Interview with Louay DaCosta of Macquarie Asset Management

Catherine: Hi, I’m Catherine McLean, Founder and CEO of Dylan Green. I’m in New York today and I have with me Louay DaCosta. He’s the VP at Macquarie. Thanks so much for joining me.

Louay: Thank you, I’m glad to be here.

Catherine: Can you introduce yourself and tell us a bit about your current role at Macquarie Group?

Louay: Of course, so I’m a vice president sitting within Macquarie Asset Management and within that team, I focus on green investments, investing across the full energy transition thematic, including renewables, storage, distributed generation, renewable fuels, and circular economy. Taking a step back for context, the green investment team sits within the wider private markets asset management platform at Macquarie. We’ve got pools of capital for all types of traditional infrastructure investments, so everything from transport, utilities, and digital, and then we also have pools of capital for other asset classes. I spend a lot of my time finding and backing companies within the energy transition, and so we’re looking at opportunities to invest along the risk return spectrum, typically in assets that have infrastructure-like characteristics, so the value is really underpinned by highly visible cash flows.

Catherine: Great, and you started corporate finance at EDF. How has your experience working inside an operator informed the way you approach investments today?

Louay: Yeah, so I’ve been fortunate enough to work both on the operator side and the investor side. On the operator side, I started my career at EDF, and for those who don’t know EDF, but I’m sure many of your listeners do, EDF is the French utility, stands for Energy of France, and I started there after studying physics as my undergraduate degree. I quickly moved into a corporate finance role at EDF, really looking at their existing fleet of nuclear assets, and then looking at the new development of renewables and nuclear within the UK. EDF is one of the largest owners and operators of nuclear assets, and so that gave me a grounding in how these mega-projects are actually financed, built, and operated in practice, and so being part of these projects, I developed a strong appreciation to the operational reality, so how construction risk, health and safety, outage profiles and asset performance ultimately drive returns. Now, how does this inform the way I approach investments today? It’s translated into a more execution-focused approach. Critically, we look at the capability of management teams in order to deliver on projects, and this can be through development, construction, or operations, because we typically find that even well-structured projects underperform without the right operators in place.

Catherine: Right, yeah, that’s a really good point. What are the most attractive opportunities in the energy transition right now, and what’s getting more hype than it deserves? That’s a very, like, e-entertainment question.

Louay: I mean, so we’re fortunate enough at Macquarie Asset Management, especially in the Green Investments team, to be constantly evaluating opportunities across the energy transition sector, and we have a deep pool of industry experts, operating partners, and an extensive set of portfolio companies that we can draw expertise from. I would say the most attractive opportunities that we’re seeing at the moment involve battery storage and on-site generation. Typically, they sit closer to the point of demand, and they help when and where power is delivered. I think specifically on the battery side, because batteries can earn multiple sources of revenue, as I’m sure your listeners know, they can trade power when prices move, they can provide grid services, and in a lot of cases, they’re tied to capacity markets, which actually means you can often get fixed tolls or availability-based contracts. And again, as an infrastructure investor, we like that because the cash flows are stable and predictable. And so double-clicking into the battery side of it, you see opportunities to invest across the front-of-the-meter and behind-the-meter opportunities. Front-of-the-meter batteries are those that are plugged into the grid and monetize wholesale power markets and capture grid revenues, while behind-the-meter batteries sit with the end-user, like a data center or an industrial site, and capture value through reliability, peak shaving, and avoided crit costs. Finding the right management team with the right market thesis and the right contracting strategy within battery storage is where we believe we can achieve attractive returns.

Catherine: Okay. What’s getting more hype than it deserves?

Louay: Yeah, so great question. Coming from a background working on the development and operations of nuclear power plants, I definitely think there’s a viable path to the technology. However, I’m yet to be convinced by the short-term LCOE projections. And I think the space still feels early for true infrastructure capital. But more generally, I think technologies that, whether LCOE is still somewhat theoretical, and this could be driven by relying on future carbon prices or unproven off-take structures, are still hard to stand behind.

Catherine: There’s a lot of focus on load growth from data centers. When you look at the assets you’re investing in, to what extent are clean energy sources actually being integrated alongside that demand?

Louay: Yeah, so there’s a lot of load growth. Here in the US, I think load growth is expected to grow by 25% by the end of 2030, and then by nearly double by 2050. A lot of that, like you said, is coming from data centers. Whilst I continue to have a healthy amount of skepticism on the gradient of the load growth curve, there’s no doubt that it’s up and to the right. What I would say is that clean energy is being built, and we’re seeing a lot of activity with PPAs, but volume generation isn’t the constraint. The constraint is really a speed to power issue. And so, in particular on the transmission side, it’s really how much time it will take to build up transmission capacity necessary to interconnect these mega data center sites to new power supply. And in most markets, that’s running at five to seven years. And so, in the current paradigm, where there’s an AI race and five to seven years is deemed too long to connect a data center. I think the solutions that have emerged are, again, battery storage, which I’m a big advocate of, and also on-site generation. Whilst on-site generation doesn’t necessarily solve the timelines to get, for example, gas turbines, what we found is that combining on-site generation with a battery can bridge short-term capacity needs until the on-site generation is built or the transmission or distribution upgrades are complete. And so, what we’re doing is investing in clean energy projects that are being built alongside data center demand, providing low carbon energy, but we are also investing in near-term solutions to solve the speed to power issues until transmission and clean and firm capacity can catch up.

Catherine: Okay, great. How has the current capital environment actually changed investor behavior? What are you seeing now that you weren’t seeing a few years ago?

Louay: So, I started my energy career in 2015, and I think 2015 through to 2020, probably even going back to 2010 was a very favorable environment. Rates were low, inflation was low, multiples and valuations were going up. And I think over the last five years, we’ve had, especially since 2020, we’ve had the pandemic, we’ve had wars, rates are up, and then we have tariffs. And so, it’s a very different period of time. I think now there’s a lot more emphasis on assets with those contracted and visible revenue streams. And I think investors are less likely to value long-dated growth assumptions or aggressive refinancing optionality. But what I would say is that the structural tailwinds that sit behind the energy transition caused by load growth and caused by grid constraints have remained strong through this period. And investor appetite has remained strong for these pools of capital and the opportunity set.

Catherine: When you’re evaluating a deal, what separates projects that get funded from ones that don’t move forward?

Louay: Yeah, so as we’ve discussed, as an infrastructure investor, revenue quality is the most important thing. I mean, stable, predictable, often inflation-linked cash flows are attractive for financing. And again, investors are not really willing to underwrite optimistic merchant curves or growth assumptions without the appropriate downside protection. We spend a lot of time evaluating the risk-return of our investments. But ultimately, as an infrastructure investor, we wanna make sure we can feel really good about the downside. And then what I would say, incrementally, is that whilst the projects underpin our investments, it’s really the company that we’re investing into. So increasingly, it’s about who’s building it. Do they have a track record? Do they have a deep understanding of the power markets? And if we find that those companies are the ones who get capital.

Catherine: Right. For people trying to break into the energy transition investing space, what actually matters now? What signals do you take seriously when hiring?

Louay: So we are in a moment of AI uptake. I think as we transition to a more AI-enabled workplace, the bar has shifted from people that have a general consensus view to individuals who can critically think and have a real understanding. And so what comes to mind are people who can connect pricing, policy, physical infrastructure, and really think creatively and form investment insights. I also personally like spending time and value entrepreneurs. I think entrepreneurs with a sense of accountability really create and drive value. And Macquarie Asset Management, along with the Macquarie Group, is an excellent place to foster that kind of entrepreneurial spirit whilst maintaining operational discipline, integrity, and accountability.

Catherine: Right. No, I think that you’re absolutely correct. You’re absolutely spot on. And I’ve heard it time and time again. The person we were just speaking with just now, we were talking about that very topic of thinking outside the box around financing and coming up with creative solutions, novel solutions, whatever adjective we want to put on it to differentiate yourself from AI. So I think that’s a really good point. So looking ahead, what’s one shift in the market you think will surprise people over the next few years?

Louay: So as we’ve discussed, we’ve got the kind of supply side of the energy markets and the demand side. I think the surprise will come from the demand side and actually assets becoming flexible and dynamic. And so what do I mean by that? I think there’s an initial presumption that all data centers need five nines availability. But I think what will happen in practice is that the data centers will evolve and adapt. We will see more flexible data centers where load can respond to power, availability or pricing, and the data center can effectively become part of the solution. And so over time, I think this can flow into how AI cloud surfaces are priced with different tiers based on latency, speed or pricing. I think customers are already exposed to some dynamic pricing in the market, whether that is surge pricing on Uber, whether that’s charging your car overnight, or whether it’s just charging price, different pricing for computing. And so all of these will lead to a more dynamic relationship between infrastructure assets and the end customer. But I think the speed at which this will happen will surprise many individuals, not directly in the energy space.

Catherine: Yeah, I totally agree. Well, thank you so much for taking the time to speak with us today.

Louay: Thank you, it’s been great.