Decarbonisation poses big opportunity for private markets
The net-zero transition presents a huge and broadly untapped opportunity for private markets, new research claims.
Placement agent Reach Capital has released its Private Markets Decarbonisation Study 2024, which said that decarbonisation goals require an estimated $200tn (£157tn) in total investments to achieve net zero by 2050, or $6.7tn per year.
This is more than three times the current commitments being supplied to decarbonization strategies by private markets players.
ReachCapital said that the net-zero transition is expected to multiply the number of investment opportunities available to private markets due to the size of the investment gap.
The total annual opportunity for fund managers and institutional investors in a “net-zero-by-2050” scenario could reach 55 per cent of the yearly needs, with 15-22 per cent coming from private markets stakeholders, the report said.
While a growing number of funds are making decarbonisation central to their investment strategies, there is still a significant investment gap, according to Reach Capital.
The report identified fewer than five “grey-to-green” funds, dedicated to the decarbonisation of its portfolio companies across industries, as well as 20 “decarbonisation” funds, and 19 “impact” funds.
It said that the number of pure decarbonisation funds in the market is underequipped to provide the level of investment required to achieve global net-zero and decarbonisation goals, with considerable headroom for private equity investment.
“Private Markets have a key role to play in meeting the level of capital required to achieve the net zero transition by 2050, yet large investment gaps remain,” said Reach Capital managing partner William Barrett.
“The need for financial and operational support, to both established companies to cut emissions and fund new climate-tech and decarbonization businesses, is providing a major opportunity for private equity funds. With the number of pure decarbonization players in the market yet to catch up to demand from institutional investors, this segment of the market is ripe for new entrants.”
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The study said a growing number of decarbonisation and ESG initiatives and regulations by European institutions have influenced general partner (GP) and limited partner (LP) decision-making, such as the Net Zero Asset Managers Alliance, Initiative Climate International, and the Sustainable Finance Disclosure Regulations.
The study said that around a third (and 52 per cent in Europe) of LPs now have established net-zero initiatives which affect investment decision-making processes.
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The study mapped 11 pre-identified sectors crucial to achieving net zero. These sectors offer large upside investment opportunities with total addressable market size expected to reach an aggregate yearly revenue of around $12tn by 2030.
Of these sectors, infrastructure funds are already highly exposed to four (water, power, buildings, and transport) representing a combined $7.2tn, approximately.
The remaining sectors (carbon management, industrials, waste, hydrogen, oil, gas and fuels, consumer, and agriculture and land use), according to the study, could represent a combined yearly revenue of around $5.3tn for private equity funds.
The study highlighted that only 38 per cent of European mid-market companies in high-emitting industries are investing heavily in decarbonising operations. Businesses in these sectors face three primary decarbonisation hurdles: financial constraints, regulatory complexity, and a lack of time and expertise – obstacles which Reach Capital said private equity funds are ideally equipped to address.
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