Beatrix Pratte-Ness
Hello and welcome to Strategic Alternatives, where we uncover new ways to raise capital, drive growth and create value in an ever changing world with insights and outlooks from the RBC Capital Markets team. I'm Beatrix Pratte-Ness , associate from our M&A team at RBC Capital Markets focus on private capital, and based in our London office, I am joined by my colleagues, Paul Betts, Managing Director and CO head of M&A in Europe, and Ralph Ibendahl, Managing Director and Head of Renewables And Energy Transition in Europe.
Paul Betts
Thank you, Beatrix. Great to be participating.
Ralph Ibendahl
Thanks, Beatrix. Yeah. Great to be on and looking forward to the discussion.
Beatrix Pratte-Ness
We are very pleased that Barrie Laver, RBCs, Managing Director and Head of venture capital and private equity, has tuned in from Toronto as well.
Barrie Laver 01:00
It's great to be able to be able to participate in the podcast. Thanks very much.
Beatrix Pratte-Ness
One of my favorite aspects of working in the private capital markets is that they tend to be a leading indicator of new industries and capital formation. Energy transition has been attracting a significant and increasing share of capital in North America and Europe. Let's start the discussion by talking about the key themes that we are seeing in the energy transition private capital markets. I'll turn to Ralph first.
Ralph Ibendahl
Yeah, thanks, Beatrix, and maybe I can speak from a sector perspective and hand over to Paul to talk from a product perspective. But clearly, access to capital is critical for energy transition. As you know, energy transition businesses tend to be highly capital intensive, with asset heavy business models requiring significant investments even at early stages of maturity and private markets in particular, are very important for the energy transition, and probably have become much more important over time. If you look back to 2020 and 2021 or at least early 2021 a lot of public capital went into the sector at attractive valuations. The sector then repriced, and we've seen less appetite from public markets for energy transition companies, hence, the need for private capital to really step in and becoming a critical funding partner for the sector. The other area that we've seen as a trend is that private investors have become a lot more sophisticated in terms of the sub sectors of energy transition that they will look at the maturity of the company that they look for, and the risk return profile. And so they've become a lot more sophisticated identifying the type of opportunities that they're looking to fund.
Paul Betts
And then on the investor front, I think it's been rather interesting to see the number of new funds which have emerged over the last 24 months that are directly focused on deploying capital into companies operating within the energy transition space. So billions of dollars have been have been raised and are due to be deployed over the next five years, with a further five year harvest period. The issues, though, is that we're seeing the investment criteria still being rather challenging and high hurdles for things like companies with improvement technologies, competitive positioning, robust offtake contracts and many other things which you would expect to see with companies which are at a much more mature phase of their lives, of their life cycle. So how do we sort of bridge the gap between earlier stage companies in the energy transition and the investment criteria being applied by these funds? Well, I think what one trend we've seen is for these funds to commit capital upfront, but not to necessarily have it all drawn down on day one, and rather structure those future drawdowns that align with the company achieving certain predetermined milestones. So you're not risking everything on day one, but you're providing capital support out and to help crown capital from other investors and so that’s a growing trend, which we're seeing and we're taking advantage of, as it relates to the companies we're helping raise capital for.
Beatrix Pratte-Ness
Barrie, from an investor perspective, what are the key themes that you're seeing in your conversations with the climate funds that RBC invests in as an LP, as well as with RBC’s portfolio companies?
Barrie Laver
Yeah, I think overall, we're seeing a very good supply of capital the early stages, and with much more of a gap for growth stage or companies taking commercialization risk. So we're seeing broadly speaking, you know, if you look at a requirement right now for potentially 2 trillion of capital in the climate markets now that that could grow to four or 5 trillion of capital by the end of this decade. And arguably, I think you could say we've seen a heavy allocation, or even an over allocation to themes such as renewables and EVs over the last number of years, but with a resultant lack of solutions for heavy industry. So you know, industrial solutions that will help companies or industries decarbonize. So what we are seeing now with a number of funds is increasing focus, or formation of funds with a focus on those industrial solutions. And the issue in market is still attracting finance for proven technologies,so when you see sort of first of a kind financings, issues in in grid management, electrification, hydrogen, we're seeing quite a number of themes around hydrogen, green hydrogen, primarily using electrolyzers, but there's still lots of risks and issues in those sectors, around inputs, high power demands, transportation, etc. And given the scale for Canada of the oil and gas sector, we are seeing a reasonable amount of interest in carbon capture and storage or sequestration solutions. Last but not least, I'd be remiss if I didn't touch very briefly on the carbon offsets markets for both compliance and voluntary markets. There's plenty of controversy around that sector or those sectors, but without a doubt, it's an important area that will play a critical factor in terms of helping industries and companies get to net zero over the next several years.
Beatrix Pratte-Ness
Thank you, Barrie, these are all very exciting themes. How is RBC positioned to help energy transition clients harness private capital to grow? Turning to you Ralph to provide insights from the investment banking side.
Ralph Ibendahl
Yeah, thanks, Beatrix. So, I mean, the first thing to say is that energy transition is hugely important to RBC, and it's an area that has very much support from the top of the organization down. You know, we're a strong bank in infrastructure, in energy and renewables, and our strategy is clear that we want to be a leader in energy transition.
I think the second thing to say is that, you know, when we set up the business, it was very much set up in a way that we wanted to provide the right advice to our clients and to support them on the journey. You know, this is a this is a Multi-Product discussion, and a multi-year discussion that starts very much, potentially, with a capital raise, may lead to an IPO and lead into a discussion on debt, whether that's a project financing or corporate financing, and RBC is very much there to support on that journey and work closely with our product partners that we can provide the right advice to clients through that through that journey.
The third thing to say is that this is a global setup that we have created. And you know what happens in the US, what happens in Canada, what happens in Asia is hugely important, also in Europe and vice versa. And it's only if you have a perspective on all of those markets can you really provide the right advice of, how do you access the right kind of capital, and what is happening on the ground, both in terms of the investors, competitors and regulatory frameworks, because that's certainly the demand we're seeing from clients.
And the final thing, I would say, from a sector perspective, you know, we set up the energy transition group more than four years ago now one of the first banks to do so, and it's only by having that sector expertise, and very much sub sector expertise within hydrogen, not just developers, but electrolyzers and off takers, that we can provide the right advice to our clients.
Paul Betts
Whilst we have a global team that focuses on private placements in Canada, New York, Europe, Asia and Australia, we all tend to work together very closely, providing full global access to our clients. Focusing on the energy transition space is something that is very close to home, and something that we are very well positioned to deliver on. Just given our broad network of infra like funds and other sponsors, which typically have invested in the infra world and in renewables, there tends to be a lot of crossover with energy transition and we have built on that that expertise to create a strong brand within the energy transition space. But we also looked to help companies that straddle multiple industries. We did notice upfront that the battery value chain was probably one of the biggest verticals where the most amount of capital would be spent and just given our expertise across mining, chemicals, technology, infra and industrials, we've been able to bring together expertise across each of those verticals to deliver value for companies across the full battery value chain.
Barrie Laver
I think it's critical to talk a little bit about RBC’s climate strategy broadly. So as Canada's largest bank, our and company, our client base is to a very large extent mirroring the Canadian economy. And so when we see a role for RBC to play a leading role, to play a leading take a leading position in supporting and accelerating clean economic growth and the transition for the Canadian economy to net zero. Our climate strategy is based on four pillars, and one of these very important ones is to help our clients as they transition to net zero. And in this context, as a bank, we've committed to invest 1 billion by 2030 to support the development of innovative climate solutions. We are investing primarily in climate funds, but we'll also directly invest in companies, but preferably on a co investment basis with a fund partner, given their depth in science and their network in the markets. We're not particularly early stage focused at this time, we've invested in both growth stage funds and early stage, primarily VC, some private equity, and at this stage, we have not really focused on any infrastructure funds. We do not need to be investing in Canadian funds or companies, but we are very much interested in where the underlying technology can be relevant to the Canadian economy and where we are partnering with funds and companies that are interested in working with Royal Bank to bring solutions into Canada and perhaps partner with us on thought leadership initiatives, or, for instance, through research and connecting with clients around certain technologies certain sectors to help inform them in their transition.
Beatrix Pratte-Ness
What other pools of capital are we seeing play an active role in the market?
Ralph Ibendahl
If we talk about sort of growth equity funds, we've recently worked with Macquarie on 175 million euro investment in SkyNRG, which is a sustainable aviation fuel company in the Netherlands. Macquarie, this was their green investment group, Energy Transition Solutions Fund. So as people may know, Macquarie large organization, many different pockets of capital, and one of the funds that they have is, is the Energy Transition solutions Fund, which is very much geared towards deploying capital into growth companies across the energy transition space, other people in for capital in EQT, the Swedish private equity fund we've worked with in EV charging, we've seen other investors in that space, whether it's the TPG Rise Climate Fund, one of the very large private equity funds dedicated to energy transition. We've seen Ara Partners deploy capital into industrial decarbonization. Across Power-to-X we've seen CBP Canadian pension fund deploy capital and banking a team there. We've seen, as of last week, KKR committed up to 400 million euros into a Power to X, JV with Ignis.
So you can see a whole range of financial investors, across pension funds, growth equity and private equity and infrastructure clients, deploying capital into the space. And the same is also true for strategic partners and strategic investors, whether that's through their direct VC funds or whether it's actually deploying capital themselves into companies where they can see an opportunity to benefit from growth in the energy transition space. So whether that's oil and gas companies, we still see them deploying capital into the space, even though they've pulled back maybe in some areas, utilities and power companies, but also across the sector spectrum. Because what we're really seeing is a collaboration of sectors coming together. Of course, the tech companies, whether they are on the off take side or investing in projects, certainly been forward leaning on decarbonization, industrial companies and capital goods companies, again, either through VCs or direct investments.
Paul Betts
We're noticing that there are a number of other funds which are emerging as well which are focused on both growth equity impact and evolving infrastructure. Several other banks have similar funds and strategies to what we are doing. But we do feel like we are leading the charge in this space and try to support companies within the energy transition space in terms of other pools of capital, project financing is a market that we are seeing evolve quite rapidly. But obviously securing project finance is very much dependent on off take contracts that absorb a significant amount of capacity for the companies looking to secure that and generally, investors are also looking for fully funded solutions. So we're seeing that the project financing process almost needs to be run in parallel with raising equity and the two of them coming in at the same time can certainly help provide a fully funded solution. In terms of other sources we're seeing strategics also play a very critical role early on in terms of bridging the cap between VC capital and more advanced infra like capital. And then lastly, the Middle East is obviously starting to play a much more meaningful role with all the sovereign wealth funds looking to diversify their portfolios away from oil and gas towards other areas which are less carbon intensive. And obviously there are deep pockets there able to deploy and write significant check sizes. So all in all, I think, in terms of what we do is we try to bring together processes which will crowd in capital from all these various pockets to ensure a successful raise.
Beatrix Pratte-Ness
Shifting slightly to another force that's really accelerating an uplift in TAM is around the regulatory and fiscal tailwinds in energy transition. What role does government play in supporting these companies?
Ralph Ibendahl
Yeah, I mean, the role of government is really crucial across a number of different aspects here. I think the most important one is around investor confidence. This is about whether investors want to deploy capital into a jurisdiction or not. And of course, 2024 is very much earmarked as the year of elections. And we've had the UK election. We've just had the outcome of the French elections, and we're looking forward to the US elections in November. And I think it can't be underestimated as to have the outcome of elections, and what that does in terms of investor confidence and whether people want to deploy capital in a market or not. Of course, that's just the overarching level of confidence.
Then you get into setting the regulatory framework. And here we're talking about energy transition, and the framework that drives transition is really, really important and very much impacted by what governments and countries how quickly they want to move on that on that transition, beyond the overarching framework of when do I want to reach net zero, you then have to look at the different sub sectors and the regulatory framework that people set within that. And just to maybe give a couple of examples, you know, when the UK moved its ban on internal combustion engines back from 2030 to 2035 that had an impact on investor confidence in EVs and EV charging, when the EU sets a sustainable aviation fuel target in terms of blending levels from 2% in 2022 to 6% in 2030 and rate rising to 20% in 2035 that creates huge demand for sustainable aviation fuel over forward, it provides a trajectory for project developers. So those individual regulations by sub sector are critically important for mobilizing capital.
And then the final part for the role of government is about revenue certainty, whether that's in terms of off take or price level. So feed in tariffs, CFDs, they can play a huge role, particularly in areas where we're trying to create a whole new market. You know, hydrogen economy, it's not just about creating projects. It's also about where does that hydrogen gets used.
And of course, governments can provide not just the revenue certainty, but also direct funding. We've got the UK infrastructure bank. We've got invest in L in the Netherlands. We've got KfW in Germany, and of course, we have the equivalents in the US. And those funding mechanisms are equally important to develop projects. So I think overarchingly, it's provide investor confidence, set a regulatory framework, set policies that then drive innovation and uptake, and finally, then provide additional support in terms of de risking and funding to enable the transition to take place.
Barrie Laver
The Canadian government has recently rolled out a number of policies following on from the US IRA enactment. A lot of the Canadian financing activity in this sector is going through the Canada Growth Fund, and it's playing a very important, early days, but playing a very important role in the Canadian market, and it's interesting to see if we'll see similar models develop elsewhere. You know, it's a bit really a blended financing strategy, with the government playing an important role in concert with the private sector. Broadly, the CGF mandate is to help commercialize technologies that are proven at pilot scale but really not yet mature. So there's some first of a kind or FOAK risk they're looking into absorb risks that the private markets are not absorbing now, and want to enable investment decisions so as a relatively new policy here, and Ralph referred to this briefly, Canada has introduced carbon contracts for different CCfDs, as we call them, and we're starting to see these in one or two other jurisdictions, beyond Canada, but CCfDs allow the Government to facilitate more certainty around long term future carbon pricing, and in our case, up to 15 years, to mitigate against re contracting risk for projects. So this is really critical to secure an investment and operating environment for financing, and it facilitates energy intensive companies to start investing in newer technologies and might otherwise be difficult to finance. We're in the early days here, but we have seen a few of these brought in into Canada through the Canada Growth Fund. And also recently, the Canadian government's introduced a very attractive ITC environment for carbon capture and storage or carbon capture utilization and sequestration of up to 50% for capital invested. So increasingly, the Canadian market is becoming attractive to bring in new capital to finance some of these decarbonization solutions.
Paul Betts
From my perspective, in terms of support from the governments. I think this is an absolute critical part of the whole capital raise. We saw the lessons learned from Britishvolt two to three years ago, where the UK Government had provided subsidies for around 100 million Sterling, but there were a number of conditions attached to that, and so the investors that were looking to invest could not get comfortable with the support that was being provided from the government. They needed significantly more than what the government was providing. I think since then, the market has changed quite considerably, and it's been great to see how various different pockets of capital supported by the government are being are being used and deployed. UKIB, in particular, we've seen them really active. I understand from some of the principles there that they've been invested in over 20 opportunities over the last two years, and have invested more than a billion Sterling to date, which is, which is a great sign of the times. Hopefully that continues, but I think we still have some ways to go. I think by providing additional government support, other investors will continue to get the support and conviction they need, and that will help crowd and other capital from other pockets as well.
Ralph Ibendahl
Barrie touched on the inflation Reduction Act and policies that the governments are implementing. This is very much something that investors are very focused on. And depending on what the regime is, they will very much pivot. I mean, the capital here is incredibly mobile. It's incredibly global and will pivot very quickly depending on how a regime changes. And certainly before the inflation Reduction Act came out, the question we got a lot was, how can we get access to capital? After that, the question was, how do we get access to capital? How do we get into the US market?
Beatrix Pratte-Ness
Completely agree with that, Ralph, and maybe looking ahead at the other sectors and how we're seeing the market change, what do you think will gain momentum this year going forward?
Ralph Ibendahl
So maybe let me just, you know, pick on three themes that we're seeing.
One is very much the decarbonization of the power system. And you know, this has been the first area of decarbonization that we have started and but we are nowhere near finished. And I think because of the increase in demand and the increasing the use of intermittent renewables, the investments in grids, in flexible generation, in renewables, in battery storage and battery technology. You know, this will require still billions of dollars or pounds of euros to be invested, and so we'll, we'll see continued investment and development in that space, including, you know, new technology companies that are researching ways of just providing. More flexible solutions for that, for that problem. The second is, and this is probably one of the newer ones, is about decarbonization of industry.
I think this is particularly focused around hard to abate sectors, because this is, these are industries that have got very significant carbon emissions, and we're only at the start of the journey, and in certain times, this requires new technology to be developed, but this is an area that is of particular interest to investors, and we're seeing businesses that have got a first mover advantage being able to raise capital, H to green steel, a great example. And there's others like it. The focus, of course, there is always about, okay, what's the off take, and what is the solution that you're providing, and how quickly can you scale up? But we see investors being very much focused around industrial decarbonization.
And then thirdly, this is really about adjacencies to asset heavy businesses. And you know, we're in a, maybe in a more scarce liquidity environment than we were prior to the interest rate increases. And so we see a lot of our clients, particularly private equity clients, ask us a lot about services businesses or asset light businesses around energy transition as a way of playing the theme, but maybe with slightly smaller check sizes.
Paul Betts
What we are seeing, though, is companies which are more centered around clean tech, asset light, climate type technology are the ones that are getting the more interest from investors, and so I think this will be an interesting space to watch. They are capital light generally. They don't have any technology that is required to be proven. They're more software type businesses that provide support to energy transition companies. And I think those are the areas we should follow with more attention, and try and learn some of the lessons as to how they go about raising capital, which hopefully we can apply to more capital intensive businesses. But obviously there are still a number of number of challenges which need to be overcome.
Barrie Laver
I do think in particular in the Canadian market, with the government programs and policies have been brought into place in the last year or so, we are going to start seeing greater interest in that sector, which could have global implications. And then so hydrogen, as I said earlier, is an area where we're seeing particular interest these days. Growth and management of the grid. Decarbonization of the grid is a big focus area. And I would also say, as I alluded earlier, to the voluntary carbon markets. I do think that there were in early days, of these markets, and I think we're going to start seeing significant growth in their importance to help companies move towards net zero. There's a number of interesting areas that are starting to take hold right now and I think we're just in the early days of seeing some significant growth.
Beatrix Pratte-Ness 28:14
Thank you. That's a great point to end on.
Ralph Ibendahl 28:17
Thank you Beatrix for being a fantastic host today, and thank you Paul and Barry for the great discussion. Look forward to catching up soon,
Beatrix Pratte-Ness
You have been listening to Strategic Alternatives the RBC podcast. This episode was recorded on July 8, 2024. Listen and subscribe to Strategic Alternatives on Apple podcasts, Spotify, or wherever you listen to your podcasts. If you enjoyed the podcast, please leave us a review and share it with others.
This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or a solicitation, and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives. I.