Articles & Papers
PE/VC Trends Report: Industrial Edition
Spotlight on Energy Transition
PE & VC firms are focusing investment on energy transition
- In the first five months of 2022, PE and VC investment in renewable energy increased by about 144%, to $11.9 billion from $4.8 billion in the same period in 2021. Niche sectors like industrial decarbonization and carbon tech in particular have been gaining traction.
- There are also strong tailwinds in sustainable infrastructure. In the U.S., the $1 trillion Bipartisan Infrastructure Bill of 2021 boosted funding for sustainable port, airport and freight infrastructure. This was followed in 2022 by the Inflation Reduction Act, which includes investments in clean energy and decarbonization in the transportation sector.
- On the venture capital front, big oil and gas companies are funding climate tech. In 2022 they participated in deals comprising more than one fifth of all VC investment in climate tech startups.
- Read more on the topic here.
"The sweet spot for PE investment will be proven stable cash flow businesses that provide niche services or equipment for the new clean energy infrastructure. These businesses should be sufficiently niche so that they are protected from the big macro level changes behind the energy transition. The new high interest rate environment and limited debt availability is challenging PE investors to become better operators of their businesses."
- Thomas Zay
Global Sector Leader, Energy
Managing Partner, United States
PE seeks to realize returns by remaking traditional energy companies
- PE investors have tended to contribute to energy transition through divestment in energy- and emissions-intensive industries. This approach is getting a rethink, as there is opportunity – both for portfolios and the planet – in grey-to-green transformation.
- Oil and gas companies with demonstrated commitments to energy transition are attracting PE investors. The biggest players are forming new funds focused on traditional energy firms whose strategies align with net zero initiatives.
- Record profits in 2022 gave oil & gas companies the cash flow to invest in energy transition. The reversal of a years-long trend of underinvestment is on the horizon. In particular, increased investment in certified “green” natural gas and carbon-neutral LNG is anticipated this year.
- In Europe, the energy crisis has stimulated deal activity across the energy sector, with oil, gas and coal companies securing $5.3 billion in PE investments in the first 10 months of 2022, up by 83.5% compared to all of 2021.
- Read more on the topic here.
"There is a continued focus on the grey to green transition with large PE firms forming new funds focused on traditional energy companies who have net zero initiatives. We have also seen small PE firms focus their energy investments on new technology to accelerate the energy transition including clear hydrogen for power plants, cleaner battery technologies, and Carbon sequestration."
- Kathy Pattillo
Managing Partner, United States
The way funds manage industrial portfolios is also in transition
- Energy transition, particularly in the industrial sector, is fraught with uncertainty due to factors such as regulation, politics and technological advancements, which are beyond the control of investors. Considering the potential rewards, GPs must remain undeterred by its complexities. The winners will be those who adapt to them.
- Pragmatic investors will look at companies that meet the energy transition needs of all competitors within a given space. For example, as car manufacturers continue producing EVs, their need for energy storage is ongoing. Likewise, rising demand for carbon transparency across industrials is creating a broad market for carbon tech.
- GPs should not underestimate the value of a clear carbon reduction strategy. Companies in the private sector continue to lag public companies in carbon maturity, and portfolio companies will be under pressure to catch up. Planning for carbon reduction is crucial to managing regulatory risks and preparing for stronger exits.
- Read more on the topic here.
"We can expect to witness not only a change in investment patterns but also a heightened focus on portfolio composition as the energy transition continues to evolve. The extremes of winners and losers will be more spread than historically with legacy investments. Success will be determined by the ability to embrace uncertainty, adapt to changing dynamics, and identify companies that cater to the energy transition needs of multiple players within a given space. New entrants to these markets will have to consider how they contend with established well-functioning supply chains as they assess their investments. The demand for talent who can deliver in this new environment will be even more acute."
- Allan Marks
Managing Partner, Australia
