Home ESG Future Returns: ESG-Related Ventures Are a ‘Bright Spot’ in Private Markets

Future Returns: ESG-Related Ventures Are a ‘Bright Spot’ in Private Markets

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An uncertain economic outlook, rising interest rates, and geopolitical instability have led late-stage venture capital, private equity, and corporate finance funds to cut back on investments.

But according to a recent Deloitte report, companies creating products and services related to environmental, social, governance, or ESG policies continue to attract funding.

said Heather Gates, Private Growth Leader for Audit and Assurance at Deloitte & Touche, Deloitte’s U.S. accounting arm.

Deloitte’s quarterly analysis of funding trends, titled ‘The Next Road’, examined 330 completed deals totaling US$15.7 billion through the third quarter of last year.

The deal involved companies from three ESG-related sectors: climate tech, clean tech, and companies that support impact investing with reporting tools and software that track ESG factors.

“These three sectors span nearly every hardware and software product, tool and service being developed to implement many ESG policies and initiatives, as well as business and investment models.” said the report.

Gates said Deloitte’s focus is on so-called expansion-stage companies that have proven ideas and solutions they’re working to bring to market.

There are now 36 expansion-stage ESG companies that have reached so-called unicorn status with a valuation of $1 billion or more, according to the study. This includes his nine companies getting there in 2022. The total valuation of all 36 companies is US$83 billion, the report said.

Most of these ESG deals involve cleantech companies such as Mainspring Energy, a clean power company that creates low-emission generators that convert multiple fuels into electricity. Menlo Park, Calif.-based Mainspring received his US$290 million funding round in September, led by London-based global growth equity investor Lightrock.

Penta Recently, I spoke with Gates about why ESG companies continue to attract private investment.

What is the appeal of ESG?

With the global trend to reduce carbon emissions, supported by governments and investors, and increased regulatory scrutiny, ESG companies continue to gain traction, Gates said.

For example, the U.S. Securities and Exchange Commission is close to issuing requirements for companies to measure and disclose their carbon emissions and other climate-related risks. “It’s only a matter of time before this is finalized,” says Gates.

At the same time, many companies with robust financial systems “don’t have systems in place to measure what we’re talking about here,” she says.

As a result, investors are drawn to emerging software companies that make it easy for businesses to collect, report, and analyze the data they need.

One example is San Francisco-based Xpansiv, which has created an infrastructure platform for global carbon and environmental commodities. The company has market data for carbon offsets, renewable energy credits and low-carbon fuels, enabling it to connect buyers and sellers. The company received $400 million in July from Blackstone Energy Partners, a division of private equity firm Blackstone.

Other examples include Measurabl, a San Diego-based company with an ESG platform for real estate, and Novata, a for-profit plus charity-backed New York company that created an ESG platform for the non-profit market. there is.

ESG unicorn

Other ESG-focused unicorns tracked by PitchBook include UPSIDE Foods, Oyster and Palmetto.

Berkeley, Calif.-based UPSIDE Foods reached a $1 billion status in April following a $400 million funding round from Singapore’s state-owned investment firm Temasek. This funding will help build a commercial production facility to make such cultured meat products from cell feed.

Oyster, a social impact company that enables companies to hire workers from anywhere (including international ones), is a 150 million dollar company led by Toronto-based financial technology company Georgian. It reached the $1 billion level after securing $1 million in funding in April. According to Oyster, companies will be able to recruit quality talent from anywhere in the world without disrupting individuals, their communities, urban or natural environments.

Another recent unicorn is Palmetto, a clean energy market and technology services platform in Charleston, South Carolina, accelerating residential solar adoption. Palmetto raised approximately US$375 million in February in a funding round led by Social Capital, an investment firm located in Menlo Park, California. Social Capital focuses on technology companies at every stage that make products that improve society.

Deloitte notes that the proliferation of unicorns within ESG “reinforces that business viability is increasingly being realized.” However, this also indicates fewer public market exits during periods of extreme market volatility.

Founders, management teams, and their investors usually prefer young companies to eventually go public. That’s because they typically earn a premium to the company’s value through public offerings rather than acquisitions, Gates said. But historically, it’s not uncommon for about 80% to 85% of ventures to be acquired and 15% to 20% to go public, she says.

In any case, today “the market is closed,” she said, and the number of initial public offerings has dwindled to virtually zero. The dynamics are unlikely to change until market volatility abates, perhaps until the third quarter of this year, she said.

One trend likely to accelerate is for venture funds to sell stakes in ESG-related companies to large private equity firms, Gates said.

“Both venture capital and private equity have raised billions of dollars over the last five years, and they need to do something with that money,” she says. “If we see stability, we may see more private equity investment increase.”

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