ECP Delivers Largest $ PE Return Ever

Thoughts? I though PE was dead. 

(Wall Street Journal) -- When private-equity firm Energy Capital Partners struck a $5.6 billion deal in 2017 to buy natural-gas power producer Calpine, it was a decidedly contrarian bet.

The fracking boom and growing production of renewable power had led to a glut of cheap natural gas, squeezing margins at the Houston-based company.

Eight years later, Calpine is poised to become the most profitable private-equity deal of all time by dollar value. Including dividends, ECP and its co-investors will have earned more than $25 billion when the firm closes its deal to sell Calpine to Constellation Energy, expected in the next month, according to people familiar with the matter.

Around $18 billion of that will come in the form of Constellation stock, which ECP will have to sell over time to fully realize its investment. Still, shares of Constellation are up nearly 50% since the deal was announced in January, suggesting the windfall will easily surpass the $14 billion Blackstone made on its record-setting investment in Hilton Hotels.

At the time of its purchase, ECP saw Calpine as an undervalued asset that generated a lot of cash and could generate even more through targeted improvements, according to people close to the firm. The market viewed gas-fired plants as a bad bet as the world transitioned to renewable energy. ECP believed the transition would take a long time -- three or four decades -- and that gas would play a key role in providing reliable power to the grid in the meantime.

What the firm couldn't have foreseen was that demand for electricity, which had long been stagnant, would also surge. Driving the uptick were factors including the onshoring of manufacturing, more electric vehicles and crypto mining. Then came the artificial-intelligence boom and its insatiable need for power.

Summit, N.J.-based ECP began investing in electricity long before it became one of the hottest trades. The firm, founded in 2005 by former Goldman Sachs partner Doug Kimmelman, is the largest private owner of power in the U.S. U.K.-based private-equity firm Bridgepoint Group acquired ECP last year. The combined entity now manages around $86 billion.

ECP President Tyler Reeder had worked with members of Calpine's management team and knew it well, the people said. He approached them about doing a deal. Other private-equity firms looked at the company during the "go-shop" period, but none was willing to make such a big bet on gas.

After closing the deal in 2018, Calpine embarked on a number of growth efforts. It launched a new battery-storage project, expanded capacity at the Geysers, a massive geothermal power plant in California, and improved its hedging. The company's profit roughly doubled during ECP's ownership, allowing it to become less indebted.

Calpine also distributed a total of around $8.5 billion in cash to its investors during ECP's ownership, the people said.

In November 2022, OpenAI launched ChatGPT, sparking a boom in AI-driven investment. Valuations of publicly traded electricity providers surged as it became clear that huge amounts of power would be needed for data centers.

That boost gave Constellation the currency it needed to do a deal. In January, it said it was buying Calpine for $4.5 billion in cash and 50 million shares of stock. Based in Baltimore, the company is the largest producer of carbon-free energy in the U.S., with most of its output coming from hydro, wind, solar and nuclear.