As the world shifts away from carbon-based fuels, private investors have increased opportunities to supply capital and help businesses speed up growth, according to Bain & Company.
The investment landscape is rich, Bain said in its 2023 Global Private Equity Report, as regulators, consumers, and investors all expressed support in 2022 for the decarbonization of portfolios.
As innovators hurry to develop alternative low-carbon energy sources, the moment is ripe for private investors to put their money to good use. Bain projected that companies supplying new technology, products, and services across the globe will need trillions in new capital.
The firms who can recognize the current transition and determine how to manage through it will benefit, Bain reported. Despite the technological, economic, political, and governmental hurdles, buy-out and growth equity funds pursued energy transition-related deals worth about $160 billion between 2016 and 2022, according to PitchBook. Most of the activity was in the renewables and clean energies segment.
The right investment depends on a fund’s risk-tolerance, capital intensity, and focus on value creation. Focusing less on picking winners and determining more on which companies are supplying tools and data to all competitors is the way to view risk, the report suggested. Finding such companies requires an in-depth due diligence to assess the technological, regulatory, and political considerations that can affect them.
But beyond typical due diligence, private equity firms need to consider several additional factors. These include the impact of regulation and subsidies on company actions and consumer preferences, the effect of different cost and production assumptions on customer and competitor behaviors, and the possibility for nonlinear impacts of tech improvements, some of which may be disruptive.
The energy transition’s effect on private equity is complex and uncertain. But failure to act, Bain said, is risky. Climate issues need to be addressed, and the transition can create wealth. So, firms need to develop experience, increase capabilities, and expand the networks that will help them not only navigate change, but gain from it.