BlackRock, TPG Deal With UAE Finds New Way To Juice ESG Returns

(Bloomberg) -- The United Arab Emirates has agreed to retain a smaller portion of the profits generated by a $30 billion venture involving BlackRock Inc., TPG Inc. and Brookfield Asset Management Ltd., in an effort to lure more private money into climate finance deals.

The arrangement is part of a de-risking clause attached to a $5 billion strategy from Alterra, an investment vehicle launched during the COP28 summit in Dubai. In practice, the UAE’s decision to impose a ceiling on its own profits means outside investors stand to receive as much as 5 percentage points of additional returns, according to a person familiar with the terms of the deal who asked not to be named discussing nonpublic information.

Jim Coulter, founding partner and executive chairman of TPG, said the UAE’s financing structure is “pretty revolutionary.” He declined to provide figures for the terms around TPG’s funds, but said in an interview that the arrangement creates enough of a “return enhancement” to attract investors “who might not have come in otherwise.” 

The UAE’s cap limits its returns to about 5% for some funds, according to a person familiar with the details of the arrangement. A spokesperson for Alterra said return thresholds and fund structures will vary from case to case.

One of the challenges facing climate finance is the lack of investments in emerging markets and developing economies, which is in part driven by the risk-return profile, the spokesperson said. The goal of the $5 billion vehicle, dubbed Alterra Transformation, is to mobilize investor capital into climate investments in the Global South, the spokesperson said.

The Alterra structure stands out as a “wonderful template” for scaling up climate funding, according to hedge fund billionaire Ray Dalio. He was among the financial heavyweights attending COP28 who underscored the need for climate projects to generate commercially appealing returns if private investors are to get involved. 

The financing structure is designed to “achieve capital mobilization at scale and in a way that is replicable,” the Alterra spokesperson said. “This calls for a private sector market model that targets climate impact as well as positive returns, and can leverage a wide funnel of deployment channels.”

The UAE deal is the latest sign that private markets are developing increasingly complex structures for climate finance. During the COP28 summit in Dubai, Goldman Sachs Group Inc. and Citigroup Inc. were among the Wall Street firms to say they were exploring new financing arrangements in an effort to generate bigger green profits.

The Global South, which includes countries such as Brazil, India and Indonesia, is increasingly recognized as the nexus for climate finance, and both policymakers and financiers in Dubai were keen to discuss innovative structures they say will get money flowing. Ideas on the table include a reform of the multilateral development banks, securitization of climate deals and scaling up voluntary carbon markets.

Barbados Prime Minister Mia Mottley, who’s long called for bigger commitments from rich countries to face the fallout of climate change, said she welcomed Alterra and its financial goals. “I really do want to salute the UAE for the establishment of the Alterra fund at $30 billion, with a view to being able to scale that up,” she said during a presentation at COP28.

The UAE said in connection with the launch of the venture that its initial injection has the potential to grow to $250 billion by 2030. The investment vehicle will focus on private markets such as infrastructure, private equity, private debt and venture capital.

Public markets are “significantly overweight” green assets such as electric vehicles and solar, but that’s “not the place to finance the climate revolution,” TPG’s Coulter said. “A lot of climate innovation is happening in the private markets.”

The Alterra vehicle is a form of so-called blended finance, which is supposed to combine public and private funds for climate projects in emerging markets. To attract private capital, the public side generally has to offer some form of de-risking mechanism, such as accepting first losses or providing guarantees. 

The vehicle is structured in two parts. The first — Alterra Acceleration — has $25 billion to deploy and functions as an anchor investor or co-investor in climate strategies. It’s already committed $4.75 billion to seed funds managed by BlackRock, Brookfield and TPG. 

“The catalytic component here is to have such a massive public commitment,” David Giordano, global head of climate infrastructure and chief investment officer of transition capital at BlackRock, said in an interview. “With Alterra as the equity investment, it will also facilitate debt issuance and give confidence to industrial players in emerging economies that there is capital available to finance the transition.”

BlackRock Chief Executive Officer Larry Fink, who has identified the transition to a low-carbon economy as one of five “mega forces sweeping markets and economies,” attended the unveiling of Alterra in Dubai together with TPG’s Coulter. Fink said at the COP28 summit that there needs to be a fundamental rethink of “the architecture for financing the developing world,” calling it “a must, not just an option.”

Alterra’s $25 billion vehicle won’t be subject to any cap on returns, but Coulter said the sheer size of the allocation will help drive down clean-tech project costs, making them more appealing for outside investors. 

“That capital will take out carbon around the world and will push green technologies down the cost curve so they can be effectively deployed” at a lower cost in emerging markets, he said. 

The second part of the UAE’s new fund — Alterra Transformation — represents the remaining $5 billion on which the UAE has agreed to cap and redistribute its returns. The money, $1.75 billion of which has been allocated to BlackRock, TPG and Brookfield, will help steer funds into developing markets facing the brunt of climate change. 

A spokesman for Brookfield, which will receive $3 billion in total from Alterra — including $1 billion for a new Catalytic Transition Fund — said that UAE’s decision to impose a cap on its returns will help “crowd in” private sector investment that wouldn’t otherwise be available for transition finance in emerging markets.

(Adds Alterra comment in seventh paragraph.)

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