Why Private Equity Firms Should Leverage Energy as an Asset

By Jim Dore, Vice President, Services Solutions, Chateau Energy Solutions

What is private equity?

Private equity is an alternative investment type, which involves capital that is not publicly listed on traditional stock exchanges. The private equity market works through investors and funds who directly invest in private companies, participate in buyouts of public companies or contribute venture capital.

When investing in private equity, retail and institutional investors provide money that can be used to fund the development of a new technology, to restructure the business and improve its profitability, to conduct some effective acquisitions or to convert a public company into private.

Key Take Aways:

  • Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies.
  • Private equity firms make money by charging management and performance fees from investors in a fund.
  • Among the advantages of private equity are easy access to alternate forms of capital for entrepreneurs and company founders and less stress of quarterly performance. Those advantages are offset by the fact that private equity valuations are not set by market forces.
  • Private equity can take on various forms, from complex leveraged buyouts to venture capital.

Leveraging Energy as an Asset™

Private Equity firms across the United States invest in many different types of companies. For our discussion, we will focus on buyouts, recapitalization and restructuring of mature companies, and on advancing new technologies. These investments require a tremendous amount of due diligence on the front end and ongoing well designed and executed strategic and tactical plans to improve operations to ensure a good return on investment.

An important part of maximizing a portfolio investment is to ensure that you have full visibility into all areas that can affect profit margin. One key area for Private Equity investments is operational efficiency, which includes energy. Energy waste is surprisingly common in facilities and each building within a portfolio will operate with different building systems, processes and procurement. An energy efficiency expert is necessary to look at how these systems and processes operate and to find ways to integrate them within a building to operate at peak efficiency. Now is the time to stop thinking about energy as a cost center and to start thinking of energy as an asset™.

Energy Management

This is where partnering with a quality energy management company can pay off. Choose a company that provides a full-service consulting and implementation offering including supply and demand-side management as well as sustainability. Private equity firms can partner with such companies to conduct pre-investment audits of prospective acquisition building portfolios to investigate how the company is purchasing and consuming gas, water, and electricity currently. There are opportunities in certain regions of the United States where these utilities can be competitively purchased which will drive the annual cost down significantly.

Additionally, building systems in the portfolio can audited prior to investment to see if there are opportunities to improve building optimization and lower operating costs.  New energy-efficient technology like LED lighting, variable frequency drives (VFD’s), smart HVAC solutions, and compressed air systems can be installed after the investment is made with ROIs ranging from 20 – 40%,improving the operating profit of the newly purchased company and making it more valuable to investors.

These same concepts can also work well after equity investments have taken place. Private Equity firms can introduce their energy management and sustainability partner to the C-Suite leadership of the companies they own and operate.  Just as with pre-investment audits, post-investment audits can be performed to identify areas where applied expertise and new technology can be implemented to drive down utility supply contracts (gas and electric) as well as to deploy high return consumption reductions to lower operating costs and improve profits. Additional benefits that come with a well-qualified partner can include leveraging utility rebates and incentives, increased maintenance savings, lower carbon emissions, as well as improved building occupant comfort.

Key Take Away:

  • Start thinking of Energy as an Asset™
  • Private Equity firms should consider partnerships with qualified energy management partner.
  • Pre-equity investment strategies should include energy supply and demand-feasibility studies/building energy audits.
  • Existing investments can be leveraged by the deployment of supply and demand-management programs to yield significant ROI.
  • Utility rebates can be leveraged to help buy down the capital cost of these programs.
  • Lower carbon emissions can have a monetary impact as well as support sustainability initiatives
  • Energy efficiency can have a significant long-term effect on costly maintenance and repair issues

As you can see, investing in a partnership with a qualified energy management company to address a portfolio’s energy supply and building systems needs has been often overlooked by the Private Equity sector. Private Equity firms will be on a path to greater ROI’s when they recognize that strategic and tactical investigations and deployment can lead to significant savings and improved profitability of your equity investments. This is how you start Making Energy an Asset®.

About the Author™

Jim Dore is Vice President of Services Solutions at Chateau Energy Solutions, a world-class energy management solutions company. He’s been in the energy efficiency business for more than 25 years. Jim has extensive experience across multiple markets developing relationships with organizations to help build momentum toward a more energy efficient and sustainable future. He can be reached at Jim.Dore@ChateauES.com or on LinkedIn.

Sources:  Investopia

Chateau Energy Solutions Making Energy an Asset®

Ready to get started on the path to energy efficiency and sustainability?