A Performance Assessment of Private Equity and Venture Capital in the Energy Transition

Abstract

The energy transition is one of the most pressing issues facing contemporary society, and financing the path to de-carbonization involves a great deal of private financing from institutional investors. While infrastructure funds often garner the most attention among these private closed-end investment vehicles, past research has documented their underper- formance relative to other alternative asset classes. This work, therefore, examines other private closed-end investment vehicles (private equity and venture capital) with exposure to energy transition assets and provides a comprehensive performance assessment of these funds relative to traditional energy private closed-end funds. Panel data from Prequin is utilized to assess various return metrics, return volatility, covariance of returns with mar- ket and energy/utilities indices, and cash flow distribution profile through various regres- sion models. Results show no overall performance differences in returns and volatility for renewable-exposed funds and mixed-mandate funds. Results do find, however, that North American and venture capital funds underperform significantly when no development incen- tives are in place. Furthermore, renewable-exposed funds exhibit lower market and energy index correlation and have shorter duration in North America and Europe, demonstrating attractive hedging and liquidity features of these funds relative to their traditional energy peers. This analysis also reflects on the role of development incentives in driving energy transition investment performance.