The future of the clean energy sector is no longer a matter of science and technology. Access to funds is everything. The fossil fuel industry has been subsidized for decades with tax incentives and government support, but renewable energy has struggled to compete. Renewable energy is now a safe bet for investors.
Renewable Energy Finance provides a detailed review of renewable energy trading and shows how countries such as the United States, India, and China respond to global energy challenges. The main suppliers of equity funds for the project are strategic investors, corporate capital, and the private sector. Private equity funds dominate equity investment. Here, we will discuss how private equity funds benefit the energy sector, but before that, let’s see what private equity is, its characteristics, and how it works.
What are Private Equity and its characteristics?
Private equity includes strategies for investing in shares of unlisted companies. It is a question of bringing fresh capital to the top of the balance sheet.
Private equity promises a high return compared to traditional asset classes. It is also an opportunity for asset diversification, sometimes accompanied by a tax advantage. Finally, venture capital places investors away from fluctuations in the financial markets since the portfolio companies are not listed.
Private equity: characteristics
Specialized funds often acquire the participations committed by private equity. The latter make long-term investments in the equity of companies. They take minority or majority stakes, which will be kept between 3 and 7 years before being sold, generally to other investors. Therefore, the value created by these operations results from the growth and development of these companies, which, for some, end up being listed on the stock market. Venture capital funds invest according to different wealth strategies:
Innovation capital: The managers rely on young innovative companies from their creation or soon after, mainly in the sectors of new information and communication technologies, life sciences (biotechnologies, etc.), or in electronics, new materials, and clean energies. The expectation of winning can be extremely high.
Development capital: The objective is to take a minority stake in the capital of mature and profitable companies searching for capital to finance their development or boost their production capacity.
Reversal capital: It finances the restructuring of a troubled company so that it returns to profit after a reorganization phase often supervised by the private equity fund.
Transmission capital: This facet of private equity consists of buying an already profitable company by means of financial techniques, which give pride of place to borrowing and leverage.
The lifecycle of Private Equity Funding
A private equity fund’s life cycle is usually divided into several different stages, such as trading time, investment time, and holding time. Trading time is the time at which the fund starts. As a successful financing organization, the market’s length varies and can usually change from months to months for the first time.
During the investment period, the money manager invests funds. The investment period depends on the investment strategy of the fund. Especially for 3 to 5 years. Fund managers are expected to invest the fund during the investment period fully. However, the fund manager may be able to extend the investment period for one or two years with the investor’s approval. During the investment period, the fund manager will receive a management fee according to the amount.
After the investment period, the fund enters the holding period. In this stage, the fund manager’s main task is to properly manage the previous investment and presentation of the investment. At this stage, the management fee is usually less than the investment required to manage the portfolio. When some investments are made, the criterion for calculating management fees is also reduced.
Role of Energy Focused Private Equity Funds
Renewable energy investments for a project or company include private investments such as investment funds, infrastructure funds, and pensions, or direct investment in projects and property portfolios.
Depending on the type of business, the level of technology development, and the magnitude of the risk, different types of equity investors will be involved.
- Venture capital focuses on technology companies in the “primary” or “growth stage” (depending on their distance from laboratories and business deployments).
- “Private equity” companies such as Blackstone energy partners focus on mature technologies and projects at the next level, usually expecting to “complete” their investments and make a profit in 3-5 years.
Advantages of private equity
Private equity financing has some distinct advantages over other forms of financing. Here are some of the main benefits:
Large amounts of funding: Of all the options we’ve seen so far, private equity can provide by far the most money. As we have seen, the deals are measured in the hundreds of millions of dollars. The impact of this type of money on a business can be enormous. Private equity funding in the energy sector will strengthen the flow of large amounts of funds towards the energy sector, which in turn leads to technology advancement and the growth of the energy sector.
Active involvement: With many of the other financing options we’ve looked at, the investor or lender has minimal involvement in running their business. Private equity firms are much more useful and will help you re-evaluate every aspect of your business to see how you can maximize their value.
It can lead to problems, of course, if their idea of maximizing value doesn’t match yours, as we’ll see in the next section. However, the experience of professionals deeply involved in your business can lead to major improvements.
Incentives: Private equity firms such as blackstone energy partners have a lot of skin in the game. As we have seen, they often borrow a lot of money to make their investments, and they have to pay it back and generate a return for their investors. To do that, they need your business to be successful.
Individual partners of the private equity firm have also often invested their own money and make additional money from performance fees if they make a profit, so they have strong personal incentives to increase their value.
Bottom Line
Hopefully, by reading this article, you will understand the benefits of energy-focused private equity funds.