The most profitable PE investment in history – from an overlooked "bottom-fishing" deal 8 years ago

Energy Capital Partners (ECP) is set to become the most profitable single transaction in private equity history with its $5.6 billion acquisition of natural gas power producer Calpine in 2017. According to the Wall Street Journal on Tuesday, including dividends, this investment will yield over $25 billion for ECP and its co-investors, far surpassing the previous record of $14 billion set by Blackstone Group's Hilton Hotels project. ECP is nearing completion of the sale of Calpine to Constellation Energy, expected to finalize within the next month. Approximately $18 billion will be paid in the form of Constellation stock, which has risen nearly 50% since the announcement of the deal in January. At the time, this transaction was seen as a contrarian bet, as the shale gas boom and the growth of renewable energy capacity led to an oversupply of natural gas, squeezing the margins of this Houston-based company. The market widely viewed gas power plants as poor investment targets, believing the world was transitioning to renewable energy. However, what the market failed to foresee was a surge in electricity demand. The return of manufacturing, the proliferation of electric vehicles, cryptocurrency mining, and the subsequent AI boom and its massive demand for electricity collectively drove this change. Contrarian Bet on Natural Gas Power When ECP acquired Calpine in 2017, it was considered a highly controversial investment. The oversupply of natural gas brought about by the shale gas revolution, coupled with the rapid development of renewable energy, led to widespread pessimism regarding the prospects of gas power plants. According to insiders, ECP viewed Calpine as an undervalued asset, believing the company could generate substantial cash flow and achieve greater returns through targeted improvements. The firm believed that the energy transition would take 30 to 40 years, during which natural gas would play a key role in providing reliable power to the grid. Founded in 2005 by former Goldman Sachs partner Doug Kimmelman and headquartered in Summit, New Jersey, ECP is currently the largest private owner of power assets in the United States. Last year, British private equity firm Bridgepoint Group acquired ECP, and the merged entity manages approximately $86 billion in assets. AI Boom Ignites Electricity Demand What ECP could not foresee was the sudden surge in long-stagnant electricity demand. Factors such as the return of manufacturing, the growth of electric vehicles, and cryptocurrency mining drove the increase in demand. The subsequent AI boom brought about a massive demand for electricity. In November 2022, OpenAI launched ChatGPT, sparking an AI investment frenzy. As it became evident that data centers required substantial electricity, the valuations of publicly traded power suppliers soared. This provided Constellation with the "currency" needed to make the acquisition. In January of this year, Baltimore-based Constellation announced it would acquire Calpine for $4.5 billion in cash and 50 million shares of stock. Constellation is the largest carbon-free energy producer in the United States, with most of its output coming from hydropower, wind, solar, and nuclear energy Operational Improvements Create Value After completing the acquisition in 2018, Calpine launched several growth initiatives. The company introduced new battery storage projects, expanded the capacity of the Geysers geothermal power plant in California, and improved its hedging strategies. During ECP's ownership, Calpine's profits approximately doubled, allowing the company to reduce its debt levels. According to informed sources, during ECP's ownership, Calpine allocated approximately $8.5 billion in cash to investors. ECP President Tyler Reeder had previously worked with members of Calpine's management team and is very familiar with the company. During the "buyout" period, other private equity firms also studied the company, but none were willing to make such a large bet on natural gas