Private equity will increasingly finance the clean energy transition, partly because of its ability to wait longer for returns compared to public markets, according to a report released Wednesday by S&P Global.
Cleantech generally requires large, up-front capital spending and private investors are better able to afford that risk, Peter Gardett, S&P Global Commodity Insights executive director of research and analysis, and Nathan Hunt, S&P Global head of content and digital marketing, said in the report.
“This phase of acceleration in the energy transition may be the first major industrial and technology investment cycle that occurs primarily in opaque private markets dominated by private equity funds and specialty asset managers, rather than through capital raises in public equity markets,” Gardett and Hunt said.
The top areas for private equity investment from August through February were “combined renewables” at $20.9 billion, the circular economy at $6.3 billion, battery storage at $5.5 billion and mobility at $5.1 billion, according to the report.
Few governments have done much to bolster their industrial bases over the last 30 to 40 years, but the acceleration of energy infrastructure investment in the last six months has been “remarkable,” Gardett and Hunt said.
“There were zero hydrogen deals six months ago, and now there are dozens,” they said. “There was also only a handful of utility-scale battery plays, and now there are well over a hundred. This pace will only pick up.”
Private equity firms aren’t investing in cleantech energy infrastructure to achieve net-zero carbon emissions, according to the analysts.
“The concept of a single, global movement into a climate-friendly and cleantech-enabled capitalism was always a political conceit rather than a grown-up investment thesis,” they said.
In many cases, cleantech is superior technology, Gardett and Hunt said, noting that battery-powered electric vehicles can be 300% more efficient than internal combustion engines and wind farms have zero fuel costs.
“A giant solar farm is pretty much self-sufficient once it is operational, while it takes dozens of highly trained and highly paid individuals to operate a coal-fired power plant,” they said.
Private equity funds focused on the energy transition and climate infrastructure have deployed only a fraction of their capital, which may have helped contribute to a bubble in cleantech valuations, according to the report.
“When lots of investors are competing for the same asset, the price goes up,” Gardett and Hunt said. “To some extent, current inflated prices will incentivize investment to catch up with infrastructure needs in the U.S. and Europe.”
Cleantech incentives, such as those found in the Inflation Reduction Act, are flowing into private equity-backed companies because private equity firms have cash ready to commit to new projects or already own the clean energy firms that could benefit from policy changes, Gardett and Hunt said.