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M&A Powering Up: The 3 Types of Deals In The New Energy Economy

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2021 was a monumental year for the sustainability-focused capital markets. Almost every type of financing vehicle related to climate tech and renewable energy hit all-time highs: SPACs, IPOs, M&A, Growth Equity, Venture Capital. While I am partial to the venture capital and growth equity stages, there has been a fascinating trend in the M&A markets that warrants a review.

The reason M&A is so exciting is because there is now a clear strategy delineation between firms inventing the new energy economy, adapting to this new framework, or trying to adjust exposure to catch minor tailwinds with the theme. But first, what is the new energy economy?

The new energy economy is the framework for our evolving energy supply and changing energy consumption habits. On the supply side, we have a growing interplay between renewables like wind and solar, alongside baseline fuels like natural gas and resilience structures like batteries. On the consumption side we have mobility going electric, energy efficiency products taking over residential and commercial avenues and new products like carbon credits gaining interest. Influencing these moving parts is the unknown of climate change and how our infrastructure can handle new perils like extreme flood, fire, and wind. Holding this jigsaw of interwoven parts together are new digital tools that are designing, balancing, and maintaining the whole structure. Artificial intelligence based design systems and predictive analytics are the pillars to the digital backbone of our new energy economy.

With that background, let’s review the 3 types of M&A events occurring now and what each event says about the participants.

#1 Building a New Energy Firm for the New Energy Economy

These acquirors are new company platforms, usually started in the past decade, that are purpose built for the new energy economy. These firms are digital-first and deliver real value by combining subject matter experts with next-generation digital tools. The acquirors in this case are already large, and are looking to bolt on other, energy-forward companies to complement product skill sets or geographic footprints.

Aurora acquires Helioscope: Aurora is the number one platform to design residential and commercial rooftop solar. The company is digitally aligned to help simplify the deployment of solar across the world and represents the best of the new energy economy. Aurora’s leadership was looking to add greater product strength in large scale commercial solar design and acquired Helioscope. This deal cements Aurora’s leadership and allows the firm to be a one-stop shop for any installer. They are built and growing exclusively focused on the new energy economy.

STEM acquires Also Energy: STEM, a recently public company, is the global leader in AI-enabled energy storage. The firm works with their customers to customize and manage batteries and energy loads across all usage profiles. Battery storage is very complementary to solar energy’s intermittent production characteristics. Also Energy, a technology platform for solar operations and maintenance, was therefore the opportune target for STEM to acquire as they look to bolster their brand from battery storage to a broader leader in energy operations and maintenance. These two combined companies now well-positioned for decades to come and will be synonymous with solar and battery pairing. Another similar transaction here is Vista Equity buying Power Factors.

SparkCognition acquires Ensemble Energy: SparkCognition is an AI-enabled data platform that helps Fortune 500 customers in nearly every vertical better optimize their business. The company’s solutions work very well in traditional energy and SparkCognition wanted to gain market share in renewables. Earlier this year the firm acquired Ensemble Energy to provide instant access to the high growth renewables market. Now SparkCognition’s core technology can access and improve our renewable energy infrastructure.

#2 Traditional Energy Firms Integrating New Energy Products

This group of acquirors have existing business lines in traditional energy but are thinking ahead. These older firms have a business that, if managed successfully, can navigate the energy transition and are businesses with strong brands, active distribution channels, and employee bases that see the new energy economy as an opportunity. These firms are deliberately looking to incorporate new digital tools to better bring their own customers into the energy transition- an admirable and likely profitable endeavor.

Generac acquires Enbala: the maker of diesel or natural gas generators is now focusing on electric battery resilience solutions within the office or residence. But batteries are new to Generac so they wisely sought out a technology partner to help them incorporate the new product suite. Enter Enbala, the firm that now gives Generac its’ own microgrid software management platform. The two firms together now enable Generac to compete with the new generation of battery-first energy service providers.

EON acquires Envelio: EON is one of the largest utilities and energy providers worldwide. They are also forward thinking about renewables. The growth of renewables is causing a big backlog in interconnection requests. Interconnection requests are created when a developer or asset owner is looking to add an asset (wind farm, rooftop solar, EV charger) to the energy grid. To keep up with the tidal wave of interconnection requests coming to EON they knew they needed a better technology system. Envelio is a European-based platform that provides exactly that service and now EON should be better positioned to bring new energy assets onto their energy grids. EON could have tried to manage the growth internally but was smart to bolster on new capabilities to ride the renewable wave.

#3 Private Equity or Traditional Service Providers looking for Climate-related Growth, and Retentive Customers

The acquirors in this space are either more traditional, low-growth technology providers, or private equity firms. Both types of buyers like this segment for two key characteristics: higher growth in climate change related products, and very retentive customer relationships in the critical infrastructure world. Climate change tailwinds are driving demand for technology products that provide resilience to our infrastructure or helps accelerate the deployment of climate-ready assets.

Bentley acquires Power Line Systems: Bentley is a premier infrastructure engineering software company with customers throughout the energy ecosystem. The firm is growing about 15-20% per year and looking for even faster growing segments. The increased perils affecting our energy grid are causing utilities to need to model and improve predictive analytics around power line maintenance and tree-trimming, to avoid fires and increase uptime. These changing conditions therefore drive demand for the technology that Power Line Systems offers. With the acquisition, Bentley staples on a climate change aligned business to their core energy technology business and this addition should further strengthen their baseline growth.

Blackstone acquires Irth Solutions: Irth is a software services platform that provides predictive analytics and damage prevention for the energy industry. Energy firms tend to be slow to acquire as customers, but these energy targets are highly retentive once onboarded as customers. Irth and other firms in the space may not grow 20%+, but the customer repetitiveness provides high certainty of cash flow for private equity buyers. Additionally, these platforms may provide a private equity buyer, like Blackstone, the ability to staple one or two other M&A add-on products that can be sold through the existing Irth distribution channels. While steadier companies, these are the types of deals that are less likely to adapt to the new energy economy.

In Summary

The new energy economy market is continuing to heat up. As the recent cohort of public companies and the industry incumbents look to stake claims in this space, there be an active M&A markets in making. I believe that each of these acquisition types will be successful. As an early-stage investor, however, I do expect that the new energy platforms that are purpose-built for the next generation of energy and sustainability will ultimately capture the most market share.  Either way, this will be fun to watch over the coming years! If there are other types of acquisitions you are seeing, please reach out to me.

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