By Michael Castellarin and Michael Andrisani
It is a time of change and growth for the power and energy sector. One of the most important and challenging questions facing the world is how it can transition towards a more sustainable future with respect to energy generation and consumption. To make substantial progress, massive investments into the power and energy sector will be required. We are already seeing some of the world’s biggest companies and deepest-pocketed investors pile capital into the industry, in what has been coined by some as an era of “green finance.”
Companies and investors alike are seeking to get behind, and capitalize on, the decarbonization tailwinds impacting the industry. These tailwinds are likely to continue given at least 125 countries have committed to net-zero carbon emissions by 2050. The Biden administration is focused on decarbonization, having declared a goal of cutting U.S. greenhouse gas emissions in half by 2030.
Investments in renewable energy need to significantly increase if society is to meet these stated targets and sufficiently decarbonize. Wood Mackenzie estimates that at least $50 trillion in investment will be needed to reduce fossil-fuel and other greenhouse gas emissions by 2050 if we are to meet the goals set out in the Paris climate accord.
There are clear examples of reputable investors investing – directly as an asset owner — in the power and energy sector to fully capitalize on the decarbonization trend taking hold. For instance, Canada Pension Plan Investment Board, which kick-started its renewables effort in 2017, said it formed a new company, Renewable Power Capital, to boost its European investments in solar, onshore wind, and battery storage.
Green finance means more than just projects
While investments in renewable energy projects, battery storage technologies, or in improving and modernizing the electricity grid are a focus for certain investors, it is not where we play at Clairvest Group. We believe that given the growth and change discussed above, the demand for certain vital services to the power and energy industry is growing significantly. For example, in our portfolio, we have partnered with a global leader in providing a robust set of operations and maintenance services to solar power project owners. For similar reasons we are now attracted to consulting and engineering firms which have a strong practice focused on serving the changing needs of the power and energy market.
We believe that consulting and engineering firms focused on the global energy transition will generate above average growth rates and industry leading profit margins. For example, firms that provide services catered to renewable energy or distributed energy should benefit from the significant growth in these projects and the necessary planning and design work that go along with them if we are to meet the net zero goals set by 2050. The breadth of the impact on the consulting and engineering space will be pervasive. Its impact will reach firms with expertise ranging from permitting and compliance to those focusing on design and construction.
We are not alone in our interest in this space as large, diversified consulting and engineering players are keen to capitalize on the decarbonization trend and continue to be acquisitive in pursuit of it. A notable example is WSP’s acquisition of Golder earlier this year which was intended to bolster the firm’s strategy and the “transition to a more sustainable and low-carbon future.”
Other consulting and engineering companies, such as Montrose and Black & Veatch, have cited decarbonization as a major growth driver and focus area for their firms. Given the growth opportunities that lie ahead, private equity investors can provide the necessary growth capital to appropriately capitalize on trends, for example, through M&A or investments in a firm’s talent and capabilities, including significant investments in technology.
In addition to growth capital requirements, we are also witnessing succession issues in the consulting and engineering sector which make the industry an excellent candidate for private equity investment and recapitalization. There is an increasing cadre of baby boomer partners or employee-owners looking to retire. The younger and rising stars in many consulting and engineering firms often do not have the financial capacity to buy out the selling partners. As a result, a private equity firm, particularly one that focuses on minority / non-control investing, can be an excellent equity partner to assist with such an ownership transition while also providing capital for growth.
In light of the potential for significant growth as well as the need for capital for orderly succession, we are confident that there will continue to be a keen interest in investing in well-positioned consulting and engineering firms. Further, acquisition activity will continue to be pervasive as firms build size, scale, and deeper capabilities to serve the power and energy sector as it transitions to a more renewables-based future.
About the Authors
Michael Castellarin, with Clairvest since 2002, handles industry research and investment origination, structuring and execution with a focus on waste management, environmental services, facility services and industrial services. Michael is currently on the Board of three solid waste management investments: Winters Bros. Waste Systems, DTG Recycling and Arrowhead Environmental Partners. Since 2006, Michael has led Clairvest’s investments in seven waste management platform companies.
Prior to joining Clairvest, he worked as a management consultant at Monitor Company and as a marketing manager for the National Hockey League Players’ Association. Michael earned his M.B.A. from Northwestern University’s Kellogg School of Management and a B.Comm. with honours from Queen’s University at Kingston.
Michael Andrisani joined Clairvest in 2020 and participates in all areas of the investment process. Prior to joining Clairvest, Michael worked on a variety of M&A transactions in investment banking at Lazard (New York) and as an attorney at Cravath, Swaine & Moore (New York). Michael earned a JD from Osgoode Hall Law School and a MBA and Bachelor of Business Administration from the Schulich School of Business.