It will not come as a surprise to anyone that the continuing credit crunch, declines in global stock markets and rising energy prices have led to a sharp decline in acquisition activity. The number of private equity transactions in Europe and the US has fallen by approximately 20 percent to 25 percent, with a substantially steeper value decline.
In spite of this, some deals are still getting done, particularly in buoyant areas such as the energy sector, where there has been a surge in activity, especially in terms of green technology.
The energy sector initially remained relatively strong through the early stages of the credit crunch. While overall volume was down in the US and Europe in 2007, global deal activity in the sector continued to be strong, with private equity as a major component, including in the midstream and service sectors.
Investment in energy and energy related services should not be surprising given the rising price of oil and the interest by Middle Eastern capital in such investments. This trend may best be demonstrated by First Reserve marketing its 12th energy-focussed fund with a hard cap of $16 billion (€10.2 billion).
A particularly bright spot has been green energy investing. Many investors expected record oil prices to create significant investment opportunities as governments and consumers have been forced to look for alternative energy forms, particularly those that are environmentally friendly. Private equity funds are in the market for “green” deals, and have even been involved in lobbying the US government with regard to tax credits for renewable energy.
Not surprisingly, fundraising by private equity and venture capital funds in green energy has grown dramatically. Approximately $148 billion was raised in 2007 for global investment in sustainable energy, according to the Global Trends in Sustainable Energy Investment 2008 Report from United Nations Environment Programme, SEFI and New Energy Finance.
While the early reports for 2008 showed a decline in investments in green energy, with poor performance blamed on the credit crunch and a sense that the sector may be fully priced with not enough supply, the UN report revealed a substantial rise in green investment activity in the second quarter, resulting in investment activity for the first half of 2008 at a similar pace to that of 2007.
As the credit crunch sets in, it is hard to be positive about the private equity industry as a whole for the remainder of 2008, however the UN report combined with the level of capital being raised for green energy provides a bright outlook for at least one sector in the midst of an otherwise dreary year for private equity.
Mark Thompson is a corporate partner in King & Spalding’s London office and co-chair of firm’s private equity practice.