Food waste, which is 30 to 40 percent of the food supply, is a growing problem in the US. Ara Partners, a Houston-based PE firm, is picking up investment opportunities to turn wasted food into renewable natural gas (RNG) through its portfolio company, Divert, a Concord, Massachusetts-headquartered company.
Earlier in March, Divert announced a $1 billion infrastructure development agreement with Enbridge, a multinational pipeline and energy company headquartered in Calgary, Canada. In addition, Divert secured $80 million in growth equity from Enbridge and another $20 million from Ara Partners.
RNG, which is used for electricity generation, vehicle fuel or thermal functions like heating and cooking, has strong demand right now, and its growth is supported on many fronts, said Ara partner Cory Steffek in an interview.
“Renewable natural gas is an incredibly hot market from an acquisition standpoint,” he said. “There is such a supply-demand imbalance of renewable natural gas, and that’s getting worse.”
Divert, formed in 2007, was a data analytics company that was working to address the human and environmental crises created by wasted food. “It was the emergence of the value of RNG that made Divert transition from a data analytics company to a build-own-operate, fully integrated RNG business. This is something that really fit our mandate,” said Steffek.
Divert collects wasted food from multiple sources, including thousands of grocery stores. The food will be divided into two categories. The first process is to preserve the food, which can be donated to communities in need. The second leg involves the RNG process, where wasted food is taken in as a feedstock.
When Ara Partners came into the picture almost two years ago, the thesis was to expand the growth of RNG, a growing market which has many supporting pillars in terms of clientele and funding.
“When you lock in the supply, lock in the demand on a fixed price basis, then you have a fairly low risk asset and then start to filter in other things like municipal debt or low-cost debt instruments that allow us to apply leverage in an early stage of a company where otherwise the alternatives might be cost prohibitive,” Steffek said about the attractiveness of the Divert project.
From the regulatory standpoint, some areas in North America are coming up with a set of rules that promote the use of renewables to combat climate change. This creates opportunities for RNG, Steffek said. “RNG is growing from a regulatory standpoint, and the entire West Coast has some sort of mandate at this point.”
Among those mandates, in California for example, there is a program called Low Carbon Fuel Standard (LCFS), that gives monetary incentives towards renewables such as RNG.
The voluntary markets are also playing a part in scaling RNG. “Some customers just want to decarbonize, whether it’s pharmaceutical, semiconductor, or transportation companies, they are all trying to get their hands on carbon negative natural gas because it helps their carbon footprint.”
Steffek said this project has attracted a lot of interest from many investors. So far Divert has signed an RNG offtake agreement with BP worth approximately $175 million.
Divert is looking forward to building at least 30 profitable facilities in North America, and the $1 billion is for the first implementation of those facilities. “That would be about 10 to 15 facilities put in the ground in North America in the next five years,” he said, adding that the $100 million is what Divert is using for early stage development of those plants.
Each facility will process between 100,000 to 150,000 tons of food waste per year and produce about 230,000 to 350,000 MMBtu of carbon negative natural gas per year.
“It’s really more of a scaling partner, and this project allowed us to use the Enbridge balance sheet to help scale a new technology and new platform faster and for much lower cost,” Steffek said.
Among its strengths, Ara Partners boasts of its “strategy of how to build out in a methodical fashion without going too quickly and at the same time being aggressive enough to have an impact in the next five to seven years,” as Steffek put it.
Late last year, Ara Partners acquired Lincoln Terminal Holdings, a provider of renewable fuel logistics and infrastructure, based in Greenville, South Carolina. The firm expects to continue investing in renewable fuels.