Private Markets: Shakeup or Slowdown? Sustainability Investments Take a Hit
In the back half of 2023, the private markets experienced a significant retrenchment, impacting various sectors including venture capital, global mergers and acquisitions (M&A), and global infrastructure fundraising. Venture capital financing in the US dropped by 30% from 2022 to 2023, and global M&A volumes appeared to have dropped by 20% year-on-year. The effects were also felt in sustainability-oriented investments, as sustainability private equity pulled back along with the broader private markets. The question now is how long this trend will continue – six months or eighteen?
Pullback in Private Equity: What It Means for Sustainability Entrepreneurs
The current pullback in the private equity space is likely to extend into the first half of 2024. While inflation has decreased, interest rates have remained high, with forecasts suggesting that they will stay elevated compared to historical lows. This has prompted some venture firms to shut down or remain inactive, creating challenges for sustainability entrepreneurs seeking funding. Lower valuations and repricing have become more prevalent among venture-backed companies that are able to raise capital. Private infrastructure investors are also expected to be on pause in the first half of 2024, due to the effects of interest rates on the profitability of existing assets.
Continued Shakeout Ahead: Valuation Reset in Store for Sustainability Investments
The first half of 2024 is likely to witness both a shakeout and a valuation reset in the sustainability investment space. Startups, companies, and projects that are perceived as clear winners may still attract investment, albeit at lower valuations compared to previous times. However, those viewed as riskier due to high cash burn or uncertain prospects may face more obstacles. Momentum and risk perception are crucial factors in this scenario. Venture-backed companies will need to present strong growth stories or demonstrate a short-term path to cashflow positivity to secure new funding. Despite the challenges, sustainability and climate-focused investments still have sectoral tailwinds, particularly in areas such as AI and cleantech, which may offer some insulation from the wider market decline.
Flight to Quality: First Half of 2024 Will Test Riskier Sustainability Ventures
As the private markets experience a shakeout and flight to quality continues into the first half of 2024, sustainability ventures deemed riskier may face significant challenges. Investors are likely to focus on startups, companies, and projects that have a clear path to success or can demonstrate immediate cash flow positivity. The perception of risk and the ability to tell a compelling growth story will be even more important during this period. Investors will scrutinize the sustainability and viability of ventures, particularly those with high cash burn or uncertain prospects. The flight to quality may result in a preference for stable and proven sustainability ventures over riskier ones.
Rebounding in the Second Half: Private Equity Eyes Return to Sustainability Investments
In the latter half of 2024, there are signs that sustainability and climate investments will be among the first to rebound across venture capital, private equity, and infrastructure. The availability of record-high dry powder indicates that there is significant capital waiting to be deployed. Infrastructure investors, in particular, may prioritize projects with ESG attributes over traditional thermal power projects. Many venture capitalists also anticipate long-term growth in the sustainability sector. Moreover, the federal spending from the Inflation Reduction Act towards climate solutions is expected to provide a substantial boost to the sector. However, the wildcard remains the US federal elections. If it appears that there is a possibility of a second Trump presidency and potential federal pullback on climate policies, it could create further uncertainty for investors. Nevertheless, the overall megatrend of sustainability investments remains strong, and the sector is likely to see a rush back even if there are temporary delays.
Barring any major setbacks, the first half of 2024 is expected to be a challenging period for sustainability entrepreneurs and investors. However, the second half offers hope for a rebound in private equity investment in the sustainability sector. The industry will need to navigate the ongoing shakeout while showcasing the potential for long-term growth and delivering on sustainable solutions.
Analyst comment
Positive news: The latter half of 2024 is expected to see a rebound in sustainability investments across venture capital, private equity, and infrastructure. Record-high dry powder and federal spending towards climate solutions will boost the sector. However, the first half of 2024 will be challenging for sustainability entrepreneurs and investors, with a flight to quality and a focus on startups with clear paths to success. Overall, the trend of sustainability investments remains strong.
