Private capital has played a critical role in financing the growth of renewable energy over the last two decades. According to the International Energy Agency, more than 80% of total power sector investment globally is focused on renewables, grid integration, and storage. Furthermore, solar makes up almost half of this new investment, split between utility scale and distributed systems. Unsurprisingly, this has resulted in an influx of private capital into the space, with S&P Global reporting over US$21.5 billion invested in the US alone during 2021.
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Much of this investment has traditionally been focused on asset owners, with pension funds and long-term capital managers investing in utility scale power plants. However, Clairvest’s activity in the renewables space over the past few years has supported an important shift towards investment in companies that enable the energy transition and support assets during and after their construction and commissioning period. Understanding this shift and the role of private equity outside of asset ownership is vital for leaders in the space.
The transition towards renewables has been a long-term secular trend in response to the fundamental need for reductions in carbon emissions and domestic energy security. Traditionally, this transition was supported by government incentives but, over the past several years, the declining capital cost of renewable energy has accelerated this transition.
Government action is again set to pour more fuel on the fire with the passage of the Inflation Reduction Act, which underscores governmental support for all forms of renewable power. Similar legislation is being passed globally, with a focus on reducing carbon emissions and empowering renewable businesses.
These new policies and continued declines in the capital cost of renewable power plants will enable continued growth for businesses in the sector. As rapid demand growth occurs, it typically drives a need for capital and expertise to support businesses as they scale. Private equity can assist companies in navigating rapid growth transitions by providing a stable balance sheet, a long-term outlook for success, and expertise in navigating the common pitfalls of a scaling business.
Private equity can provide tangible benefits, including access to equity and debt capital, strategic planning, support with mergers and acquisitions, and bolstering the team as the company grows. In addition, private equity firms typically have experience growing and scaling businesses, which allows management to better play to their strengths as industry experts.
However, there are several private equity investment styles, and it is important to choose a partner that aligns well with the business’ goals and aspirations. One of the most important factors to consider is whether or not a company is comfortable giving up control to a private equity firm, or if they would prefer a minority investment. Each has their advantages, but results in vastly different partnership structures. With minority partnerships, existing management is in control of the business and drives the business’s strategy. Conversely, majority partnerships provide private equity firms with a greater say in the day-to-day operations and business’s overall direction.
In contrast to asset ownership, which is typically long-term, private equity investment periods commonly range from 3 – 7 years, and investors are typically looking to realise a return by year five. Management should carefully analyse the average hold period of a private equity firm to ensure it is aligned with their business plan; if management has a 7 – 10 year plan to fully realise the potential of a company, but a private equity firm has a 3 – 5 year time horizon, there could be a potential misalignment of interests.
Through partnerships with NovaSource Power Services and ALSO Energy, Clairvest has witnessed the value that is created through an aligned partnership between the right investor and companies that service the renewable energy sector. Ultimately, this leads to the creation of strategically significant businesses – ones that are vital to the future of renewable energy.