Over the past couple of years, venture capitalists, PE firms and LPs have given the oil and gas sector a wide berth thanks to years of poor returns, chronic underperformance compared to sectors like tech and, lately, ESG concerns and the energy transition. But the ongoing oil price boom driven by high energy demand, supply bottlenecks and the Ukraine war has made the sector attractive again, and deep-pocketed investors are not immune to its charms. Indeed, after a brief hiatus driven by fears of a “Great Unwinding,” venture capital is back with a bang, characterized by huge deals, little diligence and hyper-fast follow-on rounds. According to the latest PitchBook-NVCA Venture Monitor, in the first nine months of this year, VCs in the United States netted a record-setting haul of $96 billion across 526 funds, topping the $85.8 billion raised for 665 funds in all of 2020. The past year witnessed dozens of startups, including a growing number of unicorns, list on public stock markets.
The PE sector is not to be outdone, with private equity investors increasingly taking advantage of market volatility and rising energy prices.
According to PitchBook data, In the first quarter of 2022, investors financed 40 US energy transactions totaling $11.2 billion in value, accounting for 5% of all US deal value. Q1’s total deal value in the energy sector is higher than each quarter last year but below the typical figures of first quarters in recent years. PE firms manage investment capital obtained from institutional investors or high-net-worth individuals (HNWIs) to acquire equity ownership of companies through a variety of strategies, including leveraged buyouts and venture capital.
High-Profile Energy Buyouts
Among the more prominent energy deals last quarter was ArcLight Capital Partners purchase of Public Service Enterprise Group’s fossil-generating portfolio for $1.92 billion. The deal came as ArcLight tapped top oil and gas dealmaker Angelo Acconcia from Blackstone Inc..
In yet another mega-deal, Pembina Pipeline (NYSE:PBA) and KKR & Co.(NYSE:KKR) have agreed to combine their natural gas processing assets in western Canada via a joint venture, which will also acquire some assets held by U.S. pipeline company Energy Transfer LP (NYSE:ET) for a deal valued at ~$8.9 billion.
Another oil and gas highlight: for the first time in many years, limited partnerships (LPs) have shown fresh interest in PE funds that invest in the oil and gas sector.
Notably, Lime Rock Partners raised $538 million for its fifth energy fund and related vehicle, with the capital to be used to acquire and operate production oil and gas properties in the U.S.
Climate-friendly deals
That said, some experts still believe that ESG and clean energy will emerge as the long-term winners when it comes to attracting funding.
PitchBook PE analyst Jinny Choi says “climate-friendly deals will likely continue their upward trajectory and become the main driving force of long-term growth in the energy sector.”
They are in good company: In an article titled The End of Venture Capital as We Know It by Sam Lessin published on The Information, the author argues that a monumental shift in startup investing with the future of venture capital being breakthrough science that will transforming billions of lives in sectors like energy, transportation, infrastructure, agriculture, manufacturing and human augmentation.
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One of the new age sectors that has been seeing renewed interest is renewable energy and technologies that address climate change.
Lessin notes that in the past, investors have felt jaded by overhyped clean energy solutions, which fell short of expectations mainly because they failed to be cost-competitive with fossil fuels and other conventional energy sources. However, this is no longer the case thanks to breakthroughs in fields such as solar energy and battery storage that have dramatically lowered costs.
Indeed, Spanish developer Acciona Energia has told Energy Intelligence that ‘‘the appetite for renewables remains strong as they are “massively” more competitive than fossil fuels.’’Today’s stratospheric gas and coal prices have helped renewables retain their crown as the cheapest option for new power generation across the globe--despite rising equipment and materials costs.
