Private equity recovers fossil fuel assets while others divest

As listed companies abandon their fossil fuel assets in the face of increasing pressure from shareholders and investors, private equity markets have filled the funding gap, according to new search by Fitch Ratings.

“There is a growing trend for listed companies or investors to choose to opt out of fossil fuels or carbon-intensive assets,” said David McNeil, director of Fitch.

“There is relatively little focus on who buys these assets – private equity and state-owned enterprises will generally have less incentive to cut emissions than their public counterparts, but there are signs of a positive impact in the growth of project finance. renewable energies.

Equity financing of oil, gas and coal projects in the United States has eclipsed solar and wind projects over the past decade, according to the rating agency.

More than $ 150 billion has been invested in fossil fuel assets over a 10-year period, compared to around $ 40 billion in solar and wind between 2010 and 2020.

Although the pressure from limited partners translates into a move towards low-carbon investments, it is paltry compared to what has been observed in public markets.

“The importance of private equity for financing fossil fuel projects is increasing as the availability of public sources of financing decreases due to the application of ESG strategies and policies by financial institutions.

“ Many miners have divested thermal coal assets when ownership of those assets has affected their market access, especially when coal mine assets are short lived and represent only a small share of overall revenue ‘ ‘, wrote the report’s authors, McNeil and Mervyn Tang.

Citing research from Institutional Investor, the authors also said that of the 431 private equity signatories of the United Nations Principles for Responsible Investment, only 16 disclose the impacts of ESG factors on financial returns.

Buy in

The authors said some buyout groups have sought to capitalize on the declining value of fossil fuel assets, despite the risks posed by climate regulations.

The majority of deals are seen in the United States and India, while new capacity is concentrated in places like India and the Philippines, where government policy towards coal is more favorable.

Additionally, although institutional investors have started to force private equity managers to higher standards and demand the integration of environmental, social and governance criteria into investments, there are fewer mechanisms to actually push private equity firms. funds towards emission reductions.

And with demand especially from the Asia-Pacific region supporting profitability, fossil fuel assets are still attractive to many funds. Fitch said he expects investments in conventional oil and gas assets to continue.

This despite the previous problems encountered by private equity firms with their holdings in this sector. According to the Hayes and Boone Bankruptcy Monitor, most of the oil and gas bankruptcies that took place last year were largely backed by private capital.

“Despite often poor returns in recent years, private equity firms continue to seek opportunities in the oil and gas sector, particularly where asset values ​​have fallen to provide an attractive expected return,” the report said.

To do business

There have been several notable transactions over the past five years.

Riverstone Holdings created a European power company called Onyx Strategic Investment Management in 2019 and acquired a fleet of coal and biomass-fired power plants in Engie.

In 2017, Blackstone and ArcLight Capital’s Lightstone Generation joint venture purchased a plant and small gas-fired units from American Electric Power Company; and later that year, Energy Capital Partners purchased a portfolio of power plants from Engie through Triton Power.

Nonetheless, Fitch expects private equity to play a key role in low-carbon investing.

For example, Blackstone recently announced an emissions reduction target of 15% in the first three years of investing in a new holding company. The rating agency said it expects this goal to be replicated by industry peers.

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