Traditional Vs. Renewable Energy: A Balancing Act
Although elevated interest rates have negatively affected the financial performance of renewable energy and infrastructure developers and electric utilities in North America, private equity managers have not observed a significant effect on private capital expenses or transaction activity.
Notwithstanding any decrease in valuations, the growth and value prospects of the energy revolution will continue to stimulate the influx of private capital seeking renewable energy and infrastructure investments. The increasing costs of renewable energy power purchase agreements (PPAs) are enabling private equity investment firms to safeguard their profits in a climate of high interest rates.
These companies are attracted not just by the social and humanitarian benefits of renewables, but also by the economic benefits, which include low-cost power, less reliance on foreign fuels, and a more secure, reliable energy supply.
The data highlights this movement. Private equity and venture capital deals globally in the renewable energy sector were almost $15 billion in 2023; the highest in the past five years according to S&P Global Market Intelligence data.
Critical Juncture
Corporate entities operating in the energy and natural resources sectors are confronted with a critical decision. Do companies allocate resources and engage in transactions to strengthen their existing higher-carbon operations, which may experience a decrease in profitability due to the global goal of achieving net zero emissions, or do they redirect their attention towards enterprises that contribute to the transition to clean energy, where profit margins are expanding quickly from a smaller starting point?
Energy and natural resources companies are currently negotiating agreements that balance the promotion of a low-carbon agenda (renewables) with the reinforcement of their primary businesses (traditional energy). The most effective companies will adopt a more focused strategy for their energy transition acquisitions to achieve the appropriate balance.
“The energy, utilities and resources sectors continue to be an exciting arena for global M&A,” said Greg Oberti, national energy transition & utilities deals leader, partner, PwC Canada.
Traditional Energy
That balancing act can be observed in mergers & acquisitions and fundraises announced in the traditional and renewable energy sectors throughout the summer. Middle-market and infrastructure-focused private equity firm Bernhard Capital Partners acquired New Mexico Gas Company (NMGC) from Canada-based energy and services company Emera for $1.25 billion in early August.
Silver Hill Energy Partners closed its fourth partnership and second institutional private equity fund, Silver Hill Energy Partners IV, with $1.13 billion in capital commitments last month to invest in direct ownership, operation, and control of onshore oil, natural gas and related infrastructure assets in premier U.S. basins.
Meanwhile, two weeks ago, Quantum Capital Group entered a $3 billion deal to acquire Cogentrix Energy from The Carlyle Group, while I Squared Capital made two strategic acquisitions in the sector: Aurora Utilities Limited in the U.K. and Priority Power Management in Texas.
Lastly, in June, Tiger Infrastructure Partners acquired Unison Energy, an Energy-as-a-Service platform that designs, builds, owns, and operates microgrids on-site at customer locations in the U.S. Northeast, Southwest and Midwest.
Renewable Energy
Last week, New York-based LS Power Group revealed that its most recent fund, LS Power Equity Partners V, held its final closing in July, accumulating approximately $2.7 billion in total commitments. Fund V will focus on investments in power and energy infrastructure assets, platforms and companies. Currently, the U.S. is experiencing its most rapid growth in power demand in many years, mostly due to the increasing electrification and proliferation of data centers.
The new fund has already deployed or committed about $1.6 billion across various sectors, including renewable and gas-fired generation, renewable fuels, and green hydrogen. In early August, the fund announced the acquisition of Algonquin Power & Utilities’ North American renewable energy business, which comprises 3 GW of operating projects and an 8 GW development pipeline across multiple states and provinces.
“Our portfolio of assets and businesses — which spans generation, transmission, and decarbonization solutions — is designed to ensure the reliability and affordability of electricity while accelerating the energy transition,” said Paul Segal, CEO of LS Power.
Last month, Blackstone, via its private equity business, Blackstone Energy Transition Partners, announced a majority investment in Westwood Professional Services, Inc. The company provides front-end engineering design services supporting the development of renewable energy generation, investment in the power grid and the continued buildout of public and private infrastructure across the U.S.
Goldman Sachs Alternatives announced in August that it made a $440 million strategic investment in BrightNight, a renewable power company. The investment, along with existing capital commitments, is expected to fully fund BrightNight’s five-year business plan and advance the execution of its 31-gigawatt renewable power project portfolio.
“Companies with strong balance sheets are proving to be best positioned to seize dealmaking opportunities in an industrial landscape which is being actively reconfigured in the face of new geopolitical realities, government initiatives and a continued market focus on energy transition and energy security,” said PwC Canada’s Oberti.
Private equity firms are increasingly investing in renewable energy, citing economic and environmental benefits. Despite obstacles such as project delays and elevated financing costs, the potential for growth in renewable energy remains high, and the growth in private funding is vital to hastening the global transition.
