While institutional investors increasingly eschew fossil fuels, private equity faces a reckoning
The Private Equity Stakeholder Project released a report today that analyzes the energy fund returns for private equity over the past decade. This report finds that private equity-backed energy funds performed poorly compared to private equity funds overall by vintage year, and the majority have lost money. Of the 16 private equity energy funds the report looks at, more than half had lost money as of late 2020. Given the concentration of fossil fuel investments in energy funds, this underperformance suggests that investors would have been better served by a strategy that didn’t rely on fossil fuel investments.
The report’s author Alyssa Giachino of the Private Equity Stakeholder Project said, “Taken together, fossil fuel fortunes have not only evaded investors in recent years but are expected to remain elusive. Private equity firms should take meaningful steps now to responsibly reposition portfolios away from fossil fuels and ensure institutional investors’ capital is deployed toward a clean energy economic future.”
Unlike private equity asset managers, governments and industry leaders are seeing the writing on the wall – fossil fuel assets are too risky as major stakeholders transition to a clean energy economic future. In February 2021, Royal Dutch Shell joined other oil majors in saying that the world reached peak oil production in 2019 and going forward it expects annual declines.
More recently, the COVID-19 pandemic dramatically decreased fossil fuel demand and helped underscore the increased bankruptcy risks associated with private equity-backed fossil fuel assets. Amid these financial risks, private equity funds continue to invest billions in fossil fuel assets, such as Blackstone’s $6.3 billion investment in Tallgrass Energy in 2020 or Kohlberg, Kravis Roberts’ $2.1 billion investment in the Coastal Gaslink Pipeline in 2020.
With the U.S. returning to the Paris Climate agreement and the strengthening of global environmental regulations, fossil fuel companies will face increasing levels of scrutiny from investors, regulators, and the public.