8-K: Hannon Armstrong and KKR Form $2 Billion Joint Venture for Clean Energy Investments

Hannon Armstrong and KKR have established a joint venture with a $2 billion commitment to invest in climate positive projects across the United States.

Summary

• Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) and Kohlberg Kravis Roberts & Co. L.P. (KKR) have formed a joint venture called CarbonCount Holdings 1 LLC (the JV).
• Both HASI and KKR will each commit $1 billion to the JV, totaling $2 billion, to be invested in clean energy assets over an 18-month period.
• HASI will provide services to the JV through its subsidiaries, Hannon Armstrong Securities, LLC (Broker-Dealer) and CarbonCount Holdings Manager LLC (Asset Manager).
• The JV will be governed by a four-member board, with two directors appointed by HASI and two by KKR.
• The Broker-Dealer will source investment opportunities, and HASI is obligated to present all suitable opportunities to the board until the commitment is fully invested or the 18-month period expires.
• The commitment period can be extended by mutual agreement or if the JV is refinanced with debt.
• Capital calls will be issued to members pro rata for mandatory and non-mandatory contributions.
• Investment proceeds will be distributed to members pro rata, subject to the JV's ability to cover expenses and debts.
• The JV has already acquired two seed assets in which both members will participate.
• There are restrictions on transferring membership interests until the commitment period ends or KKR's capital is fully invested.
• The Broker-Dealer will receive an upfront fee of 1% of the total cash consideration funded by the JV for each investment.
• The Asset Manager will receive ongoing fees, generally between 0.5% and 1% of invested capital per annum, based on performance.
• KKR Hoops will pay an expected purchase price of $54,654,961.63 to HASI for 50% of the JV interests.
• The closing of the transaction is expected to occur on or before May 17, 2024.

Sentiment

Score: 8

Explanation: The document indicates a significant positive development with a large capital commitment for clean energy investments. The partnership with KKR is also a strong positive. There are some risks and restrictions, but overall the sentiment is very positive.

Positives

• The joint venture provides a significant capital commitment of $2 billion for clean energy investments.
• The partnership with KKR brings additional expertise and resources to the venture.
• HASI's service subsidiaries will generate fees from the JV's operations.
• The JV has already secured two seed assets, indicating a quick start to investment activities.
• The structure of the JV allows for both mandatory and non-mandatory capital contributions, providing flexibility.
• The agreement includes a right of first offer for membership interest transfers, protecting the members' interests.

Negatives

• The commitment period can be terminated early under certain conditions, such as a material breach or bankruptcy of a member.
• The JV is subject to restrictions on transferring membership interests during the lockup period.
• The Asset Manager's fees are performance-based, which could result in lower fees if performance is below expectations.
• The JV may guarantee certain obligations to third parties, potentially exposing HASI to financial risk through back-stop guarantees.

Risks

• The joint venture's success depends on the ability of the Broker-Dealer to source suitable investment opportunities.
• The commitment period can be terminated early due to various factors, including breaches of the operating agreement.
• The JV's performance is subject to market conditions and the success of the underlying investments.
• There is a risk of potential conflicts of interest between HASI's service subsidiaries and the JV.
• The JV may face challenges in managing and administering its operations and investments.

Future Outlook

The joint venture is expected to invest $2 billion in clean energy assets over the next 18 months, with potential for extensions. The success of the venture will depend on the ability to source and manage profitable investments.

Industry Context

This joint venture reflects the growing trend of institutional investors allocating capital to sustainable infrastructure and clean energy projects. It demonstrates the increasing collaboration between traditional finance and renewable energy sectors.

Comparison to Industry Standards

• The $2 billion commitment is significant, placing this joint venture among the larger private investments in renewable energy infrastructure.
• Similar joint ventures often involve large institutional investors partnering with specialized firms to deploy capital in specific sectors.
• The fee structure for the Broker-Dealer and Asset Manager is typical for such arrangements, aligning incentives with performance.
• The 18-month investment period is a common timeframe for deploying capital in infrastructure projects.
• Other comparable companies include Brookfield Renewable Partners and NextEra Energy Partners, which also engage in large-scale renewable energy investments.

Stakeholder Impact

• Shareholders will likely view this as a positive development, indicating growth and diversification.
• Employees of HASI's service subsidiaries will be involved in the management and operation of the JV.
• Customers and suppliers in the clean energy sector may benefit from the increased investment activity.
• Creditors may see this as a positive sign of HASI's financial strength and growth potential.

Next Steps

• The closing of the transaction is expected on or before May 17, 2024.
• The JV will begin sourcing and investing in clean energy assets.
• The Broker-Dealer will present investment opportunities to the board.
• The Asset Manager will manage the operations and administration of the JV.

Key Dates

Keywords

joint venture, clean energy, sustainable infrastructure, investment, renewable energy, capital commitment, KKR, Hannon Armstrong, CarbonCount, asset management