Private equity firms are increasing their direct oversight of energy transition companies in their portfolios, taking on added duties to address runaway costs from supply chain issues and preserve valuations, executives said 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.
But the COVID-19 pandemic, subsequent supply-chain shortages of materials and equipment, slower-than-expected technological developments, and soaring demand for fossil fuels have left many new-energy firms in a precarious state.
Professional investors have reacted by taking a much more hands-on approach, said private equity executives.
Carlyle Group has negotiated for key components on behalf of its portfolio companies, Pooja Goyal, chief investment officer at Carlyle Global Infrastructure, said at the CERAWeek by S&P Global conference in Houston.
It put agreements in place with Chinese suppliers for solar panels, electrical equipment and other components, often jumping the queue on order books backed up for two or three years. This ensured projects could remain on time.
“No matter how much procurement you’re doing (at the portfolio company level), you’re going to be pretty much irrelevant to the suppliers,” Goyal told the conference.
It is not just procurement using economies of scale which buyout firms can offer. Traditional tenets which private equity firms push – such as leveraging their network of investments for collaboration, and drawing on senior people to offer management advice – are more important to startups hitting their first rough patch.
“Beyond capital, companies and founders are looking for investors like TPG that can deliver the full private equity toolkit,” Steven Mandel, business unit partner at TPG Rise Climate, said in an interview.
While ensuring these startups can navigate market turbulence and pursue climate goals, the money managers are also making sure their investments achieve expected returns.
Since the start of 2022, the S&P Global Clean Energy index has lost more than a third of its value, versus a 10% gain for the wider S&P 500. Valuations for private companies, while harder to track, are generally believed to have fallen by more than their publicly listed peers.
The correction also offers opportunities for buyout firms to make new investments to ultimately benefit existing businesses. This includes picking up assets or key engineering teams from struggling energy transition firms, including those which went public via blank-check firms during the boom time, and which subsequently lost much of their value.
They could also buy out other investors in the portfolio companies, thereby ensuring management teams have more time to get concepts to market and to achieve profitability.
“In more complex operating environments, entrepreneurs and founders become much more selective about the types of firms they want to partner with,” Gabriel Caillaux, head of climate at equity investor General Atlantic, told Reuters.
“Managing geopolitical risk, navigating how to leverage AI, scaling technologies, and ensuring you have a fully-funded business plan” are all things which cleantech CEOs are seeking help with, he added.
(Reporting by David French in Houston; Editing by Marguerita Choy)