Energy Transition Boom Aids Lawyers During Private Equity Slump

The shift from fossil fuels to new technology and renewables is a bright spot for private equity fundraising in a down time, providing a boost to law firms that specialize in the work.

Investors have raised $17.4 billion through June for energy transition projects, surpassing $10.3 billion for all of last year, according to investment data company Preqin. The fundraising is on pace to be the highest for any year in the past decade, the data show.

“A lot of these funds have gotten so big that they’re really looking to deploy capital at scale,” said David Penna, a mergers and acquisitions partner at Davis Polk & Wardwell.

The figures show how attractive the energy shift has become for investors and the lawyers that serve them. Tax incentives from the Inflation Reduction Act, the public’s push for solutions to climate change and technology advancements in areas such as carbon capture are helping to drive the fundraising.

The development of artificial intelligence, driven by power-hungry data centers, has also spurred the need for investments that alternative energy can’t satisfy by itself, said Michael Piazza, a Houston-based partner and co-head of Gibson Dunn’s US private equity practice.

“More proponents of energy transition now acknowledge that oil production is vital to the economy,” Piazza said. “Continued investment in oil and gas is necessary to responsibly promote the energy transition.”

The markers of success include a $10 billion fund announced in February by Brookfield Asset Management. Morgan Stanley’s asset management arm plans to raise at least $1 billion for a fund, Bloomberg reported, citing people with knowledge of the matter. Others, including Blackstone, TPG and KKR have dedicated pools of money to energy transition investments.

The energy transition has been a bright spot in a fundraising environment that has been in a slump. Private equity aggregate capital raised reached its lowest level since 2018 last year, falling by more than 8%, according to Preqin.

Limited partners have been forced to hold on to portfolio companies longer than anticipated because they have fewer initial public offerings and secondary sales to relieve them of their investments, said Robert Seber, head of the investment management practice at Vinson & Elkins.

“Fundraising in the last few years has been difficult because existing funds have been slow on their exits,” Seber said. “The institutional investors are over-allocated or fully allocated to the asset class.”

Big Law’s Role

The boom in energy transition fundraising is promising for Texas-founded law firms, such as Vinson & Elkins, along with national operations, including Latham & Watkins, that moved into the region more than a decade ago.

Latham has advised on 20 large private credit loans throughout last year, according to Debtwire. The firm guided Permira’s and Blackstone’s private credit loan to back the buyout of Adevinta ASA last year.

In March, Apollo Global Management turned to Simpson Thacher & Bartlett for legal advice when the company launched a private credit fund with money from Abu Dhabi’s Mubadala Investment Co. Fried Frank has guided the formation of several Bain Capital funds, including the $7.1 billion Bain Capital Asia Fund V in November.

Firms without a formal Texas presence such as Davis Polk & Wardwell and Paul Weiss Rifkind Wharton & Garrison have also been successful in picking up private equity work, according to Bloomberg Law’s energy League Table rankings.

The several billions poured into energy transition funds have steered Big Law firms to invest in lawyers with expertise in private credit, fund formation and energy deals.

Paul Hastings in June poached a team of 11 private credit and restructuring lawyers from King & Spalding. King & Spalding hired a group of five London-based finance lawyers focused on advising financial institutions and private market funds after weathering those departures.

‘Clients Are Busy’

Kirkland & Ellis, the largest firm by revenue in the US, said it hired Michael Urschel, who departed King & Spalding last year for Milbank, to lead its structured finance and structured private credit practice in May.

“We’ve looked to invest in practitioners on the private credit side and continue to do that because our clients are busy in that space,” said Dan Clivner, global co-leader of Sidley Austin’s mergers and acqusitions and private equity group. Sidley in March hired Peter S. Burke to join its global finance practice.

While large asset managers have set up energy transition funds, several traditional energy sponsors are still searching for their fit in the market to participate.

“The traditional energy sponsors in particular have been trying to figure out exactly what the niche is and whether to fold it into an existing fund or a separate product and pool of capital,” said Gibson Dunn’s Piazza.

Energy transition has also bucked the down trend in private equity because of a greater emphasis placed on implementing environmental, social and governance-related initiatives. Some limited partnerships have begun including ESG criteria in their mandates.

“If you’re an LP and someone said you can invest in a fund that’s going to do climate technology and ESG for projects—or another that’s gong to do just private equity—there’s some incentive to choose the former,” Davis Polk’s Penna said.