Macquarie pumps $290m into green aviation fuel

Australian Financial Review

Macquarie has made its first foray into the green aviation fuel sector, tipping up to €175 million ($290 million) into Netherlands-based SkyNRG to help it build production facilities in Europe and the US.

Macquarie Asset Management has been on the hunt for an investment in the sustainable aviation fuel (SAF) sector for more than two years, as airlines begin scrambling en-masse for green fuels to meet voluntary or mandatory emissions-cutting targets.

But MAM’s global head of green investments, Mark Dooley, said scouring for an investment in the SAF industry had been tricky because the world’s oil and gas majors held the best cards.

“Big oil and gas have some natural advantages there, and over time will inevitably be leaders – those advantages being just the comfort with molecules, the logistics to deal with, store and transport molecules, and the distribution chains and the client base,” Mr Dooley said.

“But we also thought that if we could find the right player, this stuff still needed to be pioneered. And that requires a certain amount of single-minded focus and nimbleness.”

The 14-year-old SkyNRG supplied the world’s first commercial flight using SAF back in 2011. Until now, though, its focus has been on trading, advisory services and research and development.

Mr Dooley said that because the business was now looking to develop production facilities on both sides of the Atlantic, it needed a new tranche of investment.

The company’s plan is to get those facilities up and running by 2030, with the additional backing of Boeing and KLM as offtake partners, whose combined long-term SAF purchasing commitments total up to €4 billion.

Room for everyone

SAF is produced using biomass such as cooking oil, plant oils, municipal waste, waste gases, and agricultural residues, and can be combined with traditional jet fuels in existing aircraft engines.

SkyNRG reckons using SAF can cut a plane’s CO2 emissions by 75 per cent over its lifespan, in an industry that contributes 2.5 per cent of the world’s annual emissions.

Mr Dooley said demand would expand so quickly that there was room for smaller players like SkyNRG as well as the oil and gas giants.

“If every current and would-be participant in this market does everything that they’re thinking about doing, we’re still not going to have enough SAF,” he said.

“The more SAF moves from being a marginal thing to an everyday thing, then the more it becomes an expectation and a commonplace for all commercial aviation to be using it to the maximum extent that they can get hold of it. So I don’t worry about Big Oil and Gas competing us out of the market.”

In a statement, MAM and SkyNRG said the powerful incentives provided by EU and US legislation, including the Inflation Reduction Act, would create demand for up to €650 billion of investment in the sector by 2050.

MAM made the SkyNRG investment via its new Macquarie GIG Energy Transition Solutions Fund. According to a recent Infrastructure Investor report, MGETS launched last September with a $US2 billion ($3.1 billion) target, and is aiming for a net internal rate of return on its investments of 13 to 15 per cent.

The report quoted SEC filings that put the fund’s size at $US1.7 billion as at October 30 this year, and suggested it was on track to hit $US1.9 billion by the year’s end and close in the first quarter of next year. Macquarie declined to comment on its fundraising plans.

MGETS has previously been announced as the vehicle for Macquarie investments such as the year-old battery storage company Eku Energy, and its $US325 million stake in green fertiliser firm Atlas Agro, announced in July.

Strategic shift

The fund thus appears to fit within a strategic shift at Macquarie that has divided green investments into established and emerging technologies, with MGETS appearing to focus on the latter.

“Established technologies, wind and solar, attract a certain kind of capital investment and risk and return expectation, and that’s all about volume,” Mr Dooley said.

The new technologies that Macquarie was pursuing, he said, would be proven and deployable, but where the market was immature. This meant a re-rating of those asset classes, and the projects within them, was on the cards.

“We’re trying to pick that moment where we want to be a relatively early mover, but on the other hand where broadly speaking the technology risk has washed out of the asset type that we’re looking at,” he said.

“It is really interesting that investors want to get behind that proposition. So we can have investment mandates that are not for wind or solar, they’re just for that next phase, just for those new technologies. That’s really striking.”

Besides jumping on the asset class, MAM was still looking to maximise enterprise value at the companies as well. But Mr Dooley said this was now less hands-on than Macquarie had been with its portfolio companies in the past.

“We’re not generally seeking anymore to be the arms and legs, doing stuff,” he said. “That has been an evolution over the last three years or so. I would characterise us as a very active shareholder and board member, helping our partners in the business to create a team and an organisational structure that is set up for success.”

But since the companies were often still in the development stage, MAM as a shareholder still had to work hard on helping them “realise their potential”. “There are not too many where the thing already runs like a Swiss watch, and we’re just there to monitor,” he said.