Private markets are pivotal to the energy transition

Private markets, not public ones, are driving the overwhelming majority of investment in solutions needed to combat the climate crisis.

According to BloombergNEF, new investment in the renewable energy sector globally rose 13% in 2022 to $532 billion.^[1] Private debt and investment accounted for 93% of the total, in the form of asset finance and small-scale solar projects. Investment in public markets accounted for just 3.3% of the total.^[2]

Put simply, private markets offer the most direct and effective route for investors wishing to pursue greenfield opportunities in the renewables sector and contribute meaningfully to curtailing greenhouse gas emissions.

Private markets are also playing a crucial role in funding early-stage ventures working on climate solutions, allowing investors to get close to the action in projects that could help safeguard our future, but also offer solid long-term return potential.

Scenario analysis by the International Energy Agency concludes that in order to achieve net zero globally by 2050, nearly half of all emissions savings would need to come from technologies that have yet to be commercially deployed. Many of these technologies are being developed by companies that are categorised as startups—in other words, they are not publicly listed and have yet to achieve profitability. Their main source of funding is private equity and debt.

Image source: https://privatebank.jpmorgan.com/gl/en/insights/investing/the-energy-transition-is-ramping-up-investors-should-take-note

An immense opportunity

Given the transition to clean energy is estimated to require between $119 trillion and $194 trillion by 2050,^[3] private markets will need to step up even further to meet the pressing climate investment need.

Private debt in particular is rushing in to fill the gap. Leading alternative investment manager Blackstone recently closed the biggest ever energy transition private debt fund at over $7 billion.^[4] BlackRock has also acquired Kreos Capital, one of Europe’s largest loan providers to startups and high growth companies.^[5]

Then there is global investment firm KKR & Co’s move to buy $550 million worth of solar energy loans extended to the customersof US-based startup SunPower Corp., which offers a solution to make it easier for homeowners to install solar energy solutions without having to bear the high up-front costs.^[6]

And Ares Management Corp. and Copenhagen Infrastructure Partners have recently launched large private debt funds targeting the renewables sector.

What’s more, S&P Global reports that private debt providers are also working with banks on renewable energy project financing deals. These include big hydrogen projects on the US Gulf Coast, which have struggled to access financing as banks scale back lending. Private debt has come in to take on some of the risks traditional institutions are unwilling to bear in the current market environment—by doing so, the projects become bankable enough to also attract additional funds from mainstream lenders, allowing them to get off the ground.^[7]

Riding renewables tailwinds with securities-based financing

These various private market investments targeting the energy transition stand to benefit from two critical tailwinds.

First, the economic fundamentals of renewable energy technologies continue improving rapidly. Solar and wind power is already cheaper than fossil fuels in many parts of the world, and their continued cost decline is set to make transformational technologies like green hydrogen increasingly viable.

And second, as the consequences of climate change become more visible and pronounced, major governments are likely to introduce more stringent regulations and more generous incentives designed to hasten the transition to greener energy sources. The US Inflation Reduction Act, for example, announced last year by President Biden, will provide substantial incentives for electric carmakers and other renewable energy companies over the next decade.

Individuals can also access innovative forms of private debt to access financing for small-scale renewable energy installations—through which they can collectively make a sizeable contribution to mitigating climate change. In a nod to SunPower’s playbook, homeowners and businesses could, for example, use securities-based financing from EquitiesFirst to install rooftop solar systems, which could lead to emissions reductions as well as savings on their energy bills.

More broadly, securities-based financing can provide a convenient and flexible way for long-term investors to use their equities or crypto as collateral to access liquidity to pursue a bewildering array of emerging opportunities related to the energy transition without having to sacrifice upside potential from their existing holdings.

Among these opportunities, it is worth highlighting that overall investment in electric vehicles last year was pretty much on par with investment in renewable energy. And energy storage appears to be an especially fast-growing investment segment, given one of the biggest remaining impediments to the widespread use of renewable energy is the difficulty of storing it.

Indeed, the energy transition is a critical theme that not only extends to practically every sector of the economy, but also enjoys a uniquely favourable regulatory and market climate. At a time when traditional lenders are wary of financing even such projects, securities-based financing provides a compelling means of keeping the transition moving forward.

[1] https://about.bnef.com/new-energy-outlook-series/

[2] https://www.alliancebernstein.com/n-europe/en-gb/institutions/insights/investment-insights/how-private-assets-can-empower-the-energy-transition.html

[3] https://about.bnef.com/new-energy-outlook-series/

[4] https://www.blackstone.com/news/press/blackstone-closes-record-energy-transition-private-credit-fund-at-over-7-billion/

[5] https://www.blackrock.com/corporate/newsroom/press-releases/article/corporate-one/press-releases/blackrock-to-acquire-kreos-capital

[6] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/private-credit-eyes-renewable-energy-ops-permira-direct-lending-fund-hits-8364-4-2b-76171377

[7] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/private-credit-eyes-renewable-energy-ops-permira-direct-lending-fund-hits-8364-4-2b-76171377

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