Catalysing investment in energy innovation blog series: Supporting investors in mitigating investment risks

At LCP Delta, we support investors with due diligence via providing the information and guidance they need to make informed investment decisions, paving the way for capital investment in new energy.

Our support is enabling investors to make informed decisions and provides reassurance to investment committees that the targets they are looking at are the right bets. For example, some companies may move too early and fail, policy may shift suddenly, customer appetite for certain products or services may change, innovation and new developments means the market shifts again. Various stakeholders support investors with due diligence to inform this decision making (financial advisors, legal advisors, market experts, etc), enabling investors to reduce risks / grow their confidence around topics such as:

• How well placed is this company today versus its competitors?
• Will the market grow as quickly as the target company is suggesting?
• How will the sales / revenue of the target company grow in the future?
• What market drivers and barriers will influence the success of this company?
• Which business models will succeed? What parts of the value chain will see the strong growth or highest margins?
• What is the potential for sales growth for the target company outside its core market?

The due diligence that we have undertaken for investors has taken many forms, sometimes focusing on market risks, at other times focusing on commercial or competitive risks, or have a greater interest in regulatory, policy, legal, or financial matters.

Investors commonly ask us to focus on the following topics:

Assessment of Market and Opportunities

Almost all our work has included an assessment of the market size and opportunities facing the investment target. Examples have included assessment of the retrofit market including energy efficiency measures, new heating, solar PV, battery storage systems, and EV charging; assessment of Home Energy Management (HEM) markets; and assessment of new build market and how future standards can be met and exceeded.

Our work includes an overview of the market, the market drivers, growth forecasts and an assessment of competitors and the investment target’s positioning in the market.

Policy and Regulatory Landscape Analysis

We track policy and regulation across most European countries across all low carbon technology markets, including HEMS, EV charging, heating, storage, flexibility, distributed generation.

We provide a detailed analysis of current, published, and potential legislation and regulation that could impact the target investment, assessment impact on the investment, and provide advice on how this might improve or erode revenues, competitive positions, etc., and how these risks may be mitigated, or the opportunities leveraged.

Strategic Vision Development

We work with investors to develop a range of joint visions for how markets and companies can evolve.  This helps informs investors strategic growth plans for targets they are looking at – build confidence in the growth rates and future revenue potential of companies being invested in.

Business and Revenue Model Review

The green transition brings with it a change in business and revenue model opportunities, with varying levels of attractiveness to different types of investors. For example, European low carbon technology markets are moving away from selling units of products or energy to subscription models, lease-and-fee, or as-a-service models.

We provide advice to investors and their targets regarding additional opportunities to leverage or build on their existing services and capabilities, as well as assessing the threats to their existing services.

Competitive Analysis

We provide a detailed assessment of the investment target’s overall product or service capability.

To offer context for these assessments we often provide case studies about actual or potential competitors, leveraging our deep understanding of the market and our in-depth research services.

Investors benefit by gaining an understanding of the investment target’s proposition and the degree of uniqueness, an understanding of the route-to-market and potential market shares, along with an assessment against direct and indirect competitors (competitors from other territories, or from adjacent markets, or competitors with different routes to market).

Undertaking a gap analysis that can identify strategic advantages (along with advice about how to protect and enhance them) or competitive weaknesses (along with the associated advice on closing the gap).

Commercial Risk Analysis

We help investors to understand and de-risk investing in new energy technologies, enabling finance to speed up the energy transition.  This encompasses many of the topics above, such as the policy landscape, assessment of competitive landscape, etc.  Additionally, we consider aspects such as market risk (what happens if industry trends change), financial risk – a hot topic in energy is tariff-risk (what happens under different energy price scenarios), behavioural and reputational risk (what happens if consumers behave differently from expectation, or new technologies are not used as expected, or do not perform), etc.

Moving on from setting out the risks involved, and the what-if thinking, we also set out the mitigations for each of these main risks, thus enhancing the value of deal for both sides.

Investor interest in the space is palpable. We enable a better, faster energy transition for all by helping capital to flow into the new energy sector, helping fund managers find secure, high-growth, and sustainable opportunities and to understand and mitigate risks.