Investment Opportunities in Private Markets – Investing in transformative megatrends

We witness a positive societal, as well as supportive political and regulatory environment for infrastructure investments, especially in sectors driving the energy transition.
Daniel Huss

Director Manager Selection

Prime Capital

Toni Quittschalle

Head of Manager Selection

Prime Capital

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Around the world, the structural shift towards a climate-neutral economy has gained significant momentum. Governments and companies made high-profile commitments to achieve self-imposed climate targets over the next 30 years. During the COP26 world climate conference, participants pledged to reduce greenhouse gas emissions by 45% until 2030, giving them a fighting chance to reach the +1.5°C target from the Paris climate agreement. 

We witness a positive societal, as well as supportive political and regulatory environment for infrastructure investments, especially in sectors driving the energy transition. In order to achieve climate targets, we are seeing an increase in both supply and demand for green investment opportunities. Figure 1 provides an example of how technologies will need to change by 2050 (IRENA, 2021) in order to have a realistic chance of limiting the increase in global warming to +1.5°C. To achieve these goals, it is estimated that additional investments of well over €100 trillion are needed globally by 2050 (IRENA, 2021). This is roughly equivalent to an annual investment requirement of 4% of global GDP in 2020.

Figure. 1: Technology needs (exemplary) in 2050 [figures based on IRENA (2021), World Energy Transitions Outlook: 1.5°C Pathway, International Renewable Energy Agency, Abu Dhabi]. 

Hence, we will need vast investments to (i) transform existing infrastructure (“brown-to-green”), (ii) finance new green infrastructure, and (iii) develop new scalable technologies. Investors can benefit from this momentum, as the energy transition affects the entire economy and positions some sectors for long-term growth.

With the growth potential, financing the implementation of ambitious climate targets offers attractive return potentials of often >10% (net IRR). At the same time, the long-term success of investments in the energy transition is based on a detailed risk analysis and evaluation at the level of individual investments and asset managers.

Transformative assets often have not yet assumed the size of traditional infrastructure investments,  leading to a larger opportunity set in Small-cap and Lower Mid-cap assets. This part of the manager market is characterised by specialists who need to have the necessary technical expertise and experience to deal with the complexity and deliver on long-term growth assumptions. Simultaneously, these managers are best placed to unlock the value generation potential of thematic strategies. Investors looking to invest in transformative megatrends, such as the energy transition, are facing the challenge that, especially in the mid-market segment, a large number of different strategies, managers and investment opportunities are available. As the momentum is here to stay, the number of prospective managers will continue to rise, making manager selection key to benefit in the long-term. Depending on internal resources on the investor side, external partners can create the necessary added value in the selection process and provide access to a diversified pool of thematic strategies.

Ultimately, investments in the energy transition are long-term. The environmental and societal benefits will only become apparent in many years’ time, whilst more and more investment opportunities are emerging for investors today. In order to unlock the long-term value generation potential inherent in the transformative megatrends, investors need to consider the complexity and the associated risks accordingly. Specialised partners can bring the necessary expertise to the table and can offer stand-alone or complementary portfolio solutions, achieving the necessary diversification across thematic strategies, therefore capitalising on the growth potential of transformative megatrends.

*This article was first published on the March edition of the Magazine, you can download the full magazine here

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Investment Opportunities in Private Markets – Investing in transformative megatrends