Public markets may be undervaluing the long-term opportunity of the energy transition. Across renewable generation, energy storage, grid infrastructure and transition-enabling technologies, private investors are pumping huge amounts of money into energy companies, pursuing opportunities aggressively. Meanwhile, listed companies with similar characteristics trade on more modest valuation multiples.

When we speak to our clients there is concern about whether public markets are mispricing energy transition assets. This leaves energy companies asking, is the stock market failing to see their long-term growth potential?

Why are public and private markets valuing energy transition assets differently?

Public markets provide continuous price discovery. Valuations are influenced by prevailing economic conditions, interest rate expectations, political developments and near-term financial performance. As a result, listed companies are judged on a short- to medium-term timeline. Ultimately, market values depend heavily on the predictability of a company's profits, cash flow and short-term execution.

Private capital, on the other hand, can often evaluate opportunities over a longer investment horizon. Infrastructure funds and private equity investors may be willing to look beyond short-term volatility if they believe there is the potential for long-term value creation. This is particularly relevant in the energy transition, where significant capital expenditure is needed before cash returns can be fully realised.

By themselves, different valuations do not mean that one market is mispricing an asset. My view is that they reflect different assessments of timing, risk and value realisation. For listed companies there is an interesting paradox here. While their valuations are often reviewed through a shorter time lens, they usually trade without the time pressure to exit that plays such a big role in the world of private capital.

Why is private capital investing in the energy transition?

The scale of the investment needed to transition to a low carbon economy is immense. Industry estimates put the amount of additional investment needed globally for decarbonisation and new energy infrastructure in the trillions of dollars. Private capital has a huge role to play because public sector resources alone are unlikely to be sufficient.

The UK government established Great British Energy, a publicly owned energy investment company, with a specific goal of unlocking private capital for the energy transition. The £9m investment into renewable heat technology company Naked Energy shows the importance of such investments for the UK’s net zero goals.

For many investors, the opportunity goes well beyond environmental objectives. The energy transition creates demand for new infrastructure, technologies and business models. Companies operating in these areas can offer attractive growth. However, the UK has so far struggled to implement a regulatory framework that supports investment into these newer technologies.

Do exit challenges affect private capital valuations?

Private energy and infrastructure investors have traditionally exited through either trade sales, refinancing, secondary transactions or public market listings (IPOs). Today, the exit environment is more challenging. Private equity firms are holding assets for longer, resulting in larger portfolios of unsold assets. While total deal values have shown some improvement, the overall number of transactions remains low.

Private market valuations are only estimates until an asset is actually sold or listed on a stock exchange. The ability to generate successful exits is essential for providing investment returns. In contrast, investments into public markets can be bought or sold at any stage the life cycle of the energy transition asset. This has the potential to undervalue long-term capital appreciation.

Can public market reform improve energy transition valuations?

Recent developments in the UK show a recognition of how important it is to maintain attractive public markets for growth businesses. Concerns about public market valuations are not just limited to the energy transition. There have been a series of acquisitions of listed companies in the UK as private capital has looked to capitalise.

The ongoing reform of AIM seeks to reduce regulatory friction, simplify elements of the admission process and reinforce the market's position as a venue for entrepreneurial and growth-oriented companies. The proposed changes are intended to improve access to capital while keeping appropriate investor protections.

It is unrealistic to expect regulatory reform alone to transform market valuations, but these developments are relevant to the bigger picture. Public markets offer significant advantages, particularly for businesses looking for ongoing access to growth capital, better visibility and shareholder liquidity.

What should energy businesses consider when assessing valuations?

A lower public market valuation does not necessarily imply that a business is undervalued. In my experience public investors often need greater evidence of execution, profitability or cash generation before assigning a higher rating.

At the same time, receiving a higher valuation from a private investor comes with trade-offs. Companies must weigh that extra money against the investor's business goals, the control or decision-making power they will demand, and whether their vision matches the company's long-term strategy.

The most successful businesses articulate a clear investment proposition that resonates across both public and private capital providers. Businesses and investors in both markets are looking for sustainable value creation supported by credible business plans and disciplined execution.

Public and private capital are both critical to the energy transition

Private capital is an important source of funding for the energy transition. But recent challenges around exits remind us that healthy public markets continue to play a critical role in the investment landscape. The valuation gap should be viewed through the different timelines for realising returns. Public markets are more fluid and risk undervaluing long term gains. Liquidity and time to exit are valued differently.

How we can help your energy and natural resources business

We have extensive experience in the energy and natural resources industry, working with clients in sectors spanning oil and gas, renewables and cleantech and mining and metals.

To discuss the opportunities and challenges facing your business as the energy transition evolves, please get in touch with David Hough or your usual RSM contact.

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