Blackstone Gets Into Clean Tech

the private equity giant leads funding round in biofuel startup Coskata.

BURLINGAME, Calif.--Amid the uncertainty of the financial markets, private equity giant Blackstone Group is getting into clean tech. Its first investment: Coskata, an Illinois start-up that says it can make next-generation ethanol from non-food sources for approximately $1 a gallon.

Coskata, which announced the investment Friday, did not disclose how much it raised in its third round of financing, but the company is said to have raised $40 million from Blackstone (nyse: BX - news - people ) and other investors.

Blackstone made its investment through its newly formed clean-tech fund. A spokesman for Blackstone said the company can't comment on the fund because it is still in the fundraising process. But Blackstone announced in August it was creating a clean-tech energy group headed by James D. Kiggen, formerly of investment manager AllianceBernstein (nyse: AB - news - people ).

"We are thrilled to have an investor the caliber of Blackstone working with us," Coskata CEO Bill Roe said in a press release. And lucky, too. The credit crisis dramatically slowed the pace of investment in Coskata, which began its fundraising roadshow in late June and had been hoping to announce the deal with Blackstone two months ago.

Roe added in an interview with Forbes.com that the onset of the credit crisis made the fundraising "a white-knuckler." "We were happy to get [the financing] closed because it was getting more and more difficult," he said. "Several people who were in the book had to get out of the book because they couldn't make a cash call" to come up with the money by the deadline for the fundraising. The problem: the seizing up of the financial markets. Interest is still high in the future of next-generation ethanol, despite the drop in oil prices to $42 a barrel, Roe said.

Coskata is about 80% of the way through building a commercial demonstration plant outside of Pittsburgh. The company hopes to open the plant within six months and aims to have a full commercial-scale production plant up and running by the end of 2011. By then, Roe expects oil demand will return to normal with prices in the $70-a-barrel range.

Most of the so-called cellulosic ethanol companies that Coskata is competing with are pursuing a biotech approach, using enzymes to break down plant mass into fermentable sugars. Coskata, however, is pursuing an approach that doesn't use enzymes. Instead, the plant matter (also called biomass) is gasified, then sent to a proprietary bioreactor where micro-organisms consume carbon monoxide and hydrogen and spit out ethanol.