Australia’s Pacific Equity Partners (PEP) recognises that the rise of core-plus infrastructure and the energy transition are neatly intertwined. While the Australian private equity firm’s Secure Assets Fund doesn’t focus on energy transition per se, the theme has proven fruitful in terms of de-risking new-age infrastructure projects for more traditional buyers.

Earlier this month, PEP sold Zenith Energy, an increasingly renewables-oriented power station developer it privatised in 2020 for USD AUD 259m (USD 168m). It went to KKR’s second Asian infrastructure fund for an undisclosed sum. Bloomberg reported the deal was worth AUD 1.7bn.

It extends a streak for PEP that includes a 5.2x return on smart metering business Intellihub and a 7.2x return on power utility services provider Winconnect. PEP sold a 50% stake in Intellihub to Brookfield Asset Management in 2021 and moved the rest into a single-asset continuation fund. This coincided with a full sale of Winconnect to Origin Energy.

All three were part of PEP’s first Secure Assets Fund, which closed on AUD 600m in 2018. The firm raised AUD 1.4bn for the second vintage in 2023.

“We’ve seen a global rise of multi-billion-dollar core-plus infrastructure funds that need sizeable investments just to get out of bed. The question is, how do you grow businesses that are suitable for those funds? That’s what we spend our time on,” said Andrew Charlier, a managing director at PEP.

Thoughtful refinancing

Terms for the Zenith sale were sweetened by a AUD 1.9bn refinancing of existing debt recently agreed with about 20 banks. PEP helped organise several such refinancings during its holding period, but the latest one had the added impact of demonstrating market confidence in the company immediately prior to exit. The same playbook was applied to Intellihub.

“We think about what’s right for the company and then work out what’s right for investors,” Charlier said. “So, half of that AUD 1.9bn remains undrawn. That’s to support the next wave of growth for the company. We want to make sure it will grow regardless of who the owner is.”

PEP led the acquisition of Zenith with support from OPSEU Pension Trust (OPTrust) and Infrastructure Capital Group (ICG), now part of Foresight Group. PEP took 33.35% while OPTrust and ICG each held 23.16%. The rest was retained by company management.

The deal was concluded during the early stages of the pandemic. PEP didn’t have time on the ground with management for the first year and didn’t have its first face-to-face board meeting until after that.

“This business wasn’t really affected by COVID in an operational sense, but getting alignment and thinking through risks and funding mechanisms took a lot of time,” Charlier said. “Teams and Zoom are great, but it’s not the best for getting a feel for each other.”

Alignment was especially important given the expense of the growth plan, much of it involving the construction of new power stations in remote areas and an expansion into urban microgrids. The original AUD 259m equity component was approximately doubled as a result, not unusual for Secure Assets Fund.

Building scale

Zenith, which specialises in off-grid power stations for mining companies in the Australian outback, has quickly traded gas for renewables as its preferred power source. For the mining industry, this is a game of high initial costs and long payback periods, meaning the average length of Zenith’s customer contracts grew from seven to almost 18 years.

At the time of PEP’s entry, Zenith had only one renewable station, representing about 1% of its total generation capacity. As of the sale to KKR, more than half of the capacity, including sites under construction, is renewable, primarily solar.

The number of large customers increased by a third; there are now about 15 sites secured under long-term contracts. Including the microgrid offering, there are more than 30 customers.

Overall, the company has grown more than fourfold, according to Charlier, who described PEP’s return as “healthy.” He added that EBITDA, which was about AUD 30m at the time of acquisition, has grown more than 7x.

OPTrust and Foresight have exited their entire positions alongside PEP, while Zenith management has retained its minority stake under KKR. The transaction is expected to close in late 2025.

“There’s good organic growth in off-grid power, but we saw a step-up opportunity in helping the sector decarbonise by bringing in renewables,” Charlier said. “That’s the part that has really flourished under our ownership. Across every dimension of the business, it has changed to become more infrastructure-like, with higher quality cash flows.”