Written by: Julian Knight
Edited by: Sophie Wisden
Global investment in the renewable energy industry is rising rapidly, and there are many factors to consider when determining the causes. For one, populations are starting to experience the effects of climate change, increasing the impetus for addressing the issue: investment in the clean energy sector is one way of doing this. The government, institutional investors, and personal investors all financially contribute to the industry, and this article will look into private equity firms – a type of institutional investor – and how their investments influence the clean energy sector.
According to Kristi Leung, the Director at BlackRock Private Equity Partners Asia-Pacific, it is estimated that USD $7 trillion of capital needs to be invested every year between now and 2030 in order to successfully transition to a greener economy (Leung, 2023). The significant role that private equity firms play in innovation means that they will be a key player in ensuring this target is met (Leung 2023). Since private equity firms typically have access to large amounts of capital known as “dry powder”, they are able to finance businesses that are considered risky by conventional investors such as banks (Capolaghi & Labye, 2023). These firms are attracted by the promise of potential high returns despite the relatively higher risk (Capolaghi & Labye, 2023).
For instance, financing of the off-grid renewable energy sector, a highly innovative sector, has been primarily carried out by private equity firms such as venture capital (IRENA and CPI, 2023). Among the USD $1.5 billion in equity that contributed to the global off-grid energy industry, $985 million was financed by private equity firms, demonstrating the dominance of private equity over public equity in equity financing (IRENA and CPI, 2023). Private equity firms also contributed substantially in terms of debt financing, which unlike equity financing involves the borrowing of money through fixed income rather than via the issuance of shares. Though debt financing is dominated by larger institutional investors such as banks, private equity still contributes a significant margin to debt financing for the off-grid sector (IRENA and CPI, 2023).
While numbers and their growth are undoubtedly important indicators of financial performance, they only offer a partial view of the overall picture. It is the understanding of the underlying causes and contextual factors that adds to our general understanding of financial trends. There are many reasons why USD $1.7 trillion of private equity capital was invested into renewable energy companies in 2023 (Leung, 2023). Decreased costs – caused by a reduction in operational inefficiencies in the industry and overall technological innovation – are incentivizing investors to own assets in the industry (Sklar, 2023).
In sum, private equity plays a pivotal role in the financial well-being of the renewable energy sector. Private equity entities such as venture capital firms are attracted to companies that offer technological innovation in their goods and services, since they make their money on the high risk-high return model that they offer (Capolaghi & Labye, 2023). Thus, the potential for profit paired with the innovative nature of renewable energy companies makes for the mutually beneficial marriage between private equity investors and the clean energy industry that is seen today.
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References:
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IRENA and CPI (2023), Global landscape of renewable energy finance, 2023, International Renewable Energy Agency, Abu Dhabi. Laurent Capolaghi, & Renaud Labye. (2023, March 15). Why is private equity the driving force
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Leung, Kristi. Impact Investing in Private Equity | BlackRock Alternatives. (2023). BlackRock HK. https://www.blackrock.com/hk/en/institutional-investors/insights/impact-through-private-equity
Sklar, E. (2023, July 18). Why is private equity shining with renewable energy? M&a Community Portal. https://mnacommunity.com/insights/why-is-private-equity-shining-with-renewable-energy/
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