Stability of renewable sector sees M&A activity race past €20 billion mark

31 January 2018 Consultancy.uk

Investor activity in the renewable space is picking up, as technologies becomes less costly, and more efficient. M&A activity in the space saw deal activity increase in 2017, while deal value rose 31% to €22 billion – driven, among others, by consolidation, yield and access to technologies.

In order to meet the upper targets of The Paris Agreement, considerable effort across the globe will be required, involving wide spread collaboration to achieve. As a result, the global shift towards renewable energy continues apace. While the prices of various forms of renewable energy continue to fall, governments continue to bridge the gap towards fully sustainable sustainable energy generation.

Amid this increasingly supportive and stable framework, corporate and institutional investors are on the lookout for returns in the segment. A new report from KPMG, titled ‘Great Expectations’, exploring the current trends in the global renewable energy M&A space. The study involved 200 senior executives from corporates and financial funds, across the globe.

Global renewable energy M&A

Overall the research points to a relatively stable marketplace for deal activity, with volume for the first half of 2017 at around 200 deals. Deal value too came in at around €22 billion by the end of H1 2017 alone. This represents an 8% increase in deal volume on the same period the previous year, and a 31% increase in value.

The actual energy market saw the addition of around 165GW of new generating capacity in 2016, a 9% increase on 2015. The market as a whole has been boosted by relatively low-interest liquidity and opportunities for returns, interest from institutional investors looking for stable returns, divestment out of oil and gas, as well as interest from oil and gas, too, has supported market growth.

Most active acquirers

In terms of investor type as buyer of target renewable companies for the next 12 months, the research points to a relatively even split between expectations for corporates and financial buyers. Surveyed banks expect the split to slightly favour financial buyers, while the financial buyers themselves, such as various fund types, largely (78%) expect funds to be the most active in the space. Oil and gas companies and utilities are the most likely to see corporates as the key investors in the coming 12 months, at 63% and 64% of respondents respectively.

In terms of the changes in the market when it comes to project valuations, various project types are said by respondents to see valuation increases, such as photovoltaic solar (up 81%), thermal solar (up 51%), and offshore wind (up 82%). Geothermal is likely to see the highest number of valuation decreases, at 25%, while onshore wind and biomass/biogas are the most likely to remain unchanged, at 53% and 55% respectively.

Obstacles

The research notes various difficulties when it comes to investment in the renewable energy sector. Across the globe, planning permission is the most cited difficulty, followed by incentive instability and technology changes. Access to financing and changes in the regulatory environment are of particularly concern in the ASPAC and EMA regions respectively.

Obstacles by actor

In terms of obstacles for the different investor types, corporate and financial investors, planning permission was cited relatively equally between them, while funds are the most likely to cite technology in second place, while corporates cite access to financing in second place.

Summarising the challenges faced by the automotive space, the authors commented, “There are plenty of opportunities to be found. The renewables revolution offers technology-driven energy generation and distribution, consistently and at an increasingly reasonable price. Innovative technology, designed to increase and maintain security of supply and meet growing consumer demand, is being introduced with impressive speed.”

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.