Market corrections set to continue
Higher interest rates and liquidity constraints created a tough 2023 for the battery and EV sector following the unsustainable highs of previous years. That change of mood deflated some of the “irrational exuberance” seen in the decarbonization space during 2021/22, according to Dmitry Yashnikov, Managing Director & Head of GreenTech at OMERS. While good companies with depth in their management teams managed to attract capital, others ran out of cash, partly because the investors with less experience in the field took a pause. “It’s probably going to continue, because I don’t think there will be taps opening the day after the first interest rate cut,” he predicts. “But that should introduce some additional rationality.”
Rhea Hamilton, Managing Director, BeyondNetZero at General Atlantic, expects to see a further correction in 2024, with public markets still suppressed after the bifurcation with private markets. She also notes the impact on commodity prices as businesses reacted to the supply chain issues by overstocking, as well as the effect of high valuations. While companies that grew into those valuations performed well, another group overestimated what they could achieve in capital terms. These trends, however, “make it potentially a very rich environment for 2024”.
Focus on tackling hard-to-abate sectors
Panelists revealed some diverse investment philosophies and strategies.
For Shaun Kingsbury, Co-Chief Investment Officer at Just Climate, the target is “the hard stuff,” that is, parts of industry that produce large proportions of global emissions, but see less capital flow than renewables or batteries.
The company closed its first fund just over a year ago with £1.5bn in flexible capital. “If you’re going to decarbonize things like plastics and chemicals and steel and EV charging, you’re going to have to build real assets,” he says, “and so you need that flexible capital.”
Others have a less flexible approach. General Atlantic’s status as a growth equity investor means it is unable to underwrite technology risk, says Hamilton, but it has been able to invest in a leading EV charging business. “We believe by getting behind a player like ABB E-mobility, we can help the infrastructure grow without taking that infrastructure risk,” she explains.
“We believe by getting behind a player like ABB E-mobility, we can help the infrastructure grow without taking that infrastructure risk.”
Rhea Hamilton, Managing Director, BeyondNetZero, General Atlantic
Balancing risk and return
OMERS has invested at the platform level in the sustainable battery industry, which defies the trend by many investors to back specific projects because they feel closer to cashflows. “We see that for a slightly better return, you can actually have a much better risk profile if you invest in a platform that allows you to pivot over time, rather than just invest in a project which may or may not go right.” says Yashnikov.
Investing in platforms with a heavy capital need is key to the energy transition, according to Priya Veerapen, Managing Director of InfraCapital, which has invested in battery storage service Zenobe.
“We look for investable opportunities where technology is proven, but capital is needed to scale, such that in an investment period of say three to five years, the investment proposition is significantly de-risked, both through construction delivery and also commercialization risk being abated,” she says.
“We look for investable opportunities where technology is proven, but capital is needed to scale.”
Priya Veerapen, Managing Director, InfraCapital
KKR has joined InfraCapital in a strategic partnership to support Zenobe. KKR’s Managing Director Infrastructure, Ryan Miller, notes that the company is the UK’s number one player in electrification, making it a difficult platform to replicate.“But what really unlocks it is the business model and the approach that they took – a very customer-driven approach, but also a risk-managed approach,” he says.
“What really unlocks Zenobe is the business model – a very customer-driven approach, but also a risk-managed approach.”
Ryan Miller, Managing Director Infrastructure, KKR
Europe strives to balance the IRA effect
Investors are finding the U.S. market highly attractive as a result of the Inflation Reduction Act incentives.
Yashnikov notes that companies with first-hand experience of IRA financing have found it less straightforward than billed, but the U.S. remains more attractive than Europe. However, some European countries are responding. “Tactically and regionally, certain European states understand that they want to onshore a particular part of the value chain,” he says, citing Germany, Sweden, Norway, and France as examples.
“Tactically and regionally, certain European states understand that they want to onshore a particular part of the value chain.”
Dmitry Yashnikov, Managing Director & Head of GreenTech, OMERS
“But when you look at the U.S., you see an absolutely vast pool of very enthusiastic and highly-skilled talent across different levels of expertise. You see the timeframes for permissioning, wherever you go in the U.S., times shorter than what you have to deal with in Europe.”
Kingsbury agrees, citing the $400m-plus capital support for Ascend Elements’ $1bn plant in Kentucky. “You just can’t find that anywhere else. Maybe you find it in China, but that’s geopolitically difficult at the moment for obvious reasons,” he says.
He has one note of caution, however, on the political front: “You wouldn’t want a portfolio which was entirely dependent on Inflation Reduction Act support, because it might get held up, it might get damaged in the election that’s due at the end of the year.”
“You wouldn’t want a portfolio which was entirely dependent on Inflation Reduction Act support, because it might get held up, it might get damaged in the election.”
Shaun Kingsbury, Co-Chief Investment Officer, Just Climate
