Warburg Pincus bets big on Montana Renewables’ $250m investment

'There is a realization that if we are going to decarbonize heavy duty transportation and commercial aviation, renewable diesel and sustainable aviation fuels will have to be a part of the solution,' says Jeffrey Luse.

Developing sustainable aviation fuel and renewable diesel to help decarbonize the industrial sector presents a great opportunity for Warburg Pincus in its $250 million investment in Montana Renewables, said Jeffrey Luse, principal.

Although many sectors have benefited from the decarbonization drive, some are getting less attention. Warburg Pincus wants to establish a bigger market share within renewable diesel and sustainable aviation fuel in the industrial sector.

Montana Renewables, which is upgrading assets at its Great Falls, Montana-headquarters to allow the processing of up to 15,000 barrels per stream day of renewable feedstocks into low-emission sustainable alternatives, is among a handful facilities working within this space around the country.

“We have spent a lot of time in the renewables fuel space, developing a thesis that revolves around our belief that renewable diesel and sustainable aviation fuels will be the best way to decarbonize heavy duty transport and commercial aviation for the foreseeable future,” Luse said.

After closely following companies operating within the space for almost two years, Warburg Pincus finally closed on Montana Renewables as it stood out among the rest, Luse said.

In the US, renewable diesel production grew by a staggering 1,267 percent in a decade, jumping from 0.06 billion gallons in 2011 to 0.82 billion gallons in 2021, according to the US Energy Information Administration data.

Consumption of renewable diesel and sustainable aviation fuel peaked rapidly, too, within the same period, and the EIA predicts that production for renewable diesel will surpass biodiesel, another prominent renewable source, in 2022.

“There is a realization that if we are going to decarbonize heavy duty transportation and commercial aviation, renewable diesel and sustainable aviation fuels will have to be a part of the solution,” Luse said.

“With that realization and the integration of low carbon fuel standards on the West Coast and Canada, a lot of operators and entrepreneurs are seeing opportunities to either convert existing assets to produce renewable fuels or build new facilities to take advantage of the market opportunity.”

California is one of the leading states in the US on promoting renewables, helping the sector grow in the US by incentivizing production of these fuels.

According to Luse, there is limited production of commercial sustainable aviation fuels in the US. This, for Warburg Pincus, gives Montana Renewables a chance to become one of the premier players in the country.

The expertise of the Montana Renewables management team will give the firm an upper hand in the sector because decarbonizing commercial aviation is “complicated”, said Luse.

“From the facility standpoint, I think the biggest strength is the management team,” he said. “This is a complicated business, operations are complicated, logistics are complicated, and you want to make sure you are backing up a team that really understands the industry.”

Renewable portfolio

Warburg Pincus counts its experience within the renewable energy sector as an extra asset to grow Montana Renewables. Recently, the firm invested $320 million into Viridi Energy, which deals with renewable natural gas.

There could be more such investments to come. Luse said Warburg is seeing opportunities to invest in companies that are looking to “decarbonize certain sectors that are just not as competitive as others, and I think this is especially true on the industrial side.”

“There are sectors such as steel, cement, heavy duty transportation and agriculture where we know we are going to see tremendous investment in innovation and talented entrepreneurs building compelling businesses that we think will represent great investment opportunities over the next few years,” he said.

Luse said Montana Renewables’ management team has identified ways to increase production without significantly adding more capital. He said this deal stands as a “great cornerstone” for acquiring other renewable energy facilities.

It was important, Luse said, for Warburg Pincus to invest in a facility that was almost complete as opposed to building from scratch and ending up with high capital costs due to the tightening economic conditions across the country.

The New York based-PE firm is looking toward a five-to-seven-year hold period with an option to have Montana Renewables find a new home in the public markets when Warburg Pincus exits.

“It’s too early to say exactly what exit would look like,” Luse said, adding that current focus is on building the company.