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Renewables in Private Markets: Climate Wins and Financial Gains
To examine the perception of a trade-off between climate impact and returns in renewable investments, we analyzed the returns of private investments in the renewable electricity sub-industry (renewables) against those of the oil and gas drilling, exploration, production, and integrated oil and gas sub-industries (oil and gas).1 While the two sub-industry groups may differ in their operations, business models and supply chains, a comparative analysis can provide insights into the investment appetites and the relative robustness of the exit markets in both spaces.
A trade-off between climate impact and return — a misconception?
In recent years, private funds’ exits from renewable investments have generated higher pooled2 investment multiples3 (gross of fees) compared to exits in oil and gas. Looking at the investment multiples, which compared the total investments and the total proceeds at the holding level, renewable exits outperformed oil and gas in every year between 2016 and 2023, as of Q4 2023.
To incorporate the role of cash-flow timing in the returns, we looked at the internal rate of return (IRR) (gross of fees) for both sub-industry groups. Our findings suggest that the median IRRs for the exited renewable and oil-and-gas investments were, for the most part, directionally in line with the investment-multiples findings, further reinforcing the outlined outperformance, as of Q4 2023.
The perception of a potential trade-off between climate impact and return may therefore not reflect the financial returns from renewable exits since 2016, making these assets more relevant to a wide range of energy investors, regardless of climate focus. In our blog post analysis as of Q3 2023, renewables’ relatively strong exit market in recent years was associated with a surge in net capital inflows, providing the industry with the much-needed capital to achieve net-zero.
Sunny side up: Renewables have overtaken oil and gas since 2016
Watt’s the cash-flow timing? An IRR perspective
1 Sector definitions according to the Global Industry Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.
2 “Pooled” implies that within an exit year, all the exited holdings’ investments and proceeds are aggregated.
3 Investment multiple = Total proceeds/Total investments. The proceeds may include some remaining NAVs in the exited holdings. Investment multiples are gross of fees and are only calculated for exited holdings with complete cash-flow history. Data as of Q4 2023.
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