Biomass: the Gift that Keeps on Giving

The recent €210 million IPO by wood pellets producer Enviva Partners is a great example of private equity's ability to spot promising trends and capitalise on emerging markets.

Enviva – which is backed by Riverstone Holdings and The Carlyle Group – is one of the world's largest suppliers of feedstock for the burgeoning biomass industry, providing 15 percent of global utility-scale wood pellets. As it comes off a successful public markets debut, Enviva is putting the spotlight on a high-growth market that is mobilising different corners of the alternatives universe.

Demand for utility-grade wood pellets is expected to grow at a compound annual rate of 21 percent from 2014 to 2020, according to consultant Hawkins Wright. That growth is largely thanks to the conversion of coal-fired power generation and combined heat and power plants to co-fired or dedicated biomass plants in northern Europe and, increasingly, in South Korea and Japan.

For Riverstone and Carlyle, which backed the listing of Enviva as a master limited partnership (MLP), that translated into good news. Essentially, it allowed them to debut what is effectively a new MLP asset class on solid ground: Enviva has contracted all its production capacity for 2016 and has already secured off-take for half of its production from 2017 through 2021, thanks to strong wood pellet demand.

That almost certainly helped attract investors that might otherwise have been wary of putting money into something new. As one banker told Reuters prior to the IPO: “We haven't seen a unique [MLP] asset class in some time. They [Enviva] are the market leaders, but there is no real public comparable.” Solid contracting and a market with years of high growth ahead of it will probably help assuage those concerns.
More importantly, by pricing at the mid-point of its range, it will help send a clear signal to other private equity fund managers looking for new energy services investments.

But the most interesting thing about this relatively new market is its cross asset class appeal. Because it's not just energy-focused private equity investors that can capitalise on servicing the growing biomass market: timberland investment managers, who own the land that supplies the wood pellets that firms like Enviva then process, are also taking note.

In a recent conversation with timberland investment manager Timbervest, which manages more than $1 billion of timberland assets, chief executive Joel Shapiro and chief investment officer William Bowden were bullish about growing demand for wood pellets.

They were especially excited about how the ongoing Panama Canal expansion, set to conclude in 2016, will make it easier and cheaper to export US wood pellets from the south and Gulf Coast regions to Asia, which in 2014 accounted for only 3 percent of US wood pellet exports.

Shapiro and Bowden are so bullish on growing Asian demand, in fact, that they are thinking of re-orienting a significant part of their strategy to the supply of wood pellets. Their reasoning is that growing demand is already leading to an appreciation in prices for wood pellet-supplying land, especially land in the US south and Gulf Coast regions. It probably doesn't hurt that the latter are more profitable because of shorter tree-growing periods.

Finally, let's not forget about infrastructure fund managers, the natural developers, owners and operators of the biomass plants that actually burn these wood pellets. For them, biomass is likely to become an increasingly important part of their renewable energy portfolios.
For alternatives managers, biomass is the gift that keeps on giving.