Energy infrastructure investing is often viewed as vulnerable in inflationary environments, given its reliance on commodity inputs and the widespread use of leverage. Yet, the asset class has largely performed in line with expectations, according to Cresta Fund Management partner David Altshuler.
“Whether the stock market is up or down, demand for energy has continued to increase – we are all hearing about the demand from data centers and AI but it’s also driven by people turning on their lights, heating and cooling their homes, commuting to the office, and ongoing domestic and global industrial production,” he told Benzinga. “So there is to some extent built-in demand durability, pricing power and contractual or regulated revenue frameworks that provide investors with visibility and downside protection.”
Amidst the uncertainty, the political environment has encouraged consistent capital investments on infrastructure. Cresta sees both opportunities and risks in the market, especially regarding tariffs and trade policies.
“Heightened geopolitical tension has increased the awareness of the importance of energy security and also the resilience of domestic infrastructure. Governments, but also the private sector, are increasingly focused on redundancy and localization,” Altshuler added.
The current energy infrastructure in the U.S. is not set up to meet the demand it is seeing. Data centers and AI continue to expand at a rapid pace. This is creating a “very significant gap” between the demand for data and the resources needed to invest.
While Cresta does not directly invest in power, the private equity firm does invest in fuels — a related industry. Altshuler expects it will take another decade or two for investments to catch up. Still, the industry realizes there is a real compelling opportunity to invest, upgrade and make data center power more efficient.
Is There A Gap In The Energy Transition Market?
Over the last several years, a majority of the capital in the energy transition sector has been focused on electrification, renewables, storage, transmission, EV infrastructure, and data centers. While those sectors are “absolutely critical,” areas such as heavy transport, aviation, industrial heat and hard-to-abate industries will continue to rely on fuels for years, Altshuler explained.
Decarbonizing these sectors will require specialized expertise and is currently underinvested by the market.
Altshuler noted that there is a gap not only in expertise but also in capital that’s focused on carbon molecules and fuel within the energy transition segment.
Cresta’s risk profile has changed over time. Nowadays, the market is more segmented by risk, and investors seek more predictable returns and value-creation strategies.
“Much of the infrastructure needed to support the transition still needs to be built and often requires smaller upfront dollars. This is where middle-market firms like Cresta can step in to build the necessary assets, optimize operations, and scale platforms. This is a big opportunity from our standpoint,” he said.
Cresta is currently looking to invest in hard assets that will provide investors with a less risky and more stable investment, even if the economy fluctuates.
The Market Needs Clarity And Consistency In Regulation
Altshuler noted that the industry needs greater clarity and consistency in regulations for decarbonization and sustainable infrastructure.
“Our view is that what markets need most is clarity and consistency: shifting rules, delayed guidance, and inconsistent implementation contribute to uncertainty [around the regulatory environment],” he said.
Investors have become increasingly focused on regulatory changes in the space, on both a federal and state level.
“Historically, federal policy has been best positioned to create consistency and scale across the country, while state-level programs can drive more innovation and can be targeted around specific market initiatives that a federal policy wouldn’t be able to address. It’s not so much a question of less or more, but how regulation and policies are rolled out and supported,” Altshuler said.
In Cresta’s case, the firm looks for investments that are supported by bipartisan, long-standing regulatory frameworks, rather than incentives that are new, narrower in scope or too dependent on a single political outcome.
“Our base case is typically to underwrite an investment to meet our return, even without incremental regulatory upside, such that any increases in support or improvement in policy and regulation become a tailwind,” Altshuler said.
He added that Cresta has no plans to change its core focus over the next several years. The firm plans to continue seeking attractive opportunities to build in scale across middle-market platforms, as well as in technically complex areas of the energy transition sector.
Image: Courtesy of Cresta Fund Management
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