As the new administration begins implementing its energy policy agenda, the market is keenly anticipating the impact on private equity sponsors’ energy transition investments. President Trump has signaled his desire to prioritize oil and gas extraction, and private equity appears well-suited to take advantage: dry powder remains ample, interest rates are beginning to decline, and general deal-making regulatory barriers are expected to loosen.
Although sponsors will undoubtedly increase investment in hydrocarbon energy assets, we nevertheless expect private equity to continue as a strong partner in the energy transition. We think it is likely that private equity will continue investment in the energy transition, but will focus on projects that are resilient to shifting policies on energy transition.
Investments in Infrastructure Likely to Continue
In particular, we expect significant capital deployed toward energy infrastructure—midstream services, pipelines, terminals, and technology investments (including power transmission and distribution infrastructure)—as many of these investments can toggle to energy transition under a different administration. Such investments would be a continuation rather than a course correction. The energy transition has made significant strides in both the private and public sector, due in substantial part to investments in energy infrastructure by private equity sponsors. We see a number of factors that may restrain the “drill, baby, drill” mentality within private equity going forward.
The expected increase in power demand due to data centers, electric vehicles, 5G, cryptocurrency mining, and artificial intelligence means there will be plentiful opportunities for investment in new power infrastructure, as well as upgrades to existing power infrastructure. Executing on the build-out required to satisfy the ever-increasing demand for reliable power will require private sector funds. Given sponsors have made multi-billion dollars commitments to power infrastructure investments, it is unlikely they will change course on what they see as a long-term play.
Ample Funding for Energy Transition Investments
Sponsors are generally obligated to deploy capital raised for a fund in a way that aligns with the mandate of that fund. A lot of funds have been raised for energy transition investments. In 2021 alone, total fundraising for energy infrastructure skyrocketed to $110.1 billion (from $328.5 billion during the entire first Trump administration), a trend that continued in 2022 and 2023 with total fund raises of $123.1 billion and $114.7 billion, respectively.
This expansion coincided with an uptick in the funds raised expressly for energy transition investments, with those funds raising $41.4 billion, $35.4 billion, and $52 billion in each of 2021, 2022, and 2023, respectively (that is, 37.02% of total funds raised). With at least $100 billion in funds that cannot be used for traditional oil and gas investments, sponsors will need to look elsewhere for the capital to make those investments—this is where dry powder in general infrastructure funds may come into play. Even with a more oil- and gas-friendly administration in D.C., sponsors may still have trouble marketing outwardly pro-hydrocarbon energy investments to potential investors, many of whom continue to focus on environmental impact in their investment analysis, despite the general decline of environmental, social, and governance (ESG) investing as a whole.
Although the Trump administration already is pivoting away from the Biden administration’s focus on ESG, it remains to be seen how much of the energy transition legislation passed during the prior administration will be rolled back, especially with such a closely divided Congress. In particular, the energy infrastructure lending program and carbon capture loans under the Inflation Reduction Act have not been highlighted as targets for termination. The Infrastructure Investment and Jobs Act is expected to remain in place. Continuing increase in electricity demand may serve not only as a check against limiting power infrastructure expansion, but also contribute to a depoliticization of decarbonization.
The Energy Transition Will Endure
Although President Trump retaking the White House may seem like a reset to 2016 in some respects, the developments in decarbonization in the intervening eight years have not been undone. While oil and gas assets will certainly be of interest to certain sponsors, we see private equity continuing to play a strategic role in the energy transition.
Between record amounts of capital (raised and deployed) toward clean energy infrastructure and the demographic necessity of more power generation from any and all sources in the coming years, the sector has a significant stake in ensuring that the energy transition continues to march forward. We expect private equity investments, in the aggregate, to be focused on assets and projects that are not strictly prohibited by general energy infrastructure fund mandates and can be marketed as continuing toward a decarbonized future.
—Megan Ridley-Kaye is a partner, Corporate & Finance, with Hogan Lovells, and Jake Shaner is a senior associate, Corporate & Finance, with Hogan Lovells.
