With laurents segal and from London and Gerard Reed from Berlin. This is Redefining Energy today. On redefining energy or actually going to talk about a company or an institution, KKR, which is one of the biggest private equity businesses in the world and they're heavily involved in the energy infrastructure sector.
Yeah, because on this podcast we talk a lot about those big private investors, but at some point it is great to really understand how they function, how they think, what is their strategy, how it's evolving. So if we look at KKR, they've invested dozens of billions in the acquisition of assets in our sector. And I'm just going to name a few because you're going to hear about them during the conversation. Zeno b Adventus, albionma Conto, Global actis Igny, sms at Shiona and Kavis ecg Any Bayou
fuels crazy. The level of their activity.
For me, it's really interesting on as their strategies because what they're really doing is they want to create platforms and they want to create next generation energy services businesses. And you know, it's energy service and a victag. So you've got a business that's looking at mobility. You've got a business is looking at in turn industrial and commercial. They're in different regions, and and and and they all
have some form of competitive advantage. And basically what KKR doesn't help these businesses scale.
We have the pleasure and the privilege of inviting Emmanuel la Gaigue, who is a partner at kirk and co head of the Global Climate Group.
Yeah, and guide Lauren. I've known for a long, long while. He's been in this whole energy space the whole of his career. You know, he was formerly had a strategy at Schneider. Yeah. Great guy to have on board to talk about not just KKR, but also just how he sees the future and how he's trying to create it with the businesses that is investing in scaling.
And of course we're asking about the topics right now that isn't a Hi what he thinks about hydrogen green premium. I mean really really a treat for us and I guess for our listeners.
Agree, totally listen. Why don't we bring him on the show.
Emanuel, Welcome to the show.
Thank you, Lauren, Thank you. Jerrar gread to be here.
Ko manages seven hundred billion which is enormous people don't realize, out of which probably ten percent are dedicated to energy Infatulu Emanuel, first, can you give us a big picture of how all this fits into KKO strategy.
Yeah, So, as you said, the infrastrator franchise within KKI is roughly seventy to eighty billion of asset under management.
That's a platform that started actually right after the global financial crisis in two thousand and nine and has been growing extremely fast in them used to take KEK is the second larger infrastruture investor on the planet, the largest in Asia Pacific, and so we are very proud of it and how our things are being developing and out of this, if we look at energy assets and assets linked to the energy transition, almost a third of those
investments have been in and around energy. The important point here is that sometimes when people think about infrastructure, the thing that come to mind is tow roads and ports and airports. This is not what we do. It's a very different type of assets.
Today. Most of the.
Activity across the platform is in data centers and how you bower the data centers and our AI is changing the paradigm with what we're doing with my cohead and partner Charlie around climate under decombonization of a number of supply chains. We're talking about private assets and not so much what was to twenty five years ago infrastructure.
I think that's one of the ingredients of.
The success of the car infrastructure platform. So it's like, how do you build businesses which are buying large private infrastructure businesses with no sensitivity to GDP or very low sensitivity or exposure to GDP, predictability of cash flows, downside protections and all the things that in the volatile environment are becoming a really interesting place to go for.
And Mana, let me just jump in there maybe just before we talk about your strategy and the types of companies you invest in, could you talk about how you look at risk and reward. Do you have a sort of one view of it or do you have different funds that look at different types of risk rewards? Just maybe talk a little bit about that.
Yeah, we have different strategies. Just take one sector, renewables. If you're investing in operating assets of wind and solar, where you have long term PPAs everything is built so it's very predictable, it's a lower risk glor return strategy,
so that would go into our core strategy. If you invest in a brown to green conversion, you take generating assets on agreed, then you're converting them away from fossil fuels and into renewables and biomass, where there's a bit more work, there's a bit more of a personal leverage, but it's still relatively predictable and stable asset. So you would put this in it's a higher risk and higher return.
That's more of a corplus type of strategy. And then when you look at an asset like Adventus here in the US, where we basically sell high tech solar and battery projects in the places of the US where it's highly needed, very high in the interconnection queue, so there's much more development work there. So that goes into the Climate Fund, which is more about developing the next generation of the carbonization asset. So we have to be very disciplined on how we treat everything and which asset will
go in which box. The beauty of having several strategies and several ways to treat that risk return is that we can cover the entire span of what's happening, for instance, in renewables and I could take the example of AI in at a center all the places where we can be very clear with our investors, right, so they know exactly which strategy is going to invest in, which type risk return asset.
Emanuel, when I read the presentation of all various activities, you were on a geographical split forty America, forty Europe twenty Asia. If I'm not mistaken, have you been able to follow or you have like even flows or how do you cope with the geographical diversification small.
Less how things are unfolding? Where we have that split is mostly for the climate strategies. But we say to decombanization strategy together with the positive returns, right, so it's returns first because we don't think there should be a trade off between the cambonization and return. So it has to create a return and also decoveranize the same time with But we say so if we do the is that's going to be mostly in no easid countries. Therefore
split between North America, Europe and Asia Developed Asia. I should say this is roughly what's happening. We have started a little bit more tilty towards Europe for different reasons. It was easier for us to do the first deals there the market where also valuations and volatility were lower.
But roughly what we were predicting is happening.
Maneuel. Can I pick you up on that point about your focus on Europe and also what you said about valuations, because what I think very interesting about what you've done is you've actually taken quite a few public companies privates. And I sort of scratched my head and just say, if that's the case, then you know basically something wrong with our public markets in Europe.
I don't think it's exclusive to Europe, and we see that everywhere public markets have become volatile and with a very low tolerance to risk or change. This is why you see all the biggest set managers, and we're not the only ones. When we look at Larry Fink's and your letter. It's all about democratizing the access to infrastructure investment.
So the paradox of this is that private investment, and especially in infrastructures, is becoming more stable, more predictable, especially if you want to transform things, and we've seen that around the energy and the energy transition. Five years ago, six years ago, you would see CEOs of public companies going to their board and their shoulders with very bold transition strategies. Hey, we're going to invest two three billion into this, into that transition, and we'll create a new
green growth engine to our portfolio. That has not happened because this is not what public markets are made for. Of course, the attractiveness of public markets, it's like it's the lowest tier of cost of capital. You have very cheap capital, but in exchange you need to give predictability.
Very simple equity story.
So today many of those companies who were promoting this type of strategy five six years ago, our companies we are talking to because private capital and private infrastructure is probably the place where this should happen. Yes, it's a high cost of capital that there's a guarantee of delivering.
So for many of those companies, the conversations we are having are, but let's create that green growth asset that you were planning to do, but it's going to be off balance sheet of pnls, so that you don't have to consume capital from your shoulders and from your balance sheet. You don't also to force your shoulders in subscribing to a strategy. They may not like we build that asset.
We give you the optionality once the asset is at scale and you can tell an equity story that your shoulders are ready to hear, but then you can take it back or not. If that never happens, well we'll go figure out what we do with this asset. So we see that changing because private markets are usually better equipped for anything that that is a transformation like this.
And case in point two months ago there was this listed fun on that risk called Harmony and they've been taken private with an eighty eight percent premium on their stockitching variation. So it was very clear that the stocking change was not finding the value. So we really understand
that and more. They speaking if we look just the last five years and you are a long term investor, but then you take COVID, the hydrogen bubble, Russia, Ukraine, now we have the treasuy wars and volativity absolutely crazy. So how do you survive all this?
This is part of life, So see why you have to take a long term view, none jerk reaction, Understand where this is going, try to calibrate and measure those risks. We are spending a lot of time talking to governments, not because we want to extract subsidies or preferences or influences. We just want to understand where they are going. Because today, even in the West, policies and regulation around energy become somehow volatile, and when there's an election, you can have
a change of direction. That's fair, that's how it works. So we just take this into account and we try to make the most of it. And if you think about it, and that's what our founders Henry Cravis Central Roberts always reminders when like guys at KKR, we invested in periods of time where inflation was double digit in the US and KR was successful. So that world is going to change around you and influence what you can influence and for the rest trust to apprehend those risks
and understand them the best you can. And of course that long term is a bit, especially when you invest in energy and the cambonization, you have to take a long term. This is a multidicated story. Let's not try to think this is the next LM or SaaS do things take time. We're talking about the infrastructure. We're talking about very large investments about changing the energy mix of countries or companies. So that's going to be long can.
Maybe we talked a little bit about your investment strategy, because from outside, what I look at is that it seems that you're investing in what I call platform businesses, in other words, businesses that you can really scale by bringing them into their countries, bringing them into the markets, or whatever it is. Is that a fair synopsis of what you're doing.
Yeah, especially when the climate strategy, there is this notion of platform. So if you take the example of the NOB it's a high development, high growth platform where we electrify mass transit systems. We help bus operators in the UK and Europe, in Australia transition their diesel fleets to electric.
This is new.
You have to take into account or you're going to charge those buses, or you remove the frictions, or you create a return out of the favorable total cost of ownership that an electric fleet is bringing you over the diesel fleet, and so on and so forth. What we've done in Spain withness Power to X it's a platform to decarbonize the supply of electrons and molecules and steam to heavy industry. What we are doing now in Germany around the electrification of heat for industrial and buildings and
multifamily residential buildings. We are building a platform with a roll up of several companies and contracted transitions from gas to heat pumps of heating systems and heat as a service. It's a very small platform today, but as we grow, it should be big, unstable, and therefore it's very likely that the next owner of that platform will be a
corplus and infrastratural fund. So the big names you find infrastructure and again probably not a care because we don't play that game, but all the other big names in infrastructure,
we probably have appetite for this. So we're really trying to build the platforms, especially when there's a story of direct or indirect electrification, because electrification simply brings with an efficiency in the system, and if you're able to transform that efficiency into a returning they've created something that is economically viable without subsidies, without premium to be so for and things like this.
When I look at your portfolio and again you know it one hundred times better than us, you see some companies who do the same things or sometimes in different geography. So can you coordinate? Okay, let's say seller Panels, you made a call with all your companies. Look, guys, these guys has the best seller panel supply chain, or this guide managed to get the best deal for winterbine, or look, this is the best trading system that we figure out,
So why don't everybody use it? I mean, is there a way to spread the best practices.
Yeah, we have a whole team internally called caps Tone. That team is doing exactly that. They help the companies, especially when we're talking about young platforms. They help professionalized processes find the best resources when it comes to procure sol panels, batteries or the things using the breadth of the KKR platform, not just the different platform, the seven undred billion AUM and a two hundred and fifty plus portfolio companies of KKR and the fifty years of having
done this. So we have a whole internal team that just optimizes. So helps the companies optimizing their economics, which of course at the end makes them stronger. Professionalizing processes, optimizing procurement, creating synergies when there are some always being very careful. So synergies are good between companies to an extent, right, so that you don't want them to become a distraction or if they are coming from several strategies or things.
You don't want to have a distraction between even between teams within KKR. But that's the only limit. Otherwise we try to do this a lot.
It's been twenty minutes and there's a world who have not pronounced it's Ai Ai Ai Ai. So what's in it about Ai? Because I read the recent IA report and everybody's going gangbusters and we need I don't know how much more power. What's KIKR take on AI? And of course we are interested by the energy and girl.
Yeah, so if we start from the real estate angle of this KKR, we are own five that isn't the
platforms across the world. So we have that constant communication with all the hyperscaloes, basically the seven large talking about the West here when not really engage in China on this, but in the West, we have that constant dialogue with the seven companies, seven large companies in that race because of course we build infrastructure that a center infrastructure for them for their cloud infrastructure.
But also for their infrastructure, and of course.
More and more over the last couple of years, it's like, oh, can I have the data center infrastructure together with the power. Can you do also something with the power big that the thing is going to become very powerented see very quickly.
So that does take us into a journey or for the first question is that, okay, is it going to be different this time, because if you remember twelve years ago when all the cloud infrastructures was built, everybody was also scrambling for power while the it is going to become very energy intensive and so on and so forth.
But at the end they were involved productivities that were brought in the system efficiency and other productivity on how the computer was organized for these good big cloud providers and at the end the energyman was flat. So there's a bit of that thinking like let's be mindful of what could happen. There will be other productivity moments. We saw DEEPSEK a few months ago. That's a productivity moment, right, Something that's through software is more efficient at developing llms.
I'm sure that the big suppliers of chips will come with more efficient solutions and videos. Chips are becoming more energy efficient over and over. When it comes to energy, everybody starts thinking generation, we need more generation faster. While there's a lot of slack in the grid. The distribution grid in the US and in Europe is overbuilt. Especially in the US it's overbuilt. There is something like thirty percent of the interconnections are and use eighty percent.
Of the times.
So just discovering that slack which doesn't need any CAPEX anything is you just have to organize properly the demand respond and all this without adding more generation. This is why there everybody is going a bit fast into oh we need two times more three times more energy.
Well maybe not, we need more energy this time.
It's unlikely to see a repeat of the cloud story where the end the energy deman was flat. We will probably need more energy, but not as much as what some people would tend to say. Now to do that, centers are going to require energy in very high density. This is why people start talking about nuclear because of course there's so much you can do with women, solar and gas when gas is going to be constrained because you basically have five gas stourbine manufacturers and the backloger
and five six years today. So if you want to build a new gas fire power plant, even say I'm going to run my at center i knew data center on gas, Yeah, you can start it in.
Six years from now.
So today, both in Europe and in the US, if you want to have power fast, you go for solar, and we see that we are selling a lot of solar projects to hyperscalers and people who are building AIDATA centers. Or you grab existing capacity.
Of gas and thermal plant.
That was the purpose of our partnership with the cl and eventually you will have more gas and eventually we see cs probably because those hyperscaler especially the big ones, they still worry about that cabin for print to some extent. And eventually it will get nuclear. Now which flavor of nuclear? Will it be the nuclear we have known forever Allah, Hinkley Point or Vogel. Will it be restarting the nuclear reactors like what Constellation and Microsoft start trying to do
with one of the reactors at three Mile Island. Will it be a SMRs, which are very very promising on paper but haven't really been tried outside of Russia and China and the economics will see but on paper it's just perfect, but I'm tried. Or will it be fusion? Even so, all this sounds a bit far away. So one is known, but very expensive. The second one and the other three have never been tried, right, so restarting a reactor, SMRs or fusion seducing on paper, but we'll see it anyway.
None of those is going to be available.
For reaching cod before at least twenty thirty twenty thirty five if we lucky, So we see all these, there will be more energy demand, but not that much, not two times three times two. There's a lot of shortcuts, the slack on the grid, solar and batteries, existing formal capacities. That's going to be where things are going to go into the short term and eventually in a few years from now we talk about more gas and probably nuclear or the sources, but we'll see where it goes.
Avanue I just maybe as we wrap up here, I look at it and say, we're living to the era of volatility. But of course volatility passes, then what happens. How do you see it? How do you see the future?
Basically, Yeah, there are a lot of ext factors for volatility, and also within the energy world there's been a bit of self inflicted ones. So just look at all the buzz around hydrogen two years ago with a lot of people who didn't really care about the reality of what a hydrogen molecule is, if you can transport it or not, if it was really making sense from an industrial standpoint for a number of applications, and that has led the number of countries to build hydrogen policies which were built
on shaky grounds. And now you have a lot of people, but hydrogen is not happen. Investors are not putting money in hydrogen, and no, we're not going to put money in things that don't have an economic viability over time, where there's no industrial logic where I'm sorry, but physics and supply chains are basic that you have to understand and take.
So what I.
Mean with this, Yes, there is volatility. We can always complain about all the phenomenons that Lauren was mentioning at the beginning, but sometimes also within the world of energy has been a bit of happy ideas and find people trying to apply the recipe of other industries to especially to the combonization, and that has created volatility, backlash and everything.
So relatidity is part of the game. But if we stay grounded, if we understand the physics, if we understand the supply change, how you get the economic viability how you apprehend green premiums, where you have green premiums, and being realistic about how you're going to eliminate them, and not to wait for the next government to subsidize you
for the next twenty five years. So if you take the first principal approach to number of things, I'm very optimistic looking at the long term, looking at how we are going to get enough energy for AI and electrification and other priorities. Make sure that energy is affordable, make sure that energy which is now definitely at the core of the national security of basically every region in the world. And if on top of this it's the cabanized, but
it's even better. I'm pretty optimistic on seeing all those pieces coming together. And yes we have to go through a bit of noise and volatility, but if you should really separate the noise from the signal, I think that's that's what I really promising.
That's a great way to end the podcast. So I just want to thank you for coming out. It's been really refreshing and informative.
Thank you and Manuel, thank you so much for coming.
Thank you guys, good to see you job.
You know, I'm French, or at least I used to be French deep at who you talk to, But there is this saying in France and in Manuel theerve this it's called a.
Yeah.
It's an absolute to the force, the sheer side of their operation that they built, the three sixty vision, the understanding of the dynamics of public market versus private markets, the will to develop. Wow, I'm blown away.
Yeah, I am too, And I must admit I always look with a critical eye at what investitors do, right, and so if I give you a very simple example, they took private this German business in Kaves and in Kavas is are renewable developer IPP from Germany. It's been around nine and they took it over at such a premium to the market price. I thought eight. These guys are crazy, but actually they're not, because what it is is they see in Kavas as the bedrock of that
particular platform they're building in that area. So they have a very different way of thinking about things. And as I said, the more I understand, the more I agree with what they're doing. And it's really good for the energy transition to have guys like this and that can can really create new let's call it new world energy services businesses.
And contrary to what sometimes does infrastructure investor that portrait like short term or everything. They have a vision, long term vision, but also technical visions, strategic vision. They understand the dynamics at the global level, the regions, and and then once they have identified a trend and how do we invest and scale in that trend. You know, we talk a lot about Zeno B but you know, they put a billion into Zenoby, which is basically electrifying bus fleets,
and now they're really all over the place. And of course they take advantage of the others platform they have, and then when we talk about everything around AI, they have five platforms to develop data center, so of course they know what's going on. So it's mind blowing.
Yeah, it'd be interesting to see what comes out of the businesses that they're creating. Again, just looking from the outside, I think I'm going to have some really impactful businesses that they build up over the next few years. So I think it's very important to look at their portfolio really and what happens with it.
You know, they have avoided a lot of the hypes. They didn't go into sparks, they didn't go into giga factories. They didn't go into hydrogen, didn't go into those green premium, green steel and so on, so they really understand. These are one of the few guys who you know, when I took to them, I learned a lot because the advantage point is so extraordinary.
And by the way, people listen to us probably think, my god, I on the payroll a khr. Were not actually and it's more that both of us just spend our time on looking at what investors do. And I think we both agree that investors do a lot of stupid things in this energy transition, and it's a tough place to work in. But I think both of us agree that it's just we like this, got their approach right, We like their approach and what they're doing.
Yeah, and e Manuel even disclosed a few things which after we had the center tape to the compliance and they came back and I had to remove two very good minutes which were excellent about the strategy. So you know, at some point you hear it must be like the thirteen minutes, and I say, oh, now that we reached twenty minutes. Yeah, it's done in a very proper way. I can't see why they're not going to succeed. We interviewed some guys and after five minutes we're like, oh
my god, I can foresee a lot of reading here. No, no, their portfolio is flowless exactly.
Well. We thank a lot Emanuel for coming on the show. We wish wish them the best, but I don't think they need our super encouragement.
I just want to thank the compliance department as well. It was really a pleasure working.
With you, Okay and John. I took to you next week next week.
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