Thanks to some well-timed energy-transition bets, a number of private capital funds are managing to defy the latest wave of headline-grabbing markdowns.
Fund managers at firms including Brookfield Asset Management, Eurazeo SE and Tikehau Capital say they've been riding out the panic that's gripped other corners of the private credit and equity markets. And they've been doing it by tapping into assets that address growing energy-security needs and that aren't about to be made obsolete by artificial intelligence.
Natalie Adomait, chief operating officer for Brookfield's energy group, says investors need to be aware of the split that's emerged between the performance of private capital funds devoted to energy-transition assets and those exposed to the software sector.
"What we're seeing on the ground, it's honestly never been better than it is today," she said. And the "noise" surrounding private capital's exposure to software companies is "far afield from what we do, which is very hard asset backed and contract backed."
The bets Adomait's referring to fit into the so-called heavy-asset, low obsolescence (HALO) theme, which is widely viewed as the best way to resist the disruptions being served up by AI. At the same time, capital-intensive clean energy assets are enjoying a resurgence that's fueled by the data centers needed to sustain AI's growth. That's as the Iran war turbocharges demand for energy security more broadly.
Not that long ago, being capital intensive was seen as an Achilles heel against a backdrop of rising interest rates. Now, it's morphed into what increasingly looks like a competitive moat against AI. As analysts at Goldman Sachs Group Inc. put it in a recent note, "markets are rewarding HALO." Blackstone Inc. President Jonathan Gray has referred to it as private capital's search for "terra firma."
Sophie Flak, managing partner and head of sustainability and impact at Eurazeo, says private market funds now hold a lot of the energy transition firms too small to attract other kinds of investors. The model has proved stable, and Eurazeo has seen "no panic at all" from investment clients, according to Flak. She also says there are currently no signs of "contagion" or redemption requests.
"It's good to be invested in the hard stuff," she said.
Managers at KKR & Co. and Allianz Global Investors have argued that private markets are uniquely suited to financing the energy transition because they can drive capital into new or untested technologies without fearing the disruptions more typically associated with public markets.
At the same time, public market valuations for energy-transition assets have continued to rise. The S&P Global Clean Energy Transition Index is up about 10% this year. It's a different picture for companies that provide software as a service, where agentic AI is expected to cause meaningful disruptions. The S&P Software & Services Select Industry Index has lost about 25% this year.
Brookfield, which has raised about $40 billion via a series of dedicated funds to invest in energy transition assets, has targeted sectors spanning renewables to battery storage and sustainable aviation fuel.
"The headlines around what's hurting the private credit space right now are not flowing through into how we actually think about the execution of energy transition deals," Adomait said.
Meanwhile, private capital firms exposed to the panic around software holdings have in some cases imposed caps on redemptions or even gated funds. And there's also been acknowledgment that the industry failed to clearly explain the kinds of liquidity restraints that are a feature of the asset class.
In the current market environment, the more down-to-earth the asset, the better. Pierre Abadie, co-head of the private equity decarbonization strategy at Tikehau in Paris, says the portfolio he oversees within the €53 billion European alternatives manager is focused on investing in what he calls "the muscle" of the energy transition.
"The reality of our market is that we're talking with builders, engineers and people that are manufacturing equipment," he said. "And we're mostly talking about conventional mid-cap investments that are not highly leveraged."
Abadie says most of the companies that operate in this field tend not to be publicly listed. "If you want to address properly the energy transition or the electrification of the system you need to go private," he said. What's more, "you need to go mid-market" because most of these issues require local solutions which can't typically be provided by large caps.
"The people that are refurbishing buildings,digging holes to put power cables,or manufacturing critical equipment like heat pumps,electric engines or high voltage transformers,are very difficult to find on the listed market," Abadie said.
Adomait at Brookfield says "there's still a continued depth in our market," and that's very much because "it's a totally different product that's much more de-risked and much more long-term" than the asset-light equivalents other corners of the private capital markets are currently struggling with.
"The reality is the fundamentals for the energy transition are quite frankly better than they were at any point in the last two decades," she said.