Climate transition has increasingly presented opportunity, as investors may now be better positioned to leverage technological innovation and shifting policies to unlock new avenues of value creation. Private markets are no exception. Over the past several years, private investments in renewable electricity[1] have generated robust financial returns at exit, surpassing those of oil and gas and underlining the transition’s financial opportunities against the backdrop of a shift to a low-carbon economy.
Follow the money
A more nuanced way to understand the transition’s financial opportunities involves identifying private-capital allocation across the transition supply chain — a mapping that may be relevant not only to climate-focused investors but to all investors with exposure to activities facilitating the transition.
Based on company descriptions as of Q2 2024, we identified a sample of 2,741 active[2] investments made by 1,276 private funds into 1,918 portfolio companies that may have some connection with renewable energy, green mobility or energy storage.[3] While this may not encompass all companies in the three transition themes, the objective is to pinpoint where private funds are strategically channeling investments across the transition supply chains and assess the returns of these investments. This subset will be referred to as “transition assets” throughout the blog post.
Renewables charging up the transition in private markets
Who’s plugging in? Understanding who funds the transition and where
Investing in renewable energy was dominated by infrastructure funds, accounting for about 65% of the theme’s USD 175 billion NAV, as of Q2 2024. Buyout and venture capital accounted for about half of green mobility’s USD 19 billion NAV and energy storage’s USD 39 billion NAV. Private debt was limited at about 6% across all transition assets, although some private-debt funds may sponsor infrastructure or private-equity investments in the transition space, which is outside the scope of this research. At the regional level, North America is home to about half the transition assets, in NAV terms, while Europe accounted for 31%, Asia-Pacific (APAC) for 14% and the rest of the world for 5%.
Transition assets across private-investing strategies and regions
Getting down to the grit: Navigating transition supply chains
Transition assets spanned a diverse array of companies and activities, from renewable-electricity generation to the manufacturing of electric vehicles (EVs), battery and industrial-equipment development and semiconductor design. Private-capital funds exhibited unique exposures across the supply chains of the three transition themes, presenting a broad spectrum of opportunities and risks. The percentages below are expressed in terms of NAV.
Infrastructure funds were predominately active in the renewable-energy space, allocating approximately 90% of their transition assets to energy and utilities, with 77% specifically in renewable electricity. Within these energy and utilities companies, about 8% were involved in battery or storage solutions, making infrastructure funds a relevant player in the energy-storage space. Transition assets in private debt were also notably concentrated in renewable-energy solutions, with 54% exposure to the energy and utilities sectors.
Buyout and venture-capital funds were active in other stages of the supply chain. Roughly half of buyout’s transition assets were in industrial components, supporting various transition themes. Most of these assets were in heavy electrical equipment, such as manufacturers of power-generating equipment, charging stations and batteries, as well as in construction and engineering.
Compared to other asset classes, transition assets in venture-capital funds were more evenly distributed across industries. Venture capital allocated around 28% of its transition assets to industrial components, with heavy electrical equipment — a sub-industry that plays a crucial role in power generation and storage — representing about half of that. Additionally, venture capital distinguished itself from the other asset classes through higher capital allocation to automobiles and components, which primarily included companies manufacturing low-emission and electric vehicles and their parts. This segment accounted for 16% of venture capital’s transition assets, significantly surpassing the allocation seen in buyouts (5%) and private debt (6%). Information technology remained a vital area for venture capital, constituting around 21% of its transition assets, with a notable emphasis on software and services (e.g., software to optimize energy usage and storage) and technology hardware and semiconductors (e.g., components for solar cells).
Regionally, energy and utilities were focal areas for North America, Europe and APAC. Beyond renewable energy, APAC investments demonstrated higher exposure to companies manufacturing EVs and their parts than that in North America and Europe. About 12% of the transition assets in APAC were in automobiles and components — primarily in automobile manufacturers and automotive parts and equipment. Meanwhile, automobiles and components represented only 2% and 1% of the transition assets in North America and Europe, respectively. The focus in both regions may have skewed more heavily toward industrial components, such as batteries and charging stations, at 24% and 20% of regional transition assets, respectively, compared with APAC’s 14% allocation.
Transition in focus: Navigating the supply-chain grids
Current pathways: Untangling the wires of transition returns
In aggregate, the since-inception internal rates of return (IRRs) for active investment holdings revealed that transition assets have largely kept pace with the broader private market. Specifically, they outperformed the remaining broader private-capital universe by approximately 205 basis points (bps) in median terms, though they slightly underperformed by 90 bps when considering the weighted average IRR, weighted by investment amount, as of Q2 2024. The bulk of transition assets’ robust performance may have been driven by renewable-energy investments, in contrast to the obstacles facing green mobility. Gaining further insights into the performance metrics may require a careful review of regional and asset-class factors.
A more granular approach revealed a fairly consistent ranking of asset-class performances across both transition assets and the broader private-capital universe. For instance, venture-capital funds have faced significant headwinds since 2022, resulting in the lowest median IRRs across both the transition assets and broader universe. Conversely, private debt performed well, probably buoyed by the favorable high-interest-rate environment, as of Q2 2024. Regional performance rankings, however, showed considerable variation across transition themes compared to the broader universe. This discrepancy might have been attributed to differing sector exposures and weights alongside evolving region-specific policy and trade environments that may unequally impact sectors.
A closer look at the crossover between the regional and asset-class dimensions may offer additional insights into the IRR variation. Take venture-capital investments in green mobility, for instance. These investments encountered more-pronounced headwinds compared to venture-capital investments in other energy-transition themes. Yet, a regional breakdown of IRRs for green-mobility assets in venture capital revealed additional nuances. Venture capital’s green-mobility assets in APAC exhibited a weighted average IRR of 13%, weighted by investment amount, compared to -19% in Europe and North America, underscoring the unique sector- and region-specific factors that may influence returns.
Power in the details: A closer look at returns across private asset classes and regions
Check your circuit: A nuanced way to navigate the transition’s opportunities
For private-capital investors, identifying the transition’s financial opportunities is a question of transparency: Where exactly is capital flowing across the supply chains? Investors may need to go further and take a closer look at how their portfolio companies are positioned to capture value from the transition and how they may leverage climate-related technological innovation and shifting policy. Examining these factors could open doors to previously overlooked opportunities.