Avenue Capital’s contrarian bet that started in California a decade ago paid off big time when it sold the portfolio of assets in its Golden Continuation Fund and the Middle River Power platform to Partners Group for USD 2.2bn enterprise value.

The highly competitive process resulted in infrastructure investors such as Stonepeak, OMERS and CPP Investments being in the process, said sources familiar with the situation.

The business offered buyers the long-term stability of a portfolio of operating thermal gas assets in California, a 600 MW portfolio of co-located storage assets expected online by the end of 2026, and the potential to develop a pipeline of standalone storage projects.

Avenue made its first investment in natural gas-fired power plants in California in 2016 at a time when the Golden State was amongst the first movers pushing to 100% renewables.

“However, we recognized that natural gas was a critical part of the path towards a low carbon future,” said Craig Hart, Senior Portfolio Manager of Avenue Capital Group, adding that market was also conducive for deals.

“Market pricing was much lower than it is today, and asset values were depressed as these were a collection of merchant facilities fully exposed to the market,” added Hart.

A pivot in the investment for Avenue was when it raised its “Golden” continuation fund in 2022. A source indicated that Partners infrastructure secondaries business originally invested in the continuation fund but made it clear that Partners Group’s direct infrastructure business was the winning bidder in a competitive auction and the secondaries platform played no role in setting valuation.

“This allowed us to extend the life of ownership of these assets, do a master refinancing and position the platform for energy transition.”

The co-located battery strategy allowed Avenue and MRP to add capacity to peaker plants and increase the utilization of existing interconnections. Instead of waiting multiple years in the queue they just needed a modification of the existing operating permit. Hart said this essentially reduced the pre-NTP stages of development to 6-to-12 months relative to the multi-year queue process.

The co-located storage allowed significant reduction of the carbon footprint since the storage “would cannibalize most of the time that peaker plants would have run, while also unlocking the long-term contracting market.”

First Citizens and MUFG agreed to provide USD 250m to finance a 327 MW slug of those co-located storage projects in November 2023. FlexGen was also hired in 2023 to provide the battery energy storage systems on four of those projects.

The below NPM Interconnection Queue Applications chart (desktop only) highlights Middle River Power’s pre-operational project pipeline based on NPM’s Market Research.

Partners Group and Stonepeak declined comment on the situation. OMERS and CPP did not return calls seeking comment.

*This story was originally published exclusively for NPM US subscribers.