer of low-cost mobile hydrogen refuelling equipment 
• Strohm - A Netherlands-based hydrogen pipeline company
• Sunfire - A German industrial electrolyser producer

Cordiant Capital is a partner-owned and run firm with over $4 billion (£3.26bn €3.85bn) in committed capital under management.

Approximately three-quarters of that is in classic closed-end, GP/LP funds, and a quarter in investment trusts.

Cordiant only focuses on three sectors of the infrastructure real assets world, digital infrastructure, the agriculture value chain, and the energy transition.

In all three areas, Cordiant focuses on investing in the middle market and providing growth capital in more specialist areas.

With the news of HH2E filing for insolvency and entering self-administration due to lack of investment [November 2024], questions remain over the driving factors behind the sale.

Benn Mikula, managing partner & CEO at Cordiant Capital, speaks with inspiratia on the journey to acquisition for Cordiant Capital and his thoughts on a polarising hydrogen market.

Of all the renewable technologies, why hydrogen?

There are many funds that invest in well-established large offshore wind farms in the North Sea, for example, or very large solar plants in Spain. Those types of investments tend to be a core asset and do not mesh with our middle market, growth focus.

Cordiant is focusing on either the emerging areas of the energy transition or on special situations in the energy transition space. That is why we were interested in securing a team with deep hydrogen expertise.

What attracted Cordiant Capital to HydrogenOne Capital as an investment opportunity?

We had the pleasure of meeting JJ Traynor [managing director, co-head] and Richard Hulf [managing director, co-head], who had built very strong reputations for themselves in the market. Their experience at large oil companies provided a significant understanding of the dynamics of what is fundamentally an industrial market.

It was natural to have a meaningful conversation about how they could take their team and bolt it onto the Cordiant platform. This deal will allow them to focus resolutely on delivering value for investors, with Cordiant corporate infrastructure providing additional capital formation and back-office support.

Hydrogen is not the sole solution to the energy transition, but it is part of an evolving mosaic of solutions. Our acquisition of HydrogenOne Capital gives our firm exposure to this.

What are your thoughts on the strength of the hydrogen market as a whole?

Hydrogen is a large, $150 billion+ industrial market – a very tangible sector of the economy.

Hydrogen has an important role to play in the energy transition, particularly in industry. We view it as one of several elements that will contribute to greater energy independence in Europe (enhancing security from malign actors such as Russia), even as it helps the decarbonisation agenda.

Right now, hydrogen is used in huge swathes of industry, and the potential for blending into natural gas continues to command attention (for example, in Germany).

It is demonstrably in the interest of many countries to encourage hydrogen to become part, though far from all, of the energy mix.

From a wider European standpoint, do we have the right regulatory framework in place for hydrogen to thrive as a technology?

Europe recognises the intermittency of renewable energy supply. Transforming that energy into hydrogen creates additional flexibility. Unfortunately, Europe is terrible at creating framework rules on a timely basis, and that has surely affected this market.

Yet if you are a long-term investor, you have to be willing to look through regulatory problems, which are fundamentally driven by slow-moving public policy.

So, whilst we do not know precisely when Germany will unveil a new framework for hydrogen, we do know that tanks from Russia – the former source of so much natural gas – are menacingly grinding their way westwards, and we do know that the EU has ambitious decarbonisation targets. Returning to a dependency on Russian natural gas to power industry is demonstrably not in the EU's strategic interest.

There is therefore a very interesting outlook for this critical industrial feedstock over the next five to ten years.

Are the new hydrogen investments and contracts for difference (CfD) a step in the right direction?

It really depends on what your ambitions are as a government.

The United Kingdom happens to have relatively expensive electricity, which is a function of government policy in relation to decarbonisation and some of the mechanisms that you alluded to [CfD etc.]. The government then announces an ambition to become an AI powerhouse.

The power density at the rack level of a traditional data centre could be 10kW. An AI deployment could be at 50kW, so energy costs and the need for stable baseload energy are going to become topics for conversation. England may decarbonise industry with hydrogen, but it is going to face a challenging time becoming an AI powerhouse if it retains terribly expensive electricity.

UK policy making can therefore be described as contradictory and shrouded in confusion. That is not a plea for an industrial policy, it is just a plea for joined up thinking.

Clean hydrogen remains costly, demand is not as high as expected, and the infrastructure for a viable market is still developing. How will the soon-to-be Cordiant HydrogenOne approach these obstacles?

The thing about financial markets is that they are frequently massively inefficient when it comes to judging what is going to happen to new technologies.

Hype often far outruns the capacity of a sector to deliver results. When the overinflated hype fails to live up to expectations, there is a period of catastrophic doom and gloom.

Subsequently, things achieve a more normal level, and judgments become more level in nature.

It has been called the hype cycle, and it is a recurring feature of financial markets many times. I think hydrogen has been subject to this.

How will this acquisition strengthen Cordiant's position in energy transition, and does it fit into your Infrastructure 2.0 approach?

Infrastructure 2.0 is just our shorthand way of segmenting traditional, "perceived as stable" infrastructure such as airports and pipelines from high growth areas of infrastructure and real assets where operational and technology expertise is required.

Infrastructure 2.0, in our view, is much more about having to have this technology and operational knowledge, to invest into the sectoral growth potential, and generate returns for investors from sectors that are filled with change and growth. These sectors for us are digital infrastructure, the agriculture value chain and energy transition.

If you are looking to the future and you want to have an energy transition franchise, hydrogen should be part of it.

Looking ahead, will Cordiant make more investments in this space or is the focus to enhance the existing portfolio?

The intention is to tap into the variety of sources of capital that Cordiant has to help HydrogenOne portfolio companies grow.

As a listed investment trust on the moribund London Stock Exchange, at present, the HydrogenOne team has limited scope for raising additional capital.

Looking beyond the relatively narrow confines of the investment trust market into the community of limited partners that we know from our portfolio of closed end funds, you can find much more capital to facilitate growth. That is the approach that we will be taking.