Over the last few years, there has been a surge in private funds with climate-related names, where holdings in the renewable electricity sub-industry[1] alone accounted for about 41% of these funds’ net asset value (NAV), as of Q3 2023. While the environmental impact of renewable assets may be critical to climate-focused investors, the returns on these assets may be relevant to a broader spectrum of energy investors, regardless of their climate mandates. Understanding the financial side of renewable investments may be central for all investors looking to allocate private capital to energy-transition opportunities.
We examined the performance, the net capital flow and private funds’ holding durations of assets in the renewable electricity sub-industry (renewables) and the oil and gas drilling, exploration, production, and integrated oil and gas sub-industries (oil and gas).
Have private investments in renewables paid off?
To evaluate performance, we compared the pooled[2] investment multiples[3] across the exited holdings in renewables and oil and gas. Investment multiples provide a clear picture of the actual proceeds that the investors received from the exited holdings. In this blog post, we occasionally use “returns” to refer to the investment multiples.
Exits from renewables have registered positive returns (gross of fees) in all years since 2016, compared to only two years of positive returns between 2010 and 2015. Since 2016 (excluding 2018), the returns of the exited holdings in renewables outperformed those of oil and gas. This contrasts sharply with the period before 2016, when oil and gas outperformed renewables between 2010 and 2015.
A tale of two markets: returns pre- and post-2016
A shift in the investment winds?
The changing returns outlook over the past several years has been associated with a change in the net investment flow[4] and the net number of deals in renewables relative to oil and gas.
Between 2010 and 2018, oil and gas witnessed a positive net private-capital investment flow, implying more investments (inflows) than proceeds (outflows). This was associated with a positive net deal count, which implied that the number of new deals was higher than the number of exits.[5]
This trend reversed in the subsequent years. Both the net investment and net deal count dropped into negative territory in 2019 and have not turned positive since, as of Q3 2023 (i.e., outflows were higher than inflows).
In contrast, renewables have mostly maintained a net investment inflow over the years. The net deal count quickly ballooned after 2019, demonstrating a rush toward renewable assets. For the first time in the 2010-2023 Q3 period, renewables’ net investment flow and net deal count surpassed that of oil and gas starting in 2018 and 2019, respectively. Nevertheless, private-capital investors still have higher exposure to oil and gas than renewables at about 2.0% vs 1.5% of the USD 5.7 trillion aggregate investment holdings valuation within the Burgiss Manager Universe (BMU), as of Q3 2023.
During the first three quarters of 2023, there was a notable shift in the net investment trends that had been building up since 2019. Dealmaking considerably slowed across both oil and gas and renewables, while exit activity in oil and gas plunged sharply to below 2021 and 2022 levels.
A rush toward renewables amid net exits in oil and gas
Private funds exiting renewables earlier than oil and gas
There are many factors that may influence the holding duration of an asset in a private fund’s portfolio, such as the macroeconomic outlook, the strength of the exit market or liquidity conditions. The holding duration of an exited holding is the difference between the exit and investment dates.
Between 2018 and Q3 2023, private funds exited renewable assets after holding for an average of 5.3 years compared to 6.1 years in oil and gas. By contrast, during the eight years prior to 2018, private funds held renewable assets for a longer duration than oil and gas assets, on average. The disparity between the two periods (pre- and post-2018) may reflect the strength of the exit market and the investment appetite for renewables relative to oil and gas. Since 2019, for instance, renewables have yielded higher exit returns and received higher net capital inflows compared to oil and gas — a trend that may have supported earlier exits from renewable holdings than in oil and gas.
Mind the holding-duration gap
Bridging the gap between climate impact and financial returns
Renewable exits in recent years have revealed a fundamental shift in private-capital investments in energy, demonstrated by the higher returns and the surge in net capital inflows. Understanding the financial trends in renewable investments may be relevant to a broad spectrum of energy investors, regardless of their climate focus. Bridging renewables’ climate impacts with financial returns may increasingly be pertinent for investors looking to allocate private capital to energy-transition opportunities, providing the industry with the much-needed financing to achieve net-zero.