The most profitable private equity investment in history—an “opportunistic” deal from eight years ago that no one believed in.

Energy Capital Partners (ECP)’s $5.6 billion acquisition of natural gas power producer Calpine in 2017 is about to become the most profitable single transaction in private equity history. According to a Wall Street Journal report on Tuesday, including dividends, the investment will bring ECP and its co-investors over $25 billion in returns, far surpassing the previous record of $14 billion set by Blackstone Group’s Hilton Hotels project. ECP is about to complete its sale of Calpine to Constellation Energy, expected to close within the next month. About $18 billion of the payment will be in Constellation shares, which have risen nearly 50% since the deal was announced this January. At the time, the deal was seen as a contrarian bet. The shale gas boom and growth of renewable energy capacity led to a glut of natural gas supplies, squeezing the profit margins of the Houston-based company. The market generally considered gas-fired power plants poor investments, believing the world was transitioning to renewable energy. However, what the market failed to foresee was a surge in electricity demand. Factors such as the return of manufacturing, the spread of electric vehicles, cryptocurrency mining, and subsequently the AI boom and its immense electricity needs have all contributed to this shift. Contrarian Bet on Natural Gas Power When ECP acquired Calpine in 2017, it was seen as a highly controversial investment. The natural gas oversupply brought about by the shale revolution, combined with the rapid development of renewable energy, led to widespread market pessimism about the prospects for gas-fired power plants. According to sources, ECP regarded Calpine as an undervalued asset and believed the company could generate significant cash flow and achieve greater returns through targeted improvements. The company was convinced that the energy transition would take three to four decades, and that during this period natural gas would play a key role in providing reliable power to the grid. ECP was founded in 2005 by former Goldman Sachs partner Doug Kimmelman, is headquartered in Summit, New Jersey, and is now the largest private owner of power assets in the United States. British private equity firm Bridgepoint Group acquired ECP last year, and the merged entity now manages about $86 billion in assets. AI Boom Ignites Electricity Demand What ECP could not foresee was the surge in electricity demand after years of stagnation. The return of manufacturing, growth in electric vehicles, and cryptocurrency mining all drove demand higher. Next, the artificial intelligence boom created huge new demand for electricity. In November 2022, OpenAI launched ChatGPT, sparking an AI investment frenzy. As it became apparent that data centers would need enormous amounts of power, valuations for publicly traded power suppliers soared. This gave Constellation the "currency" it needed for the acquisition. In January this year, Baltimore-based Constellation announced it would acquire Calpine for $4.5 billion in cash and 50 million shares. Constellation is the largest producer of carbon-free energy in the US, with most of its output coming from hydro, wind, solar, and nuclear energy. Operational Improvements Create Value After the acquisition was completed in 2018, Calpine launched several growth initiatives. The company added new battery storage projects, expanded capacity at its large California geothermal facility, Geysers, and improved its hedging strategies. During ECP’s ownership, Calpine’s profits roughly doubled, allowing the company to reduce its debt level. According to sources, Calpine distributed about $8.5 billion in cash to investors during ECP’s holding period. ECP President Tyler Reeder had previously worked with members of Calpine’s management team and was very familiar with the company. During the acquisition process, other private equity firms also looked at the company, but none were willing to make such a large bet on natural gas. Risk Warning and Disclaimer The market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it consider the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing based on this information is at their own risk.