E1 – Emmanuel Lagarrigue

Emmanuel Lagarrigue is the Co-Head of Climate at KKR where he leads KKR’s investments in decarbonization technologies and brown-to-green transitions.

SUMMARY

Emmanuel Lagarrigue is the Co-Head of Climate at KKR and in this fascinating discussion, he explains why he joined the firm and what they are seeking to achieve in financing the energy transition. He explains how KKR see a gap in the huge $7tn pa investment needed to fund the transition between the early stage investments and the mature infrastructure like renewables area. This middle area is not really served today and he explains where they see the greatest investment opportunities, why decarbonisation is a good business, and why he is not concerned about political risk. This is a fascinating glimpse into the future and how climate change can be funded.

WHY KKR

Emmanuel’s role at Schneider Electric involved designing the transformation of Schneider into a global leader in energy management and automation. The company was recognised as the most sustainable corporation in the world 3 years ago at Davos. Emmanuel realised in 2019 that if we are to get to net zero by 2050, we need to spend $150-200tn which is $6tn pa for the next 25 years vs $1.5 tn last year. And he realised that private equity will have to play a role and decided to get involved. KKR is already involved in classical energy transition investments like renewables, energy storage and the circular economy. What Emmanuel and partner Charlie Galliott want to do is to go beyond this. A number of opportunities were coming to the table at KKR that the existing strategies were not able to pursue because there was a different type of risk-return profile. This is the rationale behind the new initiative.

Some takeaways

 

Areas of Opportunity

They see a number of opportunities in renewables, energy storage, EV charging, and creating a sustainable value chain to make batteries for EVs and for grid storage. Beyond this, there are many other areas, such as decarbonizing steel, cement, shipping, aviation, agriculture, decarbonizing data centers, energy supply and demand, and decarbonizing the operation of buildings and many more.

Types of Investment

Emmanuel identifies 3 types of opportunity:

1     Scaling Up Existing Solutions

They have an investment in Zenobi which has a fleet electrification business with 1200 buses and they see an opportunity to get to 8000 quite easily. There is no technology risk, this is an infrastructure type asset.

2     Scaling Up New Solutions

There are lots of deals in the value chain for batteries. There is tremendous demand for lithium-ion batteries for electric vehicles because the adoption of electric vehicles is quite rapid. And then we have to put in place all the supply chain to make those batteries and the component for those batteries. Here is a significant opportunity.

3       Helping Public Companies Transition

When a company needs to execute on the transition towards a more decarbonized business, it’s extremely difficult to do it with its own balance sheet and shareholder money. KKR plans to set up structures to assist public companies who find it difficult to use their shareholders money to invest in lower return outcomes, but can partner with KKR and use its capital.

Risk Profile

These different solutions have different return profiles and different approaches. But there are some common themes: there cannot be any technology risk. Strong entry barriers, things which scale, contracted cash flows, real assets and elements of downside protection. And across a range of sectors: steel, cement, agriculture, batteries, renewables etc.

Duration

Emmanuel perceives a gap in the market between early stage, VC type deals in this space and classical infrastructure deals in for example, renewables. There is a gap when a company graduates from the early-stage climate tech eco-system and before it transitions into a classical infrastructure type investment. And that gap can have a duration of 5-7 years.

Decarbonisation Technologies

There are 10 to 12 technologies that can decarbonise the physical economy. The more mature ones are ready for the transition from climate tech to real scale and becoming infrastructures – renewables, especially solar, and any application of batteries for storage or for transportation. And then you have all the others.

Government Support

This is really helpful in accelerating the learning curve of new technologies. New technologies which otherwise would not be in the money, or would have to wait another four to five years to be in the money, receive a grant or a loan or there’s a tax credit in that value chain – all this really helps. And of course, the quid pro quo for the government is that in exchange you create jobs locally.

And the IRA In its first year created something like 200,000 jobs. That initiative will probably stay irrespective of the US election outcome because it’s creating jobs in the heartland of the US and if the investment is not initiated and the jobs are not realised the taxpayer isn’t paying anything.

Oil and Gas Companies

Emanuel thinks it’s unrealistic to expect oil and gas companies to be tomorrow’s champions in electrification. Their skills developed on long term capital expenditure projects are better suited to supporting the transition from a carbon molecule based system to a metals based system. So he thinks that it’s more natural for them to build up the raw material supply chain in the new electrified economy.

Geography

Their focus is on the OECD world and where they have KKR offices on the ground but Emmanuel sees a big opportunity in India, for example.

The Opportunity

Emmanuel makes the point that decarbonisation is a good business. Starting from scratch, solar is the cheapest form of energy, EVs are inherently better than ICE cars. It’s the transition that is difficult.

ABOUT EMMANUEL LAGARRIGUE

Emmanuel Lagarrigue joined KKR in 2022 and serves as Global Co-Head of the firm’s Climate strategy within the Infrastructure business. Mr. Lagarrigue is a Partner at KKR and has a wealth of experience in sustainability, the energy transition and the transformation of large businesses.

Prior to joining KKR, he was one of the founding partners of BeyondNetZero, a General Atlantic fund, focusing on growth equity opportunities in decarbonization technologies. Before that, Emmanuel was an executive committee member at Schneider Electric, holding the positions of Chief Strategy, Chief Sustainability and Chief Innovation Officer. Prior to that, he held various operational and marketing management positions in Europe, South America, Asia and the United States.

Lagarrigue spent over 27 years at the company. He is also a non-executive director of JBT Corporation and is the Chairman of the Board of Trustees of Menorca Preservation, an NGO dedicated to environmental causes in the Balearic Islands.

HOW STEVE KNOWS THE GUEST

I saw that Emmanuel had joined KKR and explained that I wanted to start a new podcast series to explore the financing of the energy transition and he kindly agreed to come on, slightly to my surprise. Boy am I glad he did though. This really was a fantastic discussion.

 

 

Co-Host Huw Van Steenis

I am delighted to be teaming up with Huw van Steenis for this mini-series. Huw is a Vice-Chair and Partner at Oliver Wyman. He advises investors and helps them capture opportunities and mitigate risks posed by the transition to a lower carbon economy. Huw currently serves as a member of the Investment Committee at the Oxford University Endowment and co-chair of the World Economic Forum’s Global Future Council on Responsive Financial Systems. Previously he was Senior Advisor to the Chief Executive of UBS and Chair of the Sustainable Finance Committee. Before this, he was Senior Advisor to Mark Carney when he was Governor at the Bank of England. Huw worked at Morgan Stanley mostly as Global Head of Banks and Diversified Financials research. He and his teams won numerous awards , including being voted #1 in investor surveys 12 times. Before anyone asks, that's 12 more times than Steve.

 

TRANSCRIPT

This AI generated transcript has been lightly edited for clarity. Any mistakes are ours.

Emmanuel, welcome to the podcast. I’m really excited to talk to you. I’m excited to learn about why private equity is interested in investing in the energy transition. But I’m interested, I always like to start off with people’s background because where you came from, I think is very informative. And you were an industrialist for an astonishing 27 and a half years at Schneider.

You were in sales, you were a country head, and then you became head of strategy and sustainability before moving to investing and your more recent move to global head of climate investing at KKR. Can I ask, what did you want to be when you were a kid and what made you want to make that move from industry to investing?

Emmanuel Lagarrigue (01:41.07)

Of course, when I was a kid, I was never planning to be an investor and not to be in private equity, but I’m pretty happy where all things have unfolded. Look, the story is the following. I was at Schneider Electric effectively for 27 years. Most of those 17 years plus in operational roles, managing all sorts and sizes of P&Ls in Europe, South America, the US, Asia.

And then I joined the executive committee, as you said, in charge of strategy, sustainability, innovation, basically in designing the transformation of Schneider Electric into what it is today, which is the global leader in energy management and automation, the go-to company when Nestle, Walmart, Amazon, Google want to.

Think about the decarbonization of their operations. Schneider Electric, three years ago in Davos, was recognized as the most sustainable corporation in the world by corporate knights. So, having done all this and having done that first, the first stretch of my journey into sustainability and the energy transition at Schneider Electric, I came in 2019, 2020 to the realization that really, if we want to be serious, with a net zero world by 2050. And we really want to decarbonize the economy. Of course, it’s the energy transition, but it’s also about decarbonizing demand, transportation, agriculture, heavy industry, buildings.

If we really want to be serious about it, we’re going to need something like $200 trillion of additional capital, depending on who you ask to, it varies from 150 to $200 trillion. But that means that for the next 25 years, we need to deploy in the economy something like $5 to $7 trillion per year in those decarbonization solutions. Coming from $1.5 trillion, this is more or less the number for 2023.

So you have to go from $1.5 trillion being deployed in all sorts of energy transition and decarbonization solutions to seven trillion. There is no way that will happen without private equity. So there was my reflection and my point, like, oh, yeah, private equity will play a major role. And for the second stretch of my journey into the energy transition and decarbonization, I want to play on that side of the fence, being in the private equity world, because they are going to play a major role.

Steve Clapham (04:30.726)

So where are the opportunities for KKR? Where do you see the big opportunities?

Emmanuel Lagarrigue (04:35.374)

So at KKR, what we see is the following. So our infrastructure platform, which has been extremely successful at the number of energy transition plays, but I would say what everybody would understand as classical energy transition thing, renewables thing, energy storage thing, circular economy thing, investing in the power generator with a number of high emitting assets and actively decarbonizing them. So this is something that KKR was already doing before Charlie Galliott, my partner and I joined. The idea for KKR was to go beyond this.

There are a number of opportunities in renewables, energy storage, EV charging, creating a sustainable value chain to make batteries for EVs and for grid storage. Decarbonizing steel, cement, shipping, aviation, agriculture, decarbonizing data center, energy supply and demand, decarbonizing the operation of buildings, and so on and so forth.

So there were a number of opportunities that were arising and coming to the table at KKR that really the existing strategies were not able to pursue because there was a different type of risk-return profile from our characteristics.

So this is why KKR decided to set up that new strategy. Recruiting Charlie was coming from a very long 20-year career at Goldman Sachs, on the investment side of Goldman Sachs in energy transition and decarbonization. Recruiting Neil Arora, who’s leading the Green Investment Group at Macquarie for Asia and myself with my past at Schneider Electric and my brief stint at General Atlantic and Beyond Net Zero.

So bringing people who had a long track record in decarbonization who understand all those new deals that the traditional strategies of KKR were not able to tackle and blending this in a very KKR fashion, blending this onto the KKR infrastructure platform of KKR and incubating this new strategy.

Huw van Steenis (06:58.858)

And so, Emmanuel, what do you feel is sort of the sweet spot of where you can really have an edge in investing? And I also am intrigued, obviously KKR likes to add value to its investments. Are you having to build a whole new team of capabilities for around decarbonisation to help that?

Emmanuel Lagarrigue (07:16.554)

I think that one of the strengths of a platform like KKR is that since the origin of the firm, there was always that spirit of active management of your assets, active management of growth, really making company better and making them perform. So we are building on those strengths and on the organization and the processes that are behind this and the people that are behind this.

We see three types of opportunities, basically. So there are a lot of opportunities to, yeah, I would say scaling up existing solutions. So there’s no technology risk, there’s an established business model, but there’s a tremendous growth opportunity. The case in point is an investment we made in the UK. Last year, it’s a company called Zenobi.

Zenobi has two businesses. One is about providing grid storage on the UK grid. And the UK grid has a very high penetration of renewables, so you need lots of batteries to solve for the intermittency of those renewables. And then the other business of Zenobi is the development of fleet electrification solutions. So today 80% of the electric buses running around the streets of London are on the Zenobi platform.

And when you transition your fleet of buses or delivery vehicles from diesel to electric, it’s not as simple as retiring a diesel vehicle, putting a charger on the wall and off you go. You have to be thoughtful about when every route is ready to be transitioned to electric, how you will size the bus and the batteries and so on and so forth, how you build the infrastructure, the charging infrastructure and so on and so forth. So there is no technology risk – neither in the battery business nor in the bus electrification business, but there’s a tremendous growth opportunity.

So there’s a lot of infrastructure characteristics, long-term contracts with bus operators on the bus side, with National Grid and other grid operators on the battery side. There’s no technology risk, everything is downside protected. So you can really apply an infrastructure recipe to these type of assets. It’s basically about scaling them up.

Emmanuel Lagarrigue (09:42.81)

So, Zenobi today has something like 1200 buses on their platform. We think that while Zenobi is a portfolio company, it can go from those 1200 buses to 8,000 or 10,000 very easily. So it’s about actively managing that growth. But scaling up existing solutions, so a lot in EV charging and grid storage and also still in solar and renewables, there’s a lot of growth opportunities. That’s the first category.

The second category is scaling up new solutions. Here you will find lots of deals in the value chain for batteries, for instance. So there is tremendous demand of lithium-ion batteries for electric vehicles because the adoption of electric vehicles is quite rapid. And then we have to put in place all the supply chain to make those batteries and the component for those batteries. So arguably, those are new solutions, new supply chains that you have to put in place.

You have to understand the demand will play, how the supply of raw material will play and who plays. So it’s a bit, it’s a different approach to investment, it’s new solutions, although you can also apply a lot of the infrastructure characteristics because today it’s not rare to see an automaker signing a take-home contract with a battery manufacturer or even with a supplier of components of battery. So these new solutions, this is typically what you will find.

So again, battery supply chain, green steel, sustainable aviation fuel, e-methanol and shipping fuel, sustainable and regenerative agriculture and things like this, where you see the demand side. So auto-OEMs, CPG companies, food companies, ready to sign off take contracts to help reorganize or set up the value chain for their components, for their raw materials.

So that’s the second category of the scaling of new solutions.

The third one is something that I think is fairly unique to KKR and of course for me it’s quite a comfort zone that consists in helping large corporates in their transitions. What we have seen in the last few years and I think there was very famous cases especially among the oil and gas majors is that when a company needs to execute on the transition towards a more decarbonized business, it’s extremely difficult to do it with your balance sheet and your shareholder money.

So again, many of the companies have made in 2016, 2017 big declarations and big commitments of capital on creating a more decarbonized portfolio of business until they hit a backlash a couple of years ago, three years ago, from their shareholders, saying, no, you know what? No, no, with my money, with this cheap cost of capital and public markets, you’re going to continue nurturing the current business for the transition. Don’t use my money.

So we are working. We have a number of conversations with oil and gas companies, auto AM, food companies, steel makers, on setting up investment vehicles that would finance the transition of their portfolio.

This is something that I did a lot when I was at Schneider Electric, working with private equity firms and setting up those vehicles of the balance sheet, of the P&L, the private equity firm is as the majority, but also being very clear on what was the value creation for the corporate, for Schneider Electric in that case. So I’m very comfortable with this because now I’m just on the…

And this is also something that KKR has done a lot, especially in its infrastructure platform. So those are the three types of opportunities we see, scaling up existing solutions, scaling up new solutions and partnerships with corporates to help them finance the transition.

Steve Clapham (14:01.435)

These are very different businesses and very different cashflow profiles, very different durations. You put them all in the same bucket in like a green fund. And how do you how do you manage that?

Emmanuel Lagarrigue (14:16.147)

There are different solutions, indeed, with different returns and different approach. There are a number of commonalities on how you look at those opportunities. So you’re going to always look at technology risk. There cannot be any technology risk. We are not in the business of climate tech, early stage venture here, it’s about scaling up.

So no technology risk. Strong entry barriers, you invest behind things which are scale, so usually that’s one of the two, three, five winners in the category, contracted cash flows, real assets and downside protections, so really they are indeed very different in nature of the type of strategy or across those sectors, steel, cement, agriculture, batteries, renewables. But you can apply that infrastructure framework pretty much to all of this. So this is why we’re pretty comfortable to get in with the same team on those type of deals.

You just have to understand every industry a bit in depth. So we are specializing the team a bit by industry. So we have a set of folks who are working on sustainable aviation fuel, others who are working on wind steel, others who are working on battery supply chain. But as an investor, the main parameters are roughly the same ones. And of course, the structure is going to be different in every deal, but this is also the beauty of KKR. KKR is very creative, very flexible in how we structure our deals, so there is no one size fits all recipe for those investments.

Huw van Steenis (16:11.65)

I’m really interested, as you say, about the structuring. So let’s say if you’re pitching to take private division to help them transform, you said in the beginning that it’s a very capital intensive space.  How are you thinking about the structure of the finance?

Emmanuel Lagarrigue (16:31.122)

That’s a very good question. The opportunities we look at are indeed opportunities where we would deploy between 500 million and a billion dollars at a time. But some of those opportunities are much larger than this. So what we would do, we could do club deals with other firms, of course, but the natural thing to do at KKR is to do this with our clients – pension funds, sovereign wealth funds, insurance companies.

We go back to them and propose them to participate in those deals alongside us. Again, this is something that has been very common in the life of KKR, and especially the DeFi Structure platform, and something like 60% of the deals that KKR has been doing in infrastructure over the last 15 years have that component of co-investment with our clients. And they like it because we bring them the opportunity to deploy capital and of course we do all the hard work of structuring and creating the governance and the protection.

Steve Clapham (17:49.955)

And I mean, do these have, they sound like longer duration type deals than typical private equity fund. I mean, can you talk a little bit about, you know, how, how you think about duration?

Emmanuel Lagarrigue (18:04.178)

This is a great question. Here what we think because look we’re talking about many deals where actually we are investing in companies which are graduating from growth equity but are not yet what you could call classical infrastructure. So this is that gap in the middle.

Right, so because frankly speaking today, if you look at capital formation in climate, you have a very big bucket of classical infrastructure funds doing renewables, probably $200 billion of dry powder there. So that’s well covered. And it’s like, high single digit returns usually.

And then on the other side of the spectrum you have a very rich and vibrant ecosystem of climate tech with early-stage investors seed series ABC growth equity which are covering all the categories all the shapes and shades of early-stage investors, investment in climate but there’s nothing in the middle.

So when a company graduates from that climate tech ecosystem, but it’s not really ready to become to be treated as an infrastructure or I would say as a classical infrastructure, there’s this gap in the middle. We are going to treat as an infrastructure, but call it some consultants now start calling it emerging infrastructure or growth infra. This is where we look at.

So with this in mind, we say, no, this is a way to transition those businesses from that growth equity universe into a more classical infrastructure universe. So this is five to seven years. And this is more or less the holding period we have in mind. That may change, but it’s a finite timeline because we really think that those companies, once they have graduated into classical infrastructure, they have to continue their life more in an infrastructure, classical infrastructure ecosystem.

Emmanuel Lagarrigue (20:24.87)

And also the other notion here is that when you look at decarbonization technologies, we’re talking probably about 10, 12 technologies that can really completely decarbonize the physical economy. The more mature today, the ones which are ready for that transition from I would say climate tech to real scale and becoming infrastructures.

The ones which are ready are of course renewables, solar, wind, batteries, electric vehicles. We are very close to parity when it comes to EVs. Parity means that you buy an EV at the same price or cheaper without subsidies that it’s equivalent in combustion engines. So we are very close to this. But those are really out of the 10, 12 technologies that are, I would say, in the money, and ready for that to graduate, those are the two. So renewables, especially solar, and any application of batteries for storage or for transportation. And then you have all the others.

Probably the next one in line is green steel. Lots of activity in sustainable aviation fuel, in shipping fuel, in regenerative agriculture, but there’s a number of technologies which are not really ready for prime time. We will need direct air capture one day, but it’s not in the money. It’s still in this climate tech incubation early stage phase. Data center cooling technologies, it’s still relatively early. You cannot really scale it up and put billions behind it to really change the way hyperscalers and AI data centers are cooling the infrastructure that’s coming.

So the notion here on top of this, this helping those opportunities transition from equity into classical infrastructure and building that bridge, you also have that notion that as those technologies mature and really graduate into classical infra, new ones are coming up the conveyor belt, if I may say. So this is also the notion, the reason why we think that the holding period of five to seven years is the right one.

Huw van Steenis (22:54.43)

So, Emmanuel, obviously, with some of these, in the climate space, policy has an outside interest in the investment thesis, particularly if you’re holding assets for a long while. Obviously, there’s been lots of crosscurrents, you know, positives like the Inflation Reduction Act, but obviously some challenges from energy security. How do you try and get an edge around the policy space? And, you know, if you’re pitching to your investment committee, how do you, how do they sort of get their heads around some of the policy, you know, pros and cons?

Emmanuel Lagarrigue (23:23.646)

This is a great question because indeed, and on top of this, not only it’s in the interest of governments to enact policies to accelerate the transition to a more decarbonized economy, what we have seen with the IRA, the Canada Growth Fund, the EU Green Deal and other policies or the China 2025 policy.

It’s also a business linked to nearshoring, reshoring, recreating blue collar jobs and industrial jobs, especially in Western Europe and in the US. So all those policies have also that wrinkle of nearshoring, friend shoring, reshoring, call it whatever, on top of being good decarbonization vehicles for the economy. And there is a lot of money that governments are providing in different forms, grants, loans, tax credits and so on and so forth. So it helps.

Basically what governments are doing here, they are helping accelerating the learning curve of those new technologies. So those new technologies which otherwise would not be in the money, or would have to wait another four to five years to be in the money, but not in the money because they receive that grant or that loan or there’s a tax credit somewhere in that value chain that helps. So that’s very helpful.

And of course, the deal for the government is that in exchange you create jobs locally. So, this is how the IRA and the Green New Deal are built and the Canada Growth Fund is the same thing. Now, for people who have been in the business of decarbonization and renewables and the industry for a while, we have seen that story already.

So, we all remember how the solar industry started in 2006, 2007. There were a lot of feed-in tariffs in Spain, in Germany, in California, and later on in China. And for some reason or another, but especially in the case of Europe, when the global financial crisis hit, Spain and Germany pulled off their feed-in tariffs and the industry completely collapsed. So you don’t want that here. So yes, those subsidies and those government programs are very helpful.

But you never want to take a regulatory risk where you would invest behind something where the unique economics, where the day-to-day cash flow of that business are going to be dependent on subsidies that can be pulled by a government because there is a change of majority in that government or simply because there’s different circumstances.

So the way we apprehend this, we have lots of conversations with governments. I’m going to Washington, D.C. again next week, doing the rounds, understanding where they are, and especially critical this year to understand how the IRA will evolve, bringing also to Brussels next month. So, constant dialogue with the governments. Because also the governments, what they expect from us, they say, hey, we are helping, here putting a little bit of money, but you guys, you private investors, you have to be the ones writing the big check.

So, it’s also important for them to have that constant dialogue with us, pushing us a bit in getting into those businesses because basically what we hear from them is hey, we’re putting that money on the table to create jobs but also to de-risk the investments for you. So now it’s your turn, KKR and others, to come in. So the way we apprehend this is by constantly talking to them and understanding where things are.

Steve Clapham (27:06.191)

That’s interesting. I mean, it sounds to me from what you’re saying that you’re going to be in a very good position if some of these new technologies come to fruition, because you’re kind of like at the front of the queue. What are other people doing in this space? Are other private equity firms following a similar strategy?

Emmanuel Lagarrigue (27:30.566)

Not yet. I mean, we won’t be alone, I’m sure. Again, if you look at the entire physical economy, so energy of course, but all the rest of industry, buildings, agriculture, it’s a 7 trillion per year opportunity to deploy capital. So there is room for everyone. So everyone is welcome to that strategy. It’s true and as we look at the landscape, we’re probably one of the first ones to come with that idea of investing that sleeve in that gap that has formed between climate tech and traditional infrastructure. One of the reasons is that gap did not exist until five years ago. So now it’s real, now you can really deploy this large amount of capital behind capital intensive adventures.

But five years ago, it was basically solar and that’s it. Solar and wind. But now again, you have battery, cement, steel, sustainable aviation, fuel, agriculture and so on and so forth. So the market of energy now exists and maybe didn’t exist five years ago. That’s one. So yes, we’re probably at the forefront because we come with this innovative thinking, which is also kind of a profit of KKR. So KKR has always tried to be at the forefront of innovation, everything we do. We see others which are going to come with very similar playbooks. We see and we hope there will be others so that everybody understands and it’s also when competition is also healthy also in this space. But it’s true that we’re a bit ahead of the curve probably on this.

Steve Clapham (29:20.203)

And where does that leave the public markets? Because the public markets have been sort of, they haven’t liked energy stocks. And how do you think public equity investors should think about this sort of high emitting stocks? I mean, do they just get pushed into your space? And if that, I mean, obviously that’s great for you, but at some point you need to have an exit and one exit avenue is the public markets. How do you think about that whole thing that, you know, there’s been this ESG fad and bandwagon and it’s kind of, it’s not all good, right?

Emmanuel Lagarrigue (30:02.99)

Two ideas and I think of course as everything in life you have to avoid generalizing too much. The first idea is that it’s inherent to how capitalism works if you’re a public company, if you’re financing your company with public money on stock markets, you have to provide predictability, you have to provide certainty of cash flows, and so on and so forth. This is how public markets work. And I think since Clayton Christensen’s book on the innovator’s dilemma and other principles like this, it’s been always clear that if you want to transition your business from whatever it is today to something new, because it’s more decarbonized, because there is more technology, because it’s just different, that transition cannot really be executed using your capital. If you think about it, companies which have been able to radically transform their business, staying the same without dislocating their equity story, changing the equity story or creating a separate vehicle, there are very few.

DSM under the leadership of Fakir Seidman, they did that transition from one balance sheet. Microsoft, I would argue, they transitioned to being a leader of cloud under Satya Nadella. But it takes a lot of courage, a very special CEO, and a very thoughtful approach. But apart from those two or three examples, it’s very difficult to think of transformation from one balance sheet.

This is why when I was at Schneider Electric, for me, the thing was like, yeah, we’re going to transform this, but we’re not going to use our balance sheet and our shareholder money. We are going to work with private equity folks to create those new vehicles. And eventually, when those vehicles are at scale and they are producing the cash flows that our shareholders like, yeah, we will reintegrate them. So now this is the value I’m proposing to public companies. Hey, don’t force that story. Don’t get in trouble with your shareholders.

Otherwise, you will have to choose between either changing your shareholders or changing your strategy or staying the same forever, but stay the same forever, then you don’t have any transition. So I think it’s a bit unfair to ask public markets to finance the transition to take that risk, if you will. So that’s the first idea [and then easy white price money is the right place to go].

The other idea here is also, I think, a bit unfair to ask companies, inherently oil and gas companies, to play a major role in energy tomorrow. So I think there was that mistake, make oil and gas companies are energy companies. No, oil and gas companies are oil and gas companies. It just happens that our energy system today is running on oil and gas.

But it’s a bit unfair to ask big oil and gas players to tomorrow be champions in electrification and be generating electricity, just like they are generating oil and gas. If you think about those companies in terms of capital and deployment and strategy and what they are really good at is about deploying CAPEX in long-term projects, sometimes in worldly jurisdictions with very high skilled engineers.

So for me, it would be natural to see oil and gas players becoming major players in metals value chain. We are transitioning from a molecule-based energy system to a metals-based energy system with batteries and EVs and things like this. So that would be natural to see them generating the resources and building up the raw material supply chain for these new value chains in this new electrified economy. And we see that also in carbon capture, for instance.

They have the technology, they have the skills, and they will play a major role. So what I think was the expectation of having them calling all gas companies, energy companies and saying, oh, there are energy companies, then this should solve our energy problem of tomorrow. That was a bit unfair. And this is where the thing broke because one, they were trying to do this from their balance sheet and paying that transition from their balance sheet. Not a good idea. The shareholders pushed back on this. And second, with this assimilation of calling all gas companies, energy companies, well, there was that say strategic mistake of expecting from them to become big champions in renewable power, whereas their skills are somewhere else.

Huw van Steenis (35:06.058)

I think it’s a really interesting lens. And what it means then for public markets, presumably, is then once you’ve got incremental strategies, let’s say energy efficiency, can they become 10 or 15% more efficient each and every year? I was having lunch with an energy investor we both know who’s saying half their portfolio is basically an energy efficiency plays, because he feels that’s the bulk.

But if I come to the companies that you’re coming to, obviously, cost of capital for private equity would typically be a bit higher than what historically is higher than public markets. Are you looking then just to take a division or two or the whole company and then do the capital reallocation or a bit of everything?

Emmanuel Lagarrigue (35:45.367)

No, it’s more when we work with private, with public companies, we’re talking about a division. So that division that is a promising asset for a more decarbonized portfolio or transition of the company, this is the one we are considering or building a new division from scratch. And yes, the cost of capital is going to be different.

But many companies have understood that if you’re financing your capital, if your cost of capital on public markets is 7-8%, thinking that this capital is going to finance your transition is an illusion. You cannot ask your shareholders to come along that story. And we’ve seen that a lot.

So courageous CEOs who deploy billions of dollars and euros in new adventures and public markets shareholders have six months later say where’s the cash flow that 3 billion investment you made last year and the answer is no it’s coming it’s coming in five years from now you cannot ask public markets to do that so it’s natural to use private capital yes to assume a higher cost of capital for a while you are building these – something that is predictable, easy to understand, easy to measure, that you can really put in your equity story.

So, I think many public companies are coming to that realization that, no, you cannot use that cheap capital coming from public equity for this transition. And yes, it’s actually much more efficient to have a bit of a higher cost of capital for the first five to seven years of that business and then transition it back into your balance sheet.

Huw van Steenis (37:44.414)

And so just, and then maybe just getting a little bit more, you know, going to this cost of capital, obviously, last year, there weren’t that many deals. And obviously, you weren’t necessarily live. So it’s not your problem. But obviously, as interest rates rose, there was a mismatch between buyers and sellers. Now, it seems like in the venture capital space that’s starting to clear. In your, you know, between the two valleys, sorry, the valley between the two peaks, are you seeing a greater realization of the change in the cost of capital?

Emmanuel Lagarrigue (38:12.726)

In decarbonization, I think we have been fairly isolated from that phenomenon. And also it’s clear that, but nobody knew to be fair, that everybody was calling a recession and was fearing for the worst a year ago and at the end it was not that bad. So, and I would say it’s true that I would say in our traditional private equity or infrastructure business, the first part of the year was everybody had to be very cautious because we didn’t really know where things were going. But in climate, look at the underlying trends of course, those public policies that we talked about or how fast the adoption of electric vehicles is happening in Europe, the US, in China, in other places, how people are considering green steel as a real solution and even ready to pay a premium on these, how airlines are arguing about sustainable aviation fuels and so on and so forth.

So there was still a lot of activity. So we have been quite shielded from that environment, at least in terms of opportunities we’ve seen on the market. But it’s true that everybody has been very cautious and we have walked that one very slowly because there was a lot of uncertainty, especially in the first half of last year. But now I think not only things in climate have not slowed down as much as in other places. And second, it’s clear that there was nothing to be that worried about.

Steve Clapham (40:02.639)

Yeah, I mean, you have you got any sort of particular bent in terms of geography or politics? I mean, there’s lots of elections coming around the world. How does that how do you think, you know, coming in into a new year? I mean, how do you think about that? The global perspective as KKR is a global firm today.

Emmanuel Lagarrigue (40:19.51)

Yes, so we are a global firm, we invest everywhere. We also, in terms of climate, because it’s a new strategy which we’re incubating inside the infrastructure platform of KKR, we’re going to go first to places where KKR has offices and infrastructure, qualified people, because that business of climate, like every business, is about relationship, you have to be close.

So we’re not going to go at least at the beginning with the strategy to places where we don’t have people who can really on the day-to-day basis work with the companies we want to invest in or work with. And second, we are going to go where the emissions are first, which is basically developed economies. So Western Europe, US, developed Asia, Pacific, this is where we go first.

But also India, a lot of opportunities in India, gigantic opportunity to help the Indian economy getting very faster into its transition to a more decarbonized future on the energy side, the industry side. Also relying on a very strong KKR team in India. But by and large, it’s going to be, we’re going to focus first on OECD countries. The impact of elections, we’ll see.

Again, we go with our eyes wide open when it comes to the role that governments play with subsidies and grants and loans, and we don’t want to take any regulatory risk there. And then we’ll see. Again, I think the good thing of KKR is that we try to be thoughtful enough and we have – and we try to understand the world in a way that would shield us from making those mistakes, the mistakes of taking for granted things that can inherently change.

Steve Clapham (42:24.847)

Obviously you’ve had an experience across a whole range of geographies. I just wanted to ask how concerned you are about the anti-woke movement in the US in particular, and obviously there’s an election in the United States. And one of the candidates is very interested in this area and one is less interested. How do you think about that? How should we think about that?

Emmanuel Lagarrigue (42:55.574)

Well, first, the first would be like in the first year of the IRA. There was probably something like, it would be difficult to get the exact precise numbers. There was probably something like 180,000 to 200,000 jobs being created. Many red states are very happy to see new battery companies, FOEVs coming to their state and creating thousands of jobs.

The IRA is fundamentally based on tax credits. So if the jobs are not created, if the investment is not realized, it doesn’t cost anything to the taxpayer. So I think whatever happens in November, parts of the IRA program will probably stay because I think that it made it the point that it’s creating jobs.

Creating jobs where it was needed in middle America, in the south of the US. So I think it starts to work and so that’s the first comment. So I think whoever is in the White House in a bit more than a year from now, we think twice before upending everything. That’s my take because it’s really creating jobs, especially in the Red States.

The second point is that we invest beyond political cycles. I think we perfectly understand that you cannot amalgamate and put together diversity and inclusion, governance and climate. Those are all different spots. Those are all different stories. And mixing them together and saying, oh, you know what?

No, I’m going to go a bit beyond reasonable on emissions, but I will have a perfect governance system in my book. But that’s ridiculous. So and I think the world now is moving on from what we were calling ESG and nobody calls it ESG. Nobody’s using that term anymore to something a bit more thoughtful and those stories are different. So the expression of that shift from the old ESG world to really something that’s more thoughtful about decarbonization about governance and other topics.

Well, there’s different expressions in different countries by different people. So this is how we read it. So we just want to go beyond those political cycles and how it is utilized and communicated. We’re not really interested in this. And we focus really, in our case, on the business of decarbonizing the economy, making sure that it creates value. It creates value for our clients. It creates value for the societies.

So it’s really about making the point that decarbonization is a good business. You don’t have to choose. It’s not a trade-off. You don’t have to make it a bit greener, but it’s going to be less efficient economically. No, no, it has to be very efficient economically. And on top of this, it’s decarbonizing the economy.

Huw van Steenis (46:08.546)

Emmanuel, I’m sure you’ve read it, but for any listeners, there’s a great speech by Brian Dees, who’s taking a year out at MHD. And he’s run some numbers suggesting, obviously, as Emmanuel said, the 200,000 jobs, almost half of them in Texas. But compared to what the Congressional Budget Office thought, it’s already running twice the effectiveness that they thought and may end up being three to four times as effective.

Obviously, the loan program may get put at risk, but that’s right. So I had one question though, I mean, I liked your framing of this as the next generation of climate aware investing. And I think, you know, as my old boss and your now competitor, Mark Carney said, it’s good you want finance to go where the emissions are. And I think the fact you’re embracing that. So maybe last question for me is, the asset owners, are they up for that next generation?  

Emmanuel Lagarrigue (47:01.395)

I think that story is starting indeed to be understood. People understand three things. First, that decarbonization is a good business. You can make money. Today, the cheapest source of electricity production is solar. If you try to build an energy system with anything other than solar, you’re going to leave money on the table. Now, the transition of the existing system from inherently fossil fuel-based system into renewable, that’s another thing.

You’re transitioning a system versus building a new one is a different thing. But today, if you really want to make money in energy generation, you put your money in solar. This is where the money is. Fast forward two, three years from now, same thing will happen in making cars and buses and trucks. You won’t invest in cars. I mean, peak combustion engine was in 2017.

All right, so if you start a company to make buses or cars or trucks, you’re not going to start making commercial engines, you would do it if it’s from the get-go. And here again, if you are managing a big automaker, well, it’s the transition. That’s a slightly different problem. So I think people understand by and large that where the economics are is in those decarbonization, decarbonized businesses. I think that’s the first idea. And everybody is getting to this because people see it.

They buy an EV, it’s cheaper than the combustion engine car, it’s more fun to drive, it has the same autonomy. Usually what you see in the behavior of people buying electric vehicles, usually they don’t come back to combustion engines. I think this is a bit that notion. Everybody understands this. Now there are new things. Again, direct capture is a bit more of a sophisticated thing that the general public or many investors want.

won’t need or don’t need to understand before a few years and that’s okay. But I think everybody starts understanding this and on top of this everybody starts seeing that we are looking at the supply chains that are behind the decarbonization of industry in particular.

The supply chains are creating jobs locally and we are rethinking about this because a car in Western Europe or in the US, it’s economically inefficient to bring your batteries from Asia. The battery in the car is 40% of the weight, 40% of the cost, 40% of the emissions. It’s not efficient to bring your battery from Asia, even if it’s cheaper when you buy it because it’s very heavy. So you want to produce your batteries very close to where you’re going to make the car.

And of course producing the battery where you’re going to make the car, is going to create jobs. We also have to manage the transition of jobs, which were yesterday in engine factories within auto EMs, which are now going to be in battery making plants. So we have socially to manage efficiently that transition. But I think everybody starts understanding that picture.

Steve Clapham (50:39.607)

Fantastic. Well, listen, Emmanuel, I’m incredibly grateful to you. Thank you so much. I really found it a fascinating conversation. Huw, thank you as well.

Huw van Steenis (50:48.942)

Pleasure.

Emmanuel Lagarrigue (50:50.326)

Thank you Steve, thank you Huw and thanks for having me. It was great. Great conversation.