Deal focus: KKR makes an impact with GreenCollar

George Aitken’s early career investment experience included backing the operator of Australia’s first commercial nature-based carbon offset project in 2006. He was sufficiently enthused to launch a fund to invest in more projects, but then the global financial crisis intervened, carbon prices slumped, and the market went quiet for the best part of a decade.

Aitken subsequently worked for a multi-family office and then for KKR, initially as a member of the Australia private equity team. In 2019, an opportunity to invest in GreenCollar, a local carbon projects operator, represented a return to familiar territory in more ways than one.

“I’d heard of GreenCollar and I knew of James [Schulz], the co-founder, though I didn’t know him personally. I was a bit hesitant, carrying the scars on my back from investing in carbon markets before,” said Aitken, now a managing director and head of global impact in Asia Pacific at KKR.

“But five minutes into the meeting we realised that James was the type of CEO we like to back and that GreenCollar’s platform was differentiated from what I’d seen previously. We got on well and conversation progressed quickly from there.”

KKR ended up paying approximately AUD 100m (USD 71m) for 50% of GreenCollar, overcoming competition from strategic bidders that offered more. The clinching factor was management’s reluctance to sell in full. They wanted a partner to help realise more upside and this duly happened over the next four years, culminating in a sale to Ontario Teachers’ Pension Plan (OTPP).

OTPP acquired a significant minority stake in GreenCollar in 2022 and now it has moved to nearly 100% ownership, taking out not only KKR but also multiple non-senior executives who were awarded equity under KKR’s employee ownership and engagement initiative. The exit value was nearly AUD 800m and KKR generated a 3.3x return, according to a source close to the situation. KKR declined to comment on the exit terms.

Paradigm shift

A fundamental change in market conditions facilitated KKR’s investment in March 2020 – fundamental enough to overcome any pandemic-related uncertainty. Notably, the demand side had been shored up by Australia’s Emissions Reduction Fund (ERF), now known as the Australian Carbon Credit Unit (ACCU) scheme, which created fixed-price take-or-pay contracts for carbon credits.

“The Australian government has been criticised for inconsistency around climate policy, but it should be applauded for the ERF and the Carbon Farming Initiative. Providing a stable source of demand made GreenCollar, and the carbon markets overall, investable for the first time,” explained Aitken.

“We could say with a degree of confidence that, if a project produces a certain environmental outcome, we could sell the credits to the ERF at a certain price. That mitigated the uncertainty around new market development and made it an attractive investment proposition.”

OTPP’s path to GreenCollar was smoothed by increased government and corporate emphasis on emissions reduction and efforts to diversify the company’s client base, thereby reducing dependency on the ERF. Almost all GreenCollar’s carbon credits are now sold to voluntary corporate buyers.

KKR also prioritised diversification by geography and by project type. GreenCollar became the largest player in Australia’s carbon credit space by helping landowners develop nature-based carbon projects on farms and enabling the sale of carbon credits to organisations seeking to manage their environmental impact. And most of these projects were in New South Wales.

First, an international team was established in Washington D.C. with a view to marrying global-level carbon markets expertise with Australian project management savvy. The number of projects nearly doubled to approximately 200 during KKR’s hold period, and the geographic footprint now includes Southeast Asia and Africa. Local partners are a must for projects in new markets.

Second, GreenCollar expanded from soil carbon projects to encompass methane from dairy cows, plastics recovery, cookstoves, biodiversity, and water quality. This was achieved through M&A – there were four bolt-on acquisitions early in the hold period – and organic growth.

One water project is intended to reduce damage to Australia’s Great Barrier Reef caused by the rapid runoff of sediment-rich water from farmland. Working with landowners and indigenous groups, GreenCollar develops biodiverse wetlands that slow the flow of water to the ocean, creating dwell time during which sediment settles on the wetland bed instead of reaching the reef.

“We can accurately calculate the sediment reduction and create an asset class which we sell t to groups that want to offset their impact on the reef,” said Aitken. “GreenCollar has replicated what it has learned in carbon markets in areas like water, plastics, and biodiversity.

He is especially excited about biodiversity, citing increased demand for mixed-use solutions involving native species and more flora and fauna. GreenCollar runs these projects with land managers who adapt their practices to restore environmental conditions for ecosystems, habitats, and threatened species. A credit is awarded for each hectare restored or conserved, subject to third-party auditing.

People power

It is estimated that during KKR’s hold period, the carbon dioxide emissions avoided or reduced if every project were played out over the course of its lifespan amounts to around 100m tonnes, or over 20% of Australia’s annual emissions.

It is also the first exit in Asia – under any of KKR’s strategies – from an asset in the employee ownership and engagement initiative. The initiative has already gained traction in North America with companies like CHI Overhead Doors and Minnesota Rubber & Plastics, but Aitken and Schulz mapped out a structure entirely on their own over coffee in Sydney’s The Rocks neighbourhood.

“It made sense to introduce the programme at GreenCollar because James was very focused on his team and recognised that alignment with employees would drive the right outcomes,” said Aitken. “It’s harder to implement as a minority shareholder, as every shareholder pays for it. So our job is to help them understand the benefits.”

The equity participation – an incremental benefit, not a substitute for benefits, wages, or wage increases – is structured so that it provides upside exposure to employees without them necessarily holding the physical shares. There are obstacles to rolling out the initiative in certain jurisdictions, but Aitken is convinced that the concept will pick up, especially for control deals.

“Having every employee feel like an owner is just common sense and these programmes are not overly complicated to implement,” he added. “I think this is where private equity is moving and would like to think over the next decade it becomes the rule rather than the exception.”

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• Topics
• Australasia
• Trade sale
• Cleantech
• Australia
• KKR
• ESG
• OTPP