As pressure on private equity firms to decarbonise their portfolios continues to intensify, both opportunities and challenges for private equity firms are becoming increasingly apparent. To succeed in this changing landscape, GPs must take a proactive approach, emphasising offensive and defensive strategies to address heightened demands from regulators, consumers, B2B partners, and investors alike.
Despite wide-ranging uncertainties around regulations globally as well as local politics influencing change; those who view this shift through a longer-term lens will be best poised to capitalise upon new investments on alternative sources of renewable energy.
Read on to find out the significant implications of the energy transition through the lens of private equity.
Transition-focused Investments
Investors are presented with new opportunities while the energy transition progresses, creating a complex and changing landscape across every sector of the economy. This transition brings both challenging obstacles and incredibly lucrative incentives, as it has seen $160 billion worth of transactions related to energy transition buyouts and growth equity funds since 2017.
Investors are advised to pursue strategies that allow them to take advantage of the best deals available. The tactics and levels of risk may differ, but one way to mitigate risk is to invest in companies that provide data and tools to all competitors instead of trying to pick the winners in fast-changing markets. For instance, companies that provide software, tools, and services for collecting and managing carbon emission data have the potential to be successful.
Carbon-tech companies, such as Persefoni and Watershed, have drawn considerable investment. The two have secured $101 million and $70 million to broaden their software that encourages carbon transparency and data reporting. Another noteworthy transaction within this space is Blackstone’s acquisition of Sphera for $1.4 billion, a software-as-a-service provider that assists enterprises with managing ESG data.
By putting capital into companies that provide vital services and tools while having a strategic plan, investors can overcome the difficulties of transitioning energy sources whilst making money in this swiftly evolving sector.
Careful Considerations and Due Diligence
Investors must also carefully and holistically consider a company before investing during this energy transition.
When making investment decisions, investors should factor in other aspects such as regulatory and subsidy effects on company behaviour, cost and production implications on customer and competitor behaviours, and the potential nonlinear impacts of technological advances. Investors must also assess politics and the companies’ business models.
Assessing market growth potential is a complex task that calls for an appraisal of development likelihood. For instance, Primavera Capital’s investment in the Envision Group, a wind turbine manufacturer, necessitated considerations such as their ability to retain control over the market and new income sources to counter any potential downturn in activity due to regulatory alterations.
Ultimately, conscientious investment and due diligence are necessary to gain an understanding of a company’s market position, potential growth, and the effect of external influences like regulation and technology. Thorough consideration allows investors to identify profitable long-term investment opportunities that will benefit from the energy transition.
Striking a Balance
As the movement towards energy transition intensifies, PE portfolios face many new opportunities and risks. Private companies are advised to move swiftly to embrace carbon-reduction strategies that meet regulatory standards while demonstrating loyalty to their limited partners, lenders and customers.
To comply with rising rules on emissions throughout the value chain, both upstream and downstream, private entities have no other option than to demonstrate measurable progress in environmental sustainability measures – putting them at par with public rivals in this emerging space. Simultaneously, investors must remember that their invested companies can and should minimise the costs of decarbonisation efforts by making informed decisions about priorities and solutions. This pragmatic approach to a net zero future will increase a company’s performance and potential for an exit, directly affecting an investment’s profitability.
No matter your perspective on the energy transition, there remains a pressing need for investors and private equity firms to develop experience and capabilities that enable them to capitalise on this global paradigm shift. With its complexities ranging from politics and regionalism to regulatory uncertainty, pro-active strategy development will be essential in turning risk into opportunity.
Unfortunately, those who fail to act may suffer the detrimental effects of being left behind in the dust of change. So, to stay ahead, keep your eyes on the latest developments, from ESG trends to carbon credit challenges and real estate opportunities; being in the know is a fundamental need for any savvy investor.
