Uncovering the Value of Energy Efficiency in Private Equity Assets

by Jennifer Le, MBA ’13 (8/19/12)

Jennifer Le, MBA ’13

Jennifer Le spent her summer with The Carlyle Group to develop a customized strategy to incorporate energy efficiency into Carlyle’s U.S. Real Estate investment funds.

Uncovering the value of energy efficiency has historically been a challenge for private equity firms who perceived the payout to come well beyond their usual 3-5 year investment holding period. Luckily, The Carlyle Group (Carlyle) hosted me as its first Environmental Defense Fund (EDF) Climate Corp fellow to prove the case that energy efficiency makes business sense for real estate investors and can be incorporated into the current private equity investment life-cycle.Jennifer Le with Carlyle president

During my time at Carlyle, I found that the top three values of energy efficiency for real estate investors were:  1) impact on Net Operating Income (NOI), 2) risk management related to fluctuating energy costs, and 3) stakeholder engagement from tenants to investors. It was important for me to prove these points to Carlyle since private equity firms have a greater opportunity to make an impact if they direct initiatives across an entire portfolio of companies.

Throughout my summer, I worked closely with Carlyle’s U.S. Real Estate due diligence and asset management teams. By understanding their current process, I could piggy-back on what was already being done and could provide them with the ability to also capitalize on energy efficiency opportunities. I developed a framework and customized implementation guide that leverages existing vendors or reports to allow deal teams to review potential energy efficiency initiatives and incorporate them into their decision making.

(Photo: Jennifer and Dan D’Aniello, Founder of The Carlyle Group)

A number of solutions are available for investors depending on the deal structure and asset classes. The following are my top three recommendations for a general real estate investor to find the highest ROI while smoothly integrating into the current investment process:

1.       Incorporate an energy analysis into the due diligence process

Benchmark the property’s historical energy usage and identify the buildings with the highest opportunity for change. Quantify potential operating cost savings and cost of implementation to build into the budget and pro-forma financials. Incorporate energy efficiency strategies into the business plan.

2.       Review the entire investment portfolio

Leverage the growing market of Software as a Service (SaaS) tools or online services to quickly identify and prioritize properties with the highest opportunity for operational improvement that require the lowest initial investment.

3.       Utilize current property management procedures

Develop energy performance goals (either a percent decrease in costs or a specific Energy Star rating) and apply best practices by asset class (property type) across the investment portfolio. Incorporate performance goals and energy data monitoring into the current reporting process to property owners (i.e. quarterly budget and operations reviews).

Jennifer Le final presentation
I had the opportunity to dream big and make a significant impact since this was the first time Carlyle’s real estate team had taken steps to incorporate environmental considerations into their process. I was able to develop an implementation strategy that works for Carlyle’s team and lays the groundwork for years to come. This summer gave me a glimpse into what my dream job would be like and I look forward to finding the opportunity to help firms embed sustainability strategies into their process that have a positive financial and environmental impact.