Tailwater Capital

Private Equity Executives See Opportunity in Both Old and New Energy

Few sectors have experienced as much change in the past few years as energy. Most recently, investors in the sector have navigated forces that include the war in Ukraine, a rebound in oil and gas prices and a steady push to shift to cleaner energy sources.

WSJ Pro Private Equity spoke to four private-capital fund managers who invest in the industry to reflect on how the past year has shaped the investment landscape and the opportunities they see ahead.

Wil VanLoh is chief executive of Houston-based Quantum Energy Partners, while Edward Herring is co-founder and managing partner of Dallas-based Tailwater Capital. Marion Calcine is chief investment officer at the infrastructure unit of Paris-based private markets firm Ardian and Michael Dean serves as a managing director focused on real assets at Boston-based private-markets firm HarbourVest Partners. Responses have been edited for length and clarity.

WSJ Pro: What surprised you the most about the energy industry in 2022?

Mr. Herring: It was probably a surprise that looked more like encouragement. We were encouraged by the more universal recognition that energy reliability, energy access and energy economics were all very important considerations. That conversation was healthy and was brought to the forefront by a number of things happening internationally, [the energy crisis in] Germany being one of the biggest.

Ms. Calcine: From a European perspective, of course, what has been extremely challenging, not only surprising, are the energy supply issues we’re having with the Ukrainian war and the subsequent increase in the cost of energy, as well as supply-chain constraints for new equipment.

Mr. VanLoh: The biggest surprise was the very different response to the war in Ukraine. In Europe, where energy prices went up five- to 10-fold, you would have thought that investors would have realized the huge importance of energy security and reconsidered their effective ban on investing in hydrocarbons, [but] largely they have not. In the United States, just the opposite has happened. Many investors [realized] that the energy transition, while a very noble goal, is also a very long-term goal and that it is really important that we have energy security and abundant, cheap energy.

WSJ Pro: How do you see the outlook for energy-focused private-equity firms in the year ahead?

Mr. Herring: We are strong believers in the role that infrastructure will have in the energy transition. There’s going to need to be a tremendous amount of new infrastructure. The business models we’re very excited about include carbon capture and sequestration. Anything regarding [energy] reliability, whether it’s batteries or natural gas or renewable fuels, is going to play an increasing role.

Mr. Dean: I think investors in [renewable energy] will continue to see strong demand for assets and near-term development pipelines, [but with] greater distinctions in pricing by asset quality and operating performance. That will be a little bit different from the rapid, early growth phase, where quality or location were less of a differentiator.

Mr. VanLoh: There’s just great tailwinds for private equity in traditional energy, a combination of good returns on an absolute basis but also on a relative basis, [compared to] other private-equity categories, and a growing awareness that all forms of energy are going to be needed for the energy transition.

WSJ Pro: What do you see as the biggest uncertainty or uncertainties facing investors in the energy transition over the coming year?

Mr. Herring: The biggest concerns that we as a firm will have over the course of the next 12 to 18 months are clearly driven by two things—supply-chain constraints and interest-rate sensitivity. These are really important macro conditions that can impact a lot of business models, particularly in energy.

Ms. Calcine: Volatility of [electricity] prices is an important factor. It’s really taking a view on where the short-term prices will be and if there will be caps imposed by regulators in each country. There are also the supply-chain bottlenecks that I mentioned before, [and] time to the authorization for renewable-energy projects is [another] uncertainty. If you work on a renewable project, how fast is it going to be authorized?  Many countries are lagging behind their renewables [expansion] objectives because the authorizations are not delivered sufficiently quickly.   

Mr. Dean: The first is the rising cost of raw materials globally. You did see this year the levelized cost of energy for wind and solar, and in particular for storage, tick up and start to stress the economics of some projects. The second is just potential uncertainty as to the pace and quality of the build-out of storage and transmission infrastructure.

Mr. VanLoh: I think one is the supply chain for the key inputs to the energy-transition components, [particularly] solar panels, wind turbines and batteries. Supply chains [have been] increasingly challenged and therefore costs are going up.

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