Private equity firms are intensifying their direct involvement with energy transition companies within their portfolios, assuming additional responsibilities to tackle escalating costs stemming from supply chain challenges and safeguard asset valuations, executives affirmed at the CERAWeek energy conference this week.
“Excitement around new energy technologies saw billions of dollars of investment poured in the last four years into those aiming to shape the energy transition with biofuels, hydrogen, solar, wind, and carbon removal technologies,” the executives noted.
However, the landscape has been tumultuous, marked by the COVID-19 pandemic, subsequent supply chain disruptions affecting materials and equipment, slower-than-anticipated technological advancements, and a resurgence in demand for fossil fuels. These factors have placed many new-energy firms in precarious positions.
In response, professional investors have adopted a more hands-on approach. Private equity executives highlighted their proactive strategies, with Carlyle Group (CG.O) exemplifying this trend.
Pooja Goyal, chief investment officer at Carlyle Global Infrastructure, revealed that the firm has proactively negotiated for crucial components on behalf of its portfolio companies.
The Carlyle Group secured agreements with Chinese suppliers for solar panels, electrical equipment, and other vital components, often bypassing lengthy order backlogs of two to three years. This proactive measure ensured that projects could proceed as scheduled.
Pooja Goyal emphasized at the conference, “No matter how much procurement you’re doing (at the portfolio company level), you’re going to be pretty much irrelevant to the suppliers.”
Beyond mere procurement leveraging economies of scale, private equity firms offer additional benefits. They capitalize on traditional principles, such as leveraging their extensive network of investments for collaboration and tapping into senior expertise to provide management counsel, which become pivotal for startups encountering initial challenges.
“Beyond capital, companies and founders are looking for investors like TPG that can deliver the full private equity toolkit,” noted Steven Mandel, a business unit partner at TPG Rise Climate, in an interview.
While ensuring that these startups navigate market volatility and pursue climate objectives, fund managers are also vigilant about achieving anticipated returns on their investments.
Since the beginning of 2022, the S&P Global Clean Energy index has experienced a decline of over a third of its value, in stark contrast to the 10% gain recorded by the broader S&P 500. Although valuations for private companies are more challenging to gauge, they are generally perceived to have declined more significantly than their publicly listed counterparts.
The market correction presents buyout firms with opportunities to make new investments that can ultimately benefit existing businesses.
This strategy involves acquiring assets or crucial engineering teams from struggling energy transition companies, including those that went public through blank-check firms during the boom period but subsequently saw significant declines in their value.
Additionally, buyout firms could opt to purchase stakes held by other investors in the portfolio companies. This move aims to provide management teams with an extended runway to bring their concepts to market and achieve profitability.
“In more complex operating environments, entrepreneurs and founders become much more selective about the types of firms they want to partner with,” noted Gabriel Caillaux, head of climate at equity investor General Atlantic, in a statement to Reuters.
He added, “Managing geopolitical risk, navigating how to leverage AI, scaling technologies, and ensuring you have a fully-funded business plan” are all areas where cleantech CEOs seek assistance.
