Energy Transition, ESG Riding High
Increasing exit transaction value can be an important technique for general partners (GPs) to overcome the fundraising bottleneck and return funds to investors. Exiting investments through strategic sales, initial public offerings (IPOs), or other mechanisms enables firms to generate profits and transfer them to their limited partners.
According to Bain & Co data, buyout funds alone have an all-time high of $2.8 trillion in un-exited assets in their portfolios, more than four times the levels seen during the global financial crisis. Finding suitable buyers for these assets and successfully executing exits is crucial.
Finding buyers at predicted prices is multifaceted and driven by various market factors. To accomplish effective exits, GPs must manage these hurdles wisely, considering both external market variables and internal strategies.
The energy transition is indeed a significant and dynamic subsector that has been gaining prominence in the investment landscape, where dealmakers are looking for deals and exit opportunities. As the world shifts towards more sustainable and low-carbon energy sources, there are substantial opportunities for fund managers across the spectrum to engage in real asset fundraising and dealmaking.
The need for significant investment to achieve net-zero emissions is a critical aspect of global efforts to combat climate change. The transition to a low-carbon economy requires substantial capital across various sectors, including energy, transportation, industry and infrastructure.
McKinsey’s projection of $9.2 trillion in annual capital spending between 2021 and 2050 underscores the scale of the challenge and the level of investment required to meet decarbonization targets.
General Atlantic chairman and CEO Bill Ford told the World Economic Forum meeting in Davos, Switzerland this week that he saw a “multi-decade opportunity” in energy transition, adding the world needed more renewable energy to power itself.
According to the Long-Term Infrastructure Investors Association (LTIA), funds dedicated or partly dedicated to renewable energy have accounted for more than 90% of overall infrastructure fundraising since 2019, noted Barings, a $381 billion global investment manager, in a report titled “The Evolving Opportunity in Infrastructure Debt.”
This secular shift toward strategies with an energy transition theme has resulted in an expanding pipeline of renewable energy investment opportunities. Barings noted a CBRE analysis of Infralogic data that put global deal pipelines at around $3.6 trillion.
“We think infrastructure assets with entrenched customer bases, strong market positions, and contractual and regulatory protections provide both a downside cushion in the face of uncertain economic growth and higher-for-longer interest rates and a risk-mitigated, collateral-based way to buy exposure to secular trends with high growth potential,” said Raj Agrawa, partner and global head of infrastructure, KKR, in its KKR Market Review: Infrastructure report.
Environmental and climate change concerns, as well as geopolitical worries, are driving a significant transition away from coal and oil and toward cleaner energy sources such as solar, wind, biomass, hydrogen, and hydro. Natural gas, frequently in liquefied form, serves as a transition fuel until renewable energy sources can cover the gap, added the report’s authors.
There have been a series of deals lately by major asset managers to boost their capabilities to target a rapidly growing infrastructure opportunity set driven by themes including energy transition and decarbonization, such as last week’s acquisition by BlackRock of infrastructure giant GIP for $12.5 billion and private equity giant General Atlantic’s purchase of sustainable infrastructure investor Actis on Tuesday, creating an investment platform with approximately $96 billion in combined assets under management.
Environmental, social, and governance (ESG) considerations are becoming central to dealmaking and valuations across various sectors as well, extending beyond the energy transition to encompass a broader spectrum of sustainability and conservation efforts.
ESG considerations are no longer peripheral but central to the evaluation of real assets. Investors and real asset managers increasingly understand that a holistic approach to ESG not only mitigates risks but also creates opportunities for long-term value creation, positive societal impact, and a resilient and sustainable portfolio.
While market conditions may lead to short-term rallies in various sectors, the energy transition and ESG considerations are positioned as enduring themes shaping the future of real assets. The integration of sustainability principles is not just a response to current market trends but a strategic move to address long-term challenges and opportunities in a changing global landscape.
“We’re particularly encouraged by the announcements at COP28 calling for increased collaboration and private capital mobilization to support the UN’s sustainable development goals,” said Christoph Schumacher, global head of real assets, private markets and CEO, timberland and agriculture, Manulife Investment Management.
