Evening Brief – 06.08.23

The Russian invasion of Ukraine in February 2022, followed six months later by the signing of the Inflation Reduction Act, pushed energy security and independence, and the transition to net zero emissions to the top of the global political agenda.

Bloomberg New Energy Finance recently predicted that global investment levels, which peaked at $755 billion in 2021, need to surge to $4.2 trillion per year by 2026 if the world is to achieve net zero emissions by 2050. It is becoming increasingly evident that private capital, both debt and equity, will play an important role in meeting this funding requirement, according to content aggregator Mondaq.

Traditional bank markets lack the scope, capacity and appetite for risk on the debt side to deliver everything that is required, so the opportunity for private credit is growing.

Mondaq believes there are numerous avenues for private credit in energy, infrastructure, and natural resource assets, ranging from senior debt to special situations and distressed financing. These assets have a distinct risk profile than standard project finance and can yield higher returns.

Private credit funds, if the risks are thoroughly understood, are well positioned to capitalize on the opportunities available due to their ability to assess risk and access a vast pool of dry powder.

Private lending, unlike commercial banks, provides an alternative to typical equity offerings. Borrowers faced with the option of raising equity to develop energy transition platforms, which will dilute their ownership, or pursuing debt with equity-style components that can be paid off without dilution once the business becomes profitable, are likely to respond positively to credit funds, added Mondaq.

Emerging energy industries, such as carbon capture and storage, clean hydrogen, and EV charging, represent a compelling opportunity for private finance to deploy money and profit from potentially higher returns.