Carlyle divests largest portfolio of gas-fired power plants

Despite proclamations to “invest in the energy transition, not divest from it,” The Carlyle Group is perpetuating the climate crisis by offloading its largest and most polluting portfolio of gas-fired power plants to private equity firm Quantum Energy for $3 billion, rather than responsibly transitioning the assets to clean energy generation or retiring and remediating the damage caused by the assets.  

Private equity firm Carlyle first invested in Cogentrix Energy in 2012, and the company is currently the largest platform of gas-fired power plants in Carlyle’s energy portfolio. Cogentrix owns and operates 11 power plants located across the country. According to a 2023 Private Equity Climate Risks analysis, the Cogentrix power plants were responsible for most of Carlyle’s downstream emissions over the last decade, faced financial penalties for several environmental violations, and filed for bankruptcy protection. Rather than responsibly retiring or transitioning these assets to clean energy generation such as solar or wind power, Carlyle is in the midst of a multi-billion-dollar deal to offload these polluting assets to another private equity firm, Quantum Capital Group. By selling Cogentrix, Carlyle is also poised to skirt accountability for the harms Cogentrix has caused as well.

On August 5, 2024, Quantum Capital Group entered into an agreement with Carlyle to purchase Cogentrix Energy for $3 billion dollars. Citing an unstable grid with “intermittent” renewable energy and coal plant retirements, Quantum Founder and CEO Wil VanLoh claims Congentrix’s fossil fuel assets will provide “reliable” power generation. 

The sale follows multiple reports by Private Equity Climate Risks (PECR) on Carlyle’s harmful fossil fuel portfolio and the community and environmental impacts of the firm’s portfolio, and pressure from student groups on cultural institutions to cut ties with Carlyle’s Co-Founder David Rubenstein for his continued financing of fossil fuels. Rubenstein ultimately resigned from his board position at the Harvard Corporation in June 2023. Private Equity Stakeholder Project has also highlighted the financial risks institutional investors face through continued investment in Carlyle and the firm’s fundraising and leadership challenges.  

Carlyle and Quantum were both analyzed in the 2024 Climate Risks Scorecard; both firms received Ds and ranked as two of the worst climate offenders among private equityplayers. 

Cogentrix Responsible for Majority of Carlyle’s Downstream Emissions 

A 2023 PECR report The Carlyle Group’s Hidden Climate Impact included an analysis of Carlyle’s full portfolio of holdings and revealed that the firm was one of the largest owners of gas-fired power capacity in the US, controlling over 11,000 MW of capacity across all energy generation types and producing approximately 36.6 million megawatt-hours (MWh) of electricity in 2021—rivaling Berkshire Hathaway Energy, NRG Energy, and the Tennessee Valley Authority, a few of the largest electric utility companies in the country. 

As of 2022, Carlyle financially backed 19 downstream US assets, which were operated under the umbrella of Cogentrix Energy Management and were responsible for most of Carlyle’s downstream emissions over the last decade (Figure 4).

Carlyle to Take the Money and Run

According to the PECR report: “Seventeen of Carlyle’s Cogentrix assets are gas-fired power generators, with an additional two oil-powered generators. Under Carlyles’ ownership two of the gas plants, 500-MW Elgin Energy Center and 402-MW Rocky Road power plants in Illinois, filed for bankruptcy protection on March 31, 2023, following $39 million in non-performance penalties levied by the grid operator following severe winter storms. The plants had been struggling financially, and executives said that with the penalties, the “debt load is simply no longer workable.”

In 2023, private equity portfolio companies accounted for 16% of all US bankruptcy filings and are on track to reach the same record levels in 2024. More broadly, companies bought by private equity firms are 10 times more likely to go bankrupt. The typical private equity practice of acquiring assets through leveraged buyouts saddles the company the PE firm is buying with debt. Private equity firms’ business models usually prioritizes short-term profits over long-term stability, which often leads to extensive cost-cutting measures on firm’s portfolio companies that may harm operational efficiency. The heavy debt burden acquired through leveraged buyouts contributes to financial instability, then limiting the portfolio company’s ability to invest in long-term strategies and adapt to market changes. The private equity firms that push companies into bankruptcy can often still profit through advisory fees and dividend recapitalizations while leaving the portfolio companies and its workers high and dry. 

The private equity business model centers around finding quick profits in the companies the firms own before offloading those investments in around five years. Higher interest rates in recent years have forced PE firms to hold onto investments a bit longer in hopes of better selling prices. Because of this model, private equity firms have emerged as “pollution financiers of last resort” by financing fossil fuel assets when no other companies want to and then operating the older and dirtier assets far past the point of responsible retirement or clean energy transition.

Private equity firms are not required to be registered and regulated the way public investment companies are and enjoy limited disclosure requirements because of this. This regulatory loophole veils private equity firms’ investments in secrecy and makes holding the firms accountable for the harms associated with its investments challenging. 

As Carlyle moves to offload one of its most polluting collection of energy assets (along with the community and environmental impacts associated with those assets), Quantum is expanding its dirty energy portfolio. After the sale is complete, Quantum will have 20 energy companies in its portfolio, 95% of which are invested in fossil fuels. Quantum also acquired one of Oaktree Management’s most polluting assets in August, Caerus Oil and Gas for $1.8 Billion. Quantum also backs Mexico Pacific, a midstream company developing a massive liquified natural gas terminal in Mexico that is currently faced with an array of setbacks and community opposition.

Pension Funds Face Increasing Risks

Projections of economic damages from the climate crisis are soaring, which is a material concern for fiduciaries with a long-term investment horizon. New research by Ortec Finance reveals that if the trajectory at which the climate changes reaches the point of a “high-warming scenario”, North American pension funds could face up to a 50% decline in returns by 2040. Since Carlyle did not responsibly retire or transition the Cogentrix portfolio to clean energy assets such as solar or wind, but instead is passing the polluting assets on to another firm, the emissions spewing from those gas-fired power plants will continue to pollute communities across the country. 

In order to make real climate progress, and reduce the financial risks for limited partners, public pension funds should adopt these five climate standards for private market investors:

1. Align private market portfolios with science-based climate targets to limit warming to 1.5 degrees Celsius. 
2. Disclose fossil fuel exposure, emissions, and impacts transparently.
3. Report a portfolio-wide energy transition plan to guide the shift to clean energy.
4. Asset managers will integrate climate and environmental justice.
5. Asset managers will provide transparency on political spending and climate lobbying efforts. 

These climate standards are based on the Demands for Private Equity, developed jointly by Private Equity Stakeholder Project, Americans for Financial Reform, Global Energy Monitor and 21 endorsing climate and community organizations.