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Energy Transition from a Growth Equity Perspective

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Energy Transition from a Growth Equity Perspective at a glance

Investors in energy transition through growth equity strategically support mature companies at a critical development juncture, poised for accelerated growth in the green transition. Growth equity acts as a catalyst, injecting capital to fuel expansion, enabling the leverage of emerging technologies. This empowers companies to navigate the evolving sustainable landscape. In the face of escalating climate challenges, the role of growth equity gains significance as a dynamic force propelling businesses toward sustainable practices. Urgency to address climate change heightens, with growth equity investments driving innovation and fostering resilience. Decisions made by growth equity investors today resonate beyond the boardroom, influencing industries and contributing to a collective effort for a more sustainable future.

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Asset class leaders

Altor Equity Partners
Azora
Nuveen
Nordic Investment Opportunities

Why invest in Energy Transition from a Growth Equity Perspective

Alignment with ESG Goals & Positive Societal Impact: Aligns with LPs ESG priorities, demonstrating a commitment to sustainable investing and allow LPs to support companies actively working on climate change solutions.

Risk Mitigation:  Addresses climate risks, contributing to more resilient and sustainable portfolios.

Long-Term Value: Emphasizes long-term value creation, suiting LPs seeking sustained returns.

Market Opportunity: Taps into growing sectors like renewable energy, clean tech, and sustainable infrastructure.

Innovation Exposure: Provides exposure to innovative technologies driving positive environmental change.

 

What are the main risks of Energy Transition from a Growth Equity Perspective

  • Regulatory risk: Companies operating within the scope of Climate Impact could rely on government subsidies and other regulatory factors outside investors’ control. 
  • Technology risk: Investments in emerging technologies may face uncertainties, market adoption challenges, or rapid technological advancements that could affect the success of portfolio companies.
  • Public market pressure: As public companies encounter new rules on emissions on the whole value chain, they could pressure their own suppliers to implement decarbonization efforts at substantial costs.
  • Transition Risks: Rapid shifts in the transition to a low-carbon economy may impact the valuations and financial performance of certain industries, affecting investment returns

What characterizes Energy Transition from a Growth Equity Perspective?

  • Industry/Sector: Both generalist and focused industry strategies. Focus is typically either on 1) identifying companies with an inherent impact contribution (read: a scrutinised filter and focus on scale-up), or 2) on supporting companies in climbing the ESG ladder through various initiatives (read: broader filter but more focus on engagement).
  • Integration of ESG: From value creation and risk mitigation to impact measurement and reporting, the focus on ESG plays a critical part although the approach may vary.
  • Instruments: Equity (debt impact to be covered in separate theme). 
  • Target Company Size: Small / Mid / Large. 
  • Return Profile: Revenue/Earnings Growth / Multiple Expansion. Depends on strategy but traditional Growth strategies would often implement operational improvements whereas repositioning a company to a “greener” profile could result in Multiple Expansion.
  • Geography: Global, regional or country-specific. Subject to the geography, the sustainability evolution might differ and hence the meaningful focus area will be customized.

Manager Q&A

Q1. Many institutional investors are building out Impact Programs at the present. What qualities should an investor look for to successfully identify a strong investment team and strategy? 

 

Altor Equity Partners

The key to identifying attractive impact investment opportunities lies in the manager’s experience, capabilities and ambition to effect positive impact. While a team’s experience in making impact investments is an important factor, we believe considering their demonstrated commitment to impact and sustainability is paramount during manager selection. A fund manager should establish a clear and distinct strategy that will guide investment decisions and offer differentiation from other players in the market. Further, investors should conduct deep and thorough assessments to identify funds with the objective and ability to deliver consequential and measurable impact with the capital invested. Finally, investors should seek funds that have a demonstrated ability to deliver on its investment objectives without sacrificing an attractive risk-return profile that continually seek.

 

Nordic Investment Opportunities

When sourcing high-quality impact funds, the main objective is to find fund managers who provide strong financial returns while providing measurable impact. Managers who fail to provide tangible impact can lead to greenwashing, which inevitably will damage financial returns.

We look for fund strategies that intelligently identify companies with a clear link between a business model and the impact generated. These companies will generate positive impact and great returns in tandem.

The intentionality to generate a positive impact shall be embedded in the team and be rooted in a distinct strategy with clear impact criteria guiding souring efforts. The team should be fully aware of additionality, thus, the positive (and negative) impact a potential investment will provide. An investment team without true impact intentionality and investments without impact additionality will lead to greenwashing. Lastly, the impact should be tangible and measurable. Measurability of impact is of the essence for us and offers transparency to an ability to assess and track impact performance.       

A high degree of intentionality, measurability, and additionality is not only what separates an excellent team from a good team, but what encompasses a high-quality impact fund.  

 

Q2. Where are the capital gaps and best impact investment opportunities in the climate space? 

 

Nordic Investment Opportunities

Impactful companies are significantly undercapitalized on a global scale. Within the climate space, we see significant undercapitalization in the industrial sector. Industrials account for 34% of emissions, while only receiving 14% of invested capital (PwC, State of Climate Tech 2023). For comparison, Mobility accounts for 15% of emissions but receives 45% of invested capital (PwC, State of Climate Tech 2023). There exists a huge opportunity for investing in industrial companies offering impactful solutions that decarbonize the industrial sector.

Moreover, we see that the growth space in Europe is significantly undercapitalized. While the climate VC and Buyout spaces have benefitted from significant investor interest over the last decade, the growth space has been almost untouched. We focus on this space as the companies are often de-risked, have more stable financials and growth rates, are ready for scale, and have a much broader exit landscape with both strategic and financial exit opportunities.   

 

Altor Equity Partners

Altor believes that the current climate environment poses a once in a generation investment opportunity. In particular, there is a significant and growing push to decarbonize supply chains in order to meet ambitious net zero pledges, and the vast majority of abatement is expected to be driven by limited set of existing industrial solutions in or near commercialization. Through the firm’s experience with sustainable investments, Altor believes there is a “white-space” in the commercial scaling of industrial green transition businesses as few private investment firms are focused on driving scale across the entire value chain despite a highly attractive risk-return profile and the potential for meaningful environmental impact.

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Nuveen - Growth Equity Climate Impact.pdf

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