Clean renewable energy solutions are gaining in popularity, mainly due to their potential to reduce climate change and achieve global net-zero targets. Private equity firms are surprising leaders in this trend. They invest heavily in solar, biomass, wind and other renewables.
These companies are attracted not only by social and humanitarian benefits, but also by economic advantages, such as low-cost energy, reduced dependence on imported fuels and a more reliable and secure energy supply.
Private Capital Takes the Lead in Renewable Energy Investments
Private capital is acquiring a lot of renewable energy developers. They are increasingly relying on equity-based takeovers for leveraged buyouts, due to rising electricity demand and high interest rates.
Statistics confirm this trend. In 2023, the private equity and venture capital investments in the global renewables energy sector will nearly reach 15 billion. According to S&P Global Market Intelligence, this is the highest amount in the last five years.
According to another industry report, the funds raised in recent years for renewable energy projects are 25 times higher than those raised for fossil fuel assets. This significant financial commitment demonstrates the growing recognition that renewable energy investments are economically viable and have long-term benefits.
This year, key investors such as KKR & Co. Inc. and Brookfield Asset Management Ltd. have actively bid on listed renewable platforms, aiming to increase the installed capacity of the companies in the future.
After a period in which dealmaking was limited, asset managers and infrastructure fund are now leveraging project development skills to gain more experience with the renewable energy industry. Brookfield Renewable Partners has a track record of successfully acquiring developers in the US with a significant pipeline.
Peter Zhu of Macquarie Group Ltd.’s Green Investment Group highlighted that the current environment of higher interest rates has adjusted equity returns in favorably for renewables, creating an appealing investment window for leading platforms.
Last month, the private equity firm EQT made an offer to buy Swedish renewable energy company OX2 at a price of $1.5 billion. The goal is to boost OX2’s growth in energy and enhance EQT’s renewable energy portfolio.
This shift is a strategic pivot for private capital investment. It focuses on the long-term growth potential of renewable energy developers.
Challenges in Renewable Energy Valuation
In recent years, the renewable energy sector has faced significant challenges, including project delays and supply chain disruptions. This has affected both US and European developers. These obstacles have had a negative impact on the value of publicly traded companies that are involved in renewable energy.
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For instance, within Bloomberg Intelligence’s renewables peer group–which includes Brookfield target Neoen SA and KKR target Encavis AG–the enterprise-value-to-capacity multiple has declined from 1.5x in January 2023 to 1.1x.
A notable example of this is Sweden’s OX2 AB. Its stock price fell by 24% between 2024 and May 13, when EQT AB offered $1.5 billion.
Experts say that the current market conditions make these publicly traded renewable energy developers more attractive to investors. They noted that the combination of rapid growth and low interest rates in renewable energy created opportunities for private capital.
Data centers are an important driver of growth for the renewable energy industry. KKR’s bid of $3 billion for Germany’s Encavis included a commitment to increase Encavis’ installed capacity to 7 GW before the end of 2027. This is up from its previous target of 5,8 GW.
Brookfield also expressed its intention to “accelerate Neoen’s” growth, reflecting a trend among investment giants who are looking to improve the capabilities of renewable energy developers that they acquire.
The Nordic market is a good fit for data centers and is expected to grow due to the high power requirements associated with data center construction.
Brookfield has recently entered into an 10.5 GW global framework agreement with Microsoft. This deal is nearly 8x bigger than the largest corporate PPA. It demonstrates the huge demand from hyperscale datacenters, industrial facilities, and other large-scale projects.
Energy Transition Deals: Fueling the exponential Growth
Private equity-backed energy transition deals have exploded in the last five years. The total deal value has increased by 7,300%. Private equity-backed energy transformation deals in the U.S. grew from less that $500 million in 2018 up to more than $24.9 billion in 2023.
Comparatively, traditional private equity deals in the energy sector only increased by 53% from $20.9 billion to $32.0 billion between 2018 and 2023. Private equity deals in the energy transition sector have nearly caught up to traditional energy deals, despite being behind.
Non-private equity investors continue to dominate the energy transition deal flow but their growth has been less dramatic. The value of these transactions increased by 379% from $8.9 billion to $42.7 billion.
Data suggests that private equity investments in energy transition are very broad. Most of the funds allocated in 2022 and 203 went to wind, sun, and supporting technologies (12,8 billion ).).
These efforts could be accelerated by the significant increase in private equity investment in the energy sector.
Private equity firms are investing more in renewable energy, due to the economic and environmental benefits. Renewable energy has a strong growth potential despite challenges such as project delays and rising rates of interest. This surge in private investment is crucial for accelerating global transition to clean energies.