Q&A - Denham Capital: Investing across the sustainable infrastructure space

Founded in 2004, Denham Capital is a globally focused energy transition investment firm specialising in private equity, infrastructure and credit. The firm invests across the sustainable infrastructure space, with a portfolio of assets which include wind, solar and battery storage. Most recently, in May [2023], Denham Capital backed Ceiba Energy's construction contract with Mitsubishi and CONSAG for its 1.6GW LNG-to-Power development in Northeast Brazil.

inspiratia speaks to Justin DeAngelis, partner and co-head of the Sustainable Infrastructure division at Denham Capital, about the rollout of EV charge points, the growth of the battery energy storage market and how they approach investment in renewable technologies.

Denham recently committed £165 million (€192m $205m) to EVC's charge point rollout across the UK. What attracted Denham to the company?

Denham is focused on energy transition opportunities, and the team has spent a lot of time considering how to be best positioned in the EV charging (EVC) space. In particular, the team has evaluated which markets and business models Denham should invest in. EVC's business - focusing on being a charge point owner and operator, predominantly in the destination charging market in the UK – aligned with how Denham thought best to make its first investment in the EV charging market.

At the time of the Denham investment, EVC was at the right stage of its growth to benefit from Denham funding. At the time of Denham's investment, EVC had installed around 500 chargers and had secured contracts (land leases) for a further 3,000, allowing Denham to inject capital to further scale the business. A strong team of around 40 people was already employed, and a hiring plan was in place to scale this further. Since the Denham investment, EVC has converted signed contracts into installed chargers, secured more land leases, and increased its pipeline to continue scaling the business. This is an excellent example of Denham's mid-market, buy-and-build strategy.

Denham was also attracted to the management team, which combines energy expertise with hospitality and carpark management expertise, property development, large-scale infrastructure deployment and customer-facing technology systems. Denham had not seen such a strong management team covering such a range of important skillsets and backgrounds in any other EV charging opportunity it had evaluated.

How should the charging infrastructure be financed?

Today, equity investment is key for EV charging. Transactions in the space illustrate that, for the most part, private capital is comfortable with the sector without the need for government subsidies. In fact, subsidies can be a deterrent for private capital if not well structured.

Debt capital is available for charging infrastructure, but only for companies of scale, given EV charging infra is still a nascent market. 

What needs to be done for EV charging infrastructure to become a bankable asset?

Equity capital has a role to play in proving EV charging utilisation trends before debt becomes available at meaningful volumes and on attractive terms. The asset class is "bankable," as has been proven by certain debt transactions in the space. However, longer operating track records for companies and projects should improve the attractiveness of debt.

Denham invests across the sustainable infrastructure supply chain from commodities to operational assets, what was the rationale behind this investment strategy, and what are the major supply chain bottlenecks the sector must overcome?

Denham Sustainable Infrastructure only invests in (equity) or lends to (credit) infrastructure, not commodities per se. Everything we do is centred around primarily hard assets and known revenue streams.

There are many different supply chain bottlenecks if we are talking medium to long-term. In the near term, we are still working through Covid-19 and inflationary pressures in all renewable power industries. We are also seeing a material attempt to reshore manufacturing in the US, with the passing of the IRA. 

Denham has taken an increasing interest in the battery energy storage market. Is lithium-ion storage its focus, or are there any other technologies that show promise?

Yes, we built the first wind, BESS and gas-fired generation hybrid asset in Australia through our Nexif Energy platform. Low-price power storage has always been the holy grail of the power industry, and we are finally getting to a point where BESS has become an economic power solution. Lithium-ion is the primary focus, given the proven nature of the technology, but we are seeing other technology solutions evolving. Most notably iron flow batteries and zinc-hybrid solutions.

What are the unique challenges in expansion into new jurisdictions?

We have invested in 30 countries and looked at opportunities in many more. In my experience, geopolitical issues are the ones most people focus on, but we look at much more than that. We consider who will be buyers of the sustainable infrastructure we create, what contractual frameworks look like, currency risk and financing, to name a few, and this is all balanced against whether we are getting the right risk-adjusted return. Finally, (and at many times almost most importantly), can we partner with people who have the expertise to acquire, develop, build and manage infrastructure assets and are aligned with Denham on how to execute such strategies. 

Are there any emerging technologies you see coming to the fore as an investable asset?

Green hydrogen is starting to become economic and is all the buzz. Its potential is a massive storage medium for renewable power, but besides cost, there are technical challenges to overcome. Where will the hydrogen be stored? How will it be transported? Is this green hydrogen for an existing hydrogen market or a new market?

We also see interesting advances in HVAC technologies that could drastically reduce cooling efficiency. Thermal storage also appears to be on the precipice for providing economical renewable power storage.

How does Denham achieve its investment strategy to acquire and build market-leading companies? Are there any prominent examples you could highlight?

Our strategy is called buy and build. We have investment themes, we find companies/teams we like who have deep experience in the theme we are targeting and who think like an investor and then partner. The Nexif Energy company, which we sold in 2022, is a great example.

How has the Inflation Reduction Act (IRA) impacted Denham's investment strategy? Is the US currently the most attractive renewable and sustainable infrastructure investment market?

We viewed the US as an investment opportunity in select areas and themes before the IRA. The IRA only heightened that focus and will accelerate capital into the space. The program does a very good job of fixing some of the older tax credit rules, provides a longer runway and, most interestingly, looks to reshore US manufacturing in this critical space. The US went from a policy laggard to a leader. The IRA is expected to create significant employment opportunities throughout the US since it balances incentives for generation and manufacturing.  

What regulatory issues need to be considered when entering into a PPA? What are the potential regulatory risks associated with PPAs? How can these risks be mitigated?

A key focus in our investments is to provide low-cost solutions. We view this as a primary mitigant against any regulatory changes. That said, we certainly look at the current regulatory regime to ensure it's been around for a while and not challenged. Depending on who the PPA is with, we want to be sure all of the regulatory approvals are in place after a PPA is signed to make it binding. In developed markets, this is more straightforward, although we have seen longer during project development kill projects (e.g., offshore wind) where approvals happened, but costs increased between signing and planned execution.

The world economic scenario is rocky at best. How are you approaching investing in such a climate? What worries do you have on your mind, and how are you approaching risk?

Although the macro environment is more volatile today than it has been for the past decade, the tailwinds in our asset class remain strong. In particular, the IRA in the USA has brought renewable power and sustainable infrastructure to the forefront. Europe clearly needs to put stronger policy drivers in place to stay ahead of the USA in terms of sustainable investment, which should create even more opportunities for us.

We have to be very mindful of how debt markets are moving when evaluating opportunities as rates continue to rise, and we are sensitive to the returns we expect buyers to be looking for when we exit our portfolios. While the macro factors are making these considerations increasingly important, we see more opportunity created by the focus on energy security and emission reductions across almost all developed markets.

What upcoming deals do you have on the table that you are most excited about?

We are seeing several interesting opportunities across Europe and the USA that are a good fit with our buy-and-build strategy. A bulk of these are in traditional renewables (wind and solar) and battery energy storage. We are looking for niche opportunities in renewable space (e.g., distributed generation) where we can still get revenue certainty. 

We like the battery electric storage space overall, but we are very picky about what strategy is "infrastructure" risk. We've been around the power industry for 25+ years and have seen boom and bust cycles when sectors are hot, and people take on undue risks.

We also have a very strong EV charging pipeline in several markets, with some opportunities that could prove very exciting.

The rest of our pipeline comprises other energy transition opportunities, which could prove very exciting and provide an opportunity for us to be involved early in sectors that will be very large in the next decade. The key for us is ensuring the fundamental principles of infrastructure investing are prevalent in the business models and transaction structures we put in place.