Institutional investors are setting their sights on private markets as the avenue to increase exposure to renewable energy and sustainability investments over the next few years, according to a recent survey.
The survey, conducted by Schroders of over 770 institutional investors worldwide, found a majority believe private equity, private credit, and real estate will offer the most promising opportunities to fund the transition to cleaner energy sources over the next two years. As a result, 35% of respondents plan to raise allocations to private assets.
This enthusiasm for private markets comes despite recent concerns about inflated valuations, excessive dry powder in private equity, and weaknesses in some commercial real estate sectors. However, investors see private assets as providing resilience and diversification, as well as the ability to more directly capture the growth in renewables.
In particular, private equity is poised to play an even greater role than it already does. Currently, 39% of those surveyed said PE has a major role in delivering sustainability objectives, but that figure is expected to jump to 48% in two years’ time. Similar increases are projected for private credit and real estate.
Looking ahead, this growing allocation to private markets for renewable investments is indicative of a fundamental transition that will play out over the next 5-10 years. Here are some predictions for how the renewables market may evolve:
- Massive scale-up of renewable energy production globally, with private capital helping fund large wind and solar farms. Total solar and wind capacity could double in 5 years.
- Consolidation among renewable energy companies and project developers, with private equity firms helping finance M&A activity. This will create larger players.
- Institutional investors increasingly viewing renewables as a core component of their infrastructure allocation, rather than a niche investment. Sustainable investing principles will be integrated across portfolios.
- Private credit and debt funds financing more downstream clean energy projects like rooftop solar, energy storage, and EV charging infrastructure build-outs.
- Certain renewable energy projects transitioning from reliance on government subsidies to being more market-driven and attracting private capital based on fundamentals.
While risks remain, such as commodity price shocks, the long-term trend toward greener energy supported by private investment dollars looks hard to derail. Institutional investors know the winds of change are blowing strong and are positioning private market allocations to sail alongside.