Investment in a Minute - Attractive Risk/Return Opportunities in Clean Tech

1 min read 19 Oct 22

“Across the longer term, investing selectively in private assets could generate stronger returns as compensation for that illiquidity and complexity.
- Matthew O’Sullivan, Head of Origination Asia Pacific

The most attractive sector

Clean technology as a sector has a variety of areas with strong investment opportunities across Asia Pacific.

In developing economies, commercial and industrial offtake renewable energy projects can offer attractive risk/return profiles for investors – ranging from higher returns for development to lower risk for operational assets. Within the developed economies, taking a level of development risk while investing in utility projects augments the yield on investment.

Additionally, there are attractive investment opportunities in adjacent technologies - for example green hydrogen or battery and charging infrastructure.

Outside of energy generation, there are good opportunities in:

  • The roll-out of EVs across Asia Pacific , particularly in more niche areas such as the electrification of last mile delivery.
  • Grid related and other supporting infrastructure.
  • Recycling, waste management and technology solutions focused on the circular economy.

Within all these areas, selectively, there is the potential for attractive returns to be made, with investors being able to find investments to match their risk/return appetite.

Where are the headwinds this month and will these continue?

Increased market volatility in the public markets have compounded challenges for private assets investing.

The discounts available in public debt markets driven through investors who require liquidity imply interest rates which are uneconomic for underlying businesses to borrow, making private debt difficult to originate..

Rate rises in the US have not been matched by some developing economies, so it can be challenging to invest at levels that are attractive compared to public debt in the developed markets.

Similarly, although valuations have fallen, founders in private equity are not yet willing to recognise the same contraction that has been observed in public markets. When investing with businesses that are still in rapid growth phases, challenging conversations are had involving both reductions in forecast revenue and lower multiples when valuing a business.

It is currently harder to invest in private markets, given the volatility in the public markets. Investors need to stay disciplined, focus on fundamentals, such as liquidity and the ability to pass on inflationary costs.

Additionally, as was observed following the volatility during the pandemic, private markets move less sharply than the public markets. Once the public markets correct, it is expected that there will be an extended period of attractive risk/return for private assets.

Key takeaway from last quarter

The last quarter has been a reminder of how quickly volatility can come into the markets, and the effect this can have across both public and private assets. As a private asset investor, you need to be able to take a long- term view – you are inherently investing in illiquidity and complexity.

However, across the longer term, investing selectively in private assets could generate stronger returns as compensation for that illiquidity and complexity.

By Matthew O'Sullivan

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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