In the case of renewable or alternative energy and infrastructure, this financing gap has emerged and continues to widen for two primary reasons. First, the nature of the asset type is complex and inherently risky without deep domain expertise and experience working with business models that require large amounts of upfront capex, generally exposed to commodity price risk, and sensitive to supply chain issues, among other complications. This type of financing is not new - project finance has been a cornerstone of the power, utilities, and infrastructure sectors for a long time. What makes the energy transition, broadly defined, different is the relatively unproven technology behind much of the low carbon/low methane intense alternatives to coal, oil, and natural gas. Development-stage projects with a substantially de-risked business case through secured offtake agreements speaking for a meaningful percentage of output/revenue (whether it be electricity, RNG, “green” steel, etc.) with low counterparty risk is rare for any sector. Assessing credit risk and determining a proper structure becomes somewhat equity-like, upending a more traditional lending framework and leaving only those with specialized industry knowledge, operational expertise, and flexible capital. Further, the current state of the economy has rendered some private capital investors unable to deploy due to fundraising woes, a heightened focus on portfolio management, difficulty in returning capital to LPs, and an inability to exit.

On the back end of these transactions exists another opportunity for mispriced assets and managers forced to generate liquidity - possibly in cases where the asset is knowingly being monetized despite having strong upside potential. As a secondary buyer, an investor with more permanent capital, and perhaps distressed-oriented funds with an eye for deep value, the opportunity set could be large - as is the growing TAM of managers seeking synthetic routes to increase DPI, notably through NAV loan distributions.