Published 14 April 2022

Private equity and the green energy transition

As the global energy sector pivots away from fossil fuels towards cleaner renewable energies, this shift is driving change across many other markets and sectors too.

Private equity and the green energy transition

James Christian, a Partner for Gerard Daniels in London, describes private equity as a sector that is already adapting and likely to play an important role in supporting the green energy transition.

“As the energy sector moves its focus towards renewables momentum has also been growing in private equity to advance investment and exit strategies to support this change,” James explains.

Here we consider how private equity firms are working through the green energy transition, and why strong leadership is so highly coveted in this space.

Developing new investment strategies

One of the challenges that private equity firms must address in working through in the green energy transition is developing strategies to future proof investment, and to create strong exit strategies around new and emerging markets.

“Value creation is critical in private equity and because EBITDA has traditionally been very good in oil and gas many of our clients have previously held strong portfolios in these sectors,” says James. “As the global economy moves away from traditional energy industries like these the transition could be interesting, but also quite challenging for private equity firms.”

Raising funds will be another important focus area for private equity as it moves through the energy transition. “Investors aren’t interested in fossil fuels right now,” James notes. “Instead, many pension funds and sovereign wealth funds are moving towards industries that are carbon neutral.”

Norway's $1.3 trillion sovereign wealth fund – the largest owner of publicly traded stocks globally – provides a great example of how private equity can lead this change.

“This fund is now pushing companies in its portfolio to make the transition to net zero emissions, and is making plans to divest from funds with business models that are not sustainable,” James explains. “This shows the considerable influence that investors and private equity can have.”

Investments with green appeal

The energy transition has accelerated interest in a wide range of technologies, equipment and services that support emissions reduction and the growth of green energy.

“The companies that are most attractive to private equity firms are those that offer greatest value creation opportunities,” James explains. “Given the global focus on climate change, the investment in companies that can help industrial clients to reach their net zero carbon targets is undoubtedly going to grow.”

Markets to watch:

  • Hydrogen is a good example of an up-and-coming fuel that is clean, flexible, storable and safe – and looks likely to grow for the foreseeable future.
  • Solar and offshore wind technologies remain of interest, with strong growth forecast in both sectors.
  • Battery technology, energy storage, grid technology and electric battery chargers are some other good examples of popular investment markets, particularly across Europe, the United States and the Middle East.

“One of our clients recently purchased a company that provides power resilience, micro grid and energy efficiency equipment and services,” says James. “These are some more examples of the types of markets that are growing in appeal for private equity.”

The importance of leadership

As the global energy sector changes its focus James has witnessed growing demand for new skills and experience across all markets, particularly at leadership level. “Some of the skills and experience that businesses are looking for in leadership talent today are areas that we simply wouldn’t have been thinking about 10 years ago,” James explains.

“From our client base we know that businesses in many sectors want CEOs who are visionaries, and have some understanding and experience in leading organisations through the energy transition,” says James. “Naturally the leaders within our network that that fit this description are highly coveted.”

As part of the energy transition the types of roles and the influence that energy transition leaders can now have within their organisation is also changing. A search that Gerard Daniels is currently working on with an oil and gas services company provides a great example of this evolution.

“We work closely with an established energy sector business with five business lines and strong EBITDA,” says James. “This particular client recently created a role for an Energy Transition Director, and our brief is to find someone who understands both their traditional core competencies, but also how they could be pivoted and applied to clean energy and renewable energy transition markets.”

“For our client this is a brand new role and a brand new idea, and helping them to find the right candidate with the right experience has been an interesting process,” James continues. “The fact that this role will sit on the Executive Leadership Team and report directly into the CEO also demonstrates the importance of strong leadership in this space.”

For advice on building energy transition leadership capability within your organisation connect with James Christian today. Or reach out to your local Gerard Daniels team

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