What are the key themes in energy transition in today’s private markets?
Ralph Ibendahl: Private markets, in particular, are very important for the energy transition, and probably have become much more important over time. 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.
“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.”
Ralph Ibendahl, Managing Director and Head of EMEA Energy Transition, RBC Capital Markets
Paul Betts: One issue is how we bridge the gap between earlier stage companies in the energy transition and the investment criteria being applied by funds. A trend we've seen is for funds to commit capital upfront, but not necessarily have it all drawn down on day one, and rather structure those future drawdowns to align with the company achieving certain predetermined milestones.
Barrie Laver: We've seen a heavy allocation, even an overallocation, to themes such as renewables and EVs, but a resultant lack of solutions to help companies or industries decarbonize. We are now seeing formation of funds with a focus on those industrial solutions.
“We've seen a heavy allocation, even an overallocation, to themes such as renewables and EVs, but a resultant lack of solutions to help companies or industries decarbonize.”
Barrie Laver, Head of Venture Capital & Private Equity
How is RBC positioned to help energy transition clients harness private capital?
Laver: 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, preferably on a co-investment basis with a fund partner.
Ibendahl: Our strategy is clear: we want to be a leader in the energy transition. We set up the energy transition group more than four years ago now, one of the first banks to do so. This is a global setup: what happens in the US, Canada, and Asia is hugely important also in Europe, and vice versa. Only if you have a perspective on all of those markets can you really provide the right advice.
Betts: We did notice upfront that the battery value chain was one of the biggest verticals where most capital would be spent. We’ve been able to bring together our expertise across mining, chemicals, technology, infra, and industrials, to deliver value for companies across the battery value chain.
What other capital pools are playing an active role?
Ibendahl: 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. The same is true for strategic partners and investors, whether that's through their direct VC funds or deploying capital themselves into companies where they can see an opportunity to benefit from growth.
Betts: 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 companies, and generally, investors are also looking for fully funded solutions. We've observed how the project financing process almost needs to be run in parallel with raising equity.
What’s the role of governments in supporting energy transition players?
Ibendahl: The most important one is around investor confidence. When the UK moved its ban on internal combustion engines back from 2030 to 2035, that had an impact on investor confidence in EVs. When the EU sets a sustainable aviation fuel target in terms of blending levels from 2% in 2022 to 6% in 2030 and rising to 20% in 2035, that creates huge demand for sustainable aviation fuel.
Laver: The Canadian government has rolled out a number of policies, following on from the US IRA. It’s early days, but the Canada Growth Fund is playing a very important role. CCFDs allow the government to facilitate more certainty around long-term future carbon pricing – in Canada’s case, up to 15 years – to mitigate against recontracting risk. This facilitates energy-intensive companies to start investing in newer technologies that might otherwise be difficult to finance.
Betts: We saw lessons learned from Britishvolt, where the UK Government provided subsidies for around £100m, but with conditions attached that made investors uncomfortable. 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 by UKIB in particular.
How do you foresee the market developing this year?
Ibendahl: We’ll see continued investment and development in decarbonization of the power system. Decarbonization of industry, focused around hard-to-abate sectors, is an area of particular interest to investors.
Betts: Companies which are more centered around asset-light technology are getting more interest from investors. This will be an interesting space to watch. 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.
“Companies which are more centered around asset-light technology are getting more interest from investors. This will be an interesting space to watch.”
Paul Betts, Managing Director and Co-Head of M&A Europe, RBC Capital Markets
