Equilibrium re-thinks wastewater strategy amid growing RNG interest

Equilibrium paused fundraising on the second iteration of its wastewater fund due in part to the evolving investment environment surrounding renewable natural gas-producing assets, according to the firm’s chief executive.

Dave Chen declined to disclose exactly when Equilibrium formalized its decision to pause fundraising and update its strategy for Water and Wastewater Opportunity Fund II, which launched in August 2018 with target of $300 million.

That launch followed a 2016 close on $184 million for the vehicle’s predecessor, the Wastewater Opportunity Fund.

According to an overview provided to the $9.5 billion Contra Costa County Employees Retirement Association, WOF’s strategy focused on helping utilities meet renewable energy requirements through investments in anaerobic digesters capable of producing RNG derived from “organic waste laden effluent from food and agricultural processors.”

Chen stressed that investors active in energy and infrastructure have traditionally utilized a mixture of closed-end funds and open-ended, partnership-like structures. Equilibrium’s decision to pause fundraising on its second water and waste fund, he said, fits within a pattern of firms “repositioning themselves” to adapt to the evolving environment around renewable and conventional energy.

According to the US Environmental Protection Agency’s AgSTAR database, dairy waste was the feedstock for 223 of the 282 domestic digester projects in operation as of September. In a 2016 white paper, Equilibrium identified 10 US states with significant wastewater resources alongside supportive energy prices and waste-diversion mandates.

Portland, Oregon-headquartered Equilibrium’s Threemile Canyon Farms digester facility is up and running, Chen said, and stands to benefit from a recent regulatory change allowing RNG to be included in the public utility’s renewables mandate.

Capital from WOF was also used tor Equilibrium’s investment into a facility producing dairy-derived RNG in Pinal County, Arizona that in late 2018 received a $61 million “green bond” from Goldman Sachs then hailed as the first of its kind. Chen declined to directly discuss the instrument, which has reportedly been subject to delays and technical defaults.

“We have earned the experience, the network and the scar tissue to understand how to make these assets productive,” he said. “Anybody that thinks this is ‘Build a pipeline’ or ‘Build a solar field’ will learn how operationally intensive these assets are. They are very valuable, but they have very different characteristics.”

Chen highlighted French infrastructure manager Meridiam’s entry into the US RNG market in August, when it participated in the $35 million acquisition of a digester in Twin Falls, Idaho. Other GPs, he said, are likely to follow.

“All way through to the oil and gas midstream, fund managers are all starting to seek out this field,” he said of RNG. “We find ourselves in the enviable position where we have big chunky assets that are now up and running, operational and generating gas.”

Among the factors driving investor attention towards methane, said Chen, are expectations that US recent elections could lead to increased support for alternative energy.

“With the Biden administration coming in, you are going to see this great acceleration – I jokingly call it the ‘Great Burp’ – this explosion of gas,” he predicted. “If that’s the case, we have to rethink our strategy.”