Evolution of Private Equity
Starting in the early 2000s, Private Equity, commonly referred to PE, has generally had a relatively easy time raising capital for oil and gas projects. More recently, however, PE firms have increasingly focused more investment into energy transition companies with a focus on industrial decarbonization, clean energy and renewables.
One reason for a shift in focus is the low rates of returns over the last 10 years from traditional energy investments. Also, the public is demanding more carbon reductions in a bid to protect the atmosphere and reduce human influence on climate change. For example, pension and endowment funds are less willing to invest sizeable equity into the traditional energy space. Some would argue that clean and renewable energy companies have outperformed both listed fossil fuel companies and public equity market indices in recent years, and with lower volatility.
At Alvear Capital we work actively in developing private equity investment opportunities in various sectors and at different maturity of the activity developments of our targets. We remain exposed to the activities that have significant carbon footprint, while working in ESG program and decarbonization methodology to reduce exposure and carbon footprint.
Illustration of the activity waste-to-energy
Alvear Capital works in launching a private equity fund that invests in “waste-to-value” renewable energy such as low carbon fuels and renewable natural gas, as low-carbon fuels continue to garner investor interest.
Investment in products such as renewable diesel made from waste oils and gas made from methane has risen as state and federal incentives reward producers for decarbonizing. The fund will target projects that produce renewable natural gas, renewable diesel, renewable fertilizer, and other similar products. Renewable fuels account for roughly 12% of U.S. energy consumption, according to government data, and are growing every year.
For some time, private equity (PE) firms have focused on investments in the traditional energy sector. This usually involved investing in oil and gas companies that extracted crude oil and produced refined petroleum products. In recent times, however, PE firm investors have shifted their focus from traditional fossil fuels-based businesses to energy transition companies that focus on clean energy and renewables. Does this signal a fundamental and permanent shift for PE investment away from traditional fossil fuels-based businesses? Also, how does the PE sector view traditional energy companies and their move into cleaner and greener spaces? We take a look at these questions through the PE lens.
Capital raising in the energy sector
The particular issue of capital allocation by PE firms in the energy sector appears to be LP specific. On one end of the spectrum, some LPs want none of their investments to be in fossil fuels-based businesses, whereas other LPs believe in an incremental shift away from fossil fuels to investments in industrial decarbonization businesses such as hydrogen blending and renewable competing alternatives.
Consequences in the green energy transition
Despite the many benefits of clean energy and renewables, the energy transition sector faces its own challenges and unintended consequences, which cannot be ignored.
For instance, transitioning from gas powered to electric vehicles results in a proliferation of lithium ion batteries, increasing waste, and creates issues around how such waste is disposed. In addition, electric vehicles will put a strain on power grids as a whole and are less effective in times of natural disasters such as floods and hurricanes.
Alvear Capital will accompany the process of your company to lead the energy transition in a optimal way. It will not focus only on ESG and corporate governance, but also integrate the aspects of leading new projects that will reposition your company activity in an efficient manner.
What Alvear Capital will offer
The transition to cleaner, green and renewable energy on a global scale will likely take a much longer period than anticipated so it is never too late to get the right focus of your Company on these aspects. Alvear Capital is the partner of choice for this transition.
Alvear Capital will originate investment opportunities for your company to make not only incremental changes, but also practical changes, and will assess the compatibility of the new activities with the current activity, process and projects of your Company. Typical opportunities could include the following investments opportunities:
- Reducing and eliminating waste through recycling plastics.
- Recycling of lithium ion batteries, which are used to power various devices, including smart phones and electric vehicles.
- Processing waste to value by converting waste plastic feedstock to post-consumer products that trade at a premium.
- Investing in feedstock substitutions by substituting methane derivative products with ethanol.
Alvear Capital is well-equipped to evaluate early-stage companies through due diligence and organizational management, which can help those companies grow and become viable investments for traditional energy companies.
Alvear Capital has a broad commodities transaction practice, representing energy companies, trading houses, private equity firms, and global financial institutions. Our commodity coverage includes crude, refined products, NGLs, LPGs, renewables, metals, agricultural products, and credits, as well as the physical (e.g., long-term supply and offtake arrangements, storage and transportation via pipe, vessel, rail, and truck) and financial trading of same.
Alvear Capital also focuses on large-scale structured transactions involving inventory monetization, intermediation, and true sale arrangements for refineries and storage and pipeline positions.
Private Equity role in energy transition
PE firms can play a very important role when it comes to the transition from traditional to cleaner forms of energy. Alvear Capital has the ability to assist traditional energy companies in making incremental improvements to help decarbonization efforts.
We understand that traditional energy companies trying to making significant investments in non-fossil fuel-based businesses can be hampered, given that traditional energy companies are generally not set up to experiment with new technologies or processes outside their core business of fossil fuels extraction and production.
The valuation expectations at energy transition companies are much higher in comparison to traditional energy companies, which trade at a much lower level. If traditional energy companies partner with Private Equity firms, this can create comfort for companies to dabble in the renewable energy sector.