Outlook 2025 - Private assets

Editorial

The market for private assets offers attractive investment opportunities at a time when the economy is losing steam and interest rates have recently begun to fall. Investors are increasingly drawn to private assets due to their potential for high returns and effective risk diversification. Additionally, these assets are being leveraged to develop solutions that support the transition towards a more sustainable future. Private assets are still in the process of maturing, backed by significant developments on the regulatory and international fronts.

Energy transition infrastructure

MARKET PENETRATION ON THE RISE

The renewable energy segment is one of the most promising in the infrastructure market. Mirova boasts strong positions in this segment, with operations and developments extending beyond Europe into Australia, Asia, and Africa. The energy transition not only involves low-carbon electricity generation from wind and solar power plants; it also includes power grids, storage, mobility, hydrogen, charging stations, etc., all of which Mirova considers to be opportunities for investment. Renewable energies are now no longer merely an option but a fundamental pillar of the world’s energy strategy. Their market penetration is on the rise in a reflection of the paradigm shift towards a more environmentally-friendly and sustainable economy. Conditions are ideal for renewable energies as economic operators are equipping themselves with the infrastructure they need to diversify their energy mix or shore up their energy sovereignty. The market has been rattled on occasion by higher interest rates and higher commodity costs, but this has not undermined the market’s depth. Construction delays have posed somewhat of a challenge, but prices have stabilised recently and so visibility has improved and profitability has risen. The market now seems poised to embrace a new phase of growth as it prepares to meet the world’s future energy needs. Another telling sign of the market’s momentum in 2024 was the large number of M&A (merger-acquisition) deals that took place. This shows that businesses are keen to consolidate, expand their geographical reach and gain access to new technologies or new markets. For instance, here at Mirova we carried out 229 transactions and committed €500 million in 2024.

SUBTLE DIFFERENCES BETWEEN REGIONS

A WIDE VARIETY OF ASSETS

Private Equity

2024: A MIX OF CAUTION AND RESILIENCE

Financing is back as key interest rates have recently eased, but valuations are still struggling to adjust. In recent years, investors have entered the private equity market at relatively high multiples. However, investors have questioned such high multiples since 2022, as valuations have fallen, due to sluggish growth in the European Union, liquidity has been scarce, and interest rates have been structurally higher. Unsurprisingly, therefore, many investors opted instead to sit back and wait during most of 2024. There was little deal activity, and it was sometimes challenging to reconcile asking prices with bidding prices. The situation changed in the third quarter when business activity picked up a little along with a rebound in the EV/EBITDA multiples⁵ applied in corporate deals.

PRIVATE EQUITY IN A FEY FIGURES

The Argos Index⁶ fell from 11.6x  EBITDA to 8.9x EBITDA in the space of 3 years. It bounced back to 9.5x in the 3^rd quarter of 2024, with progress observed in both the lower and upper mid-market⁷.

Growing interest from private investors

Retail investors accounted for 20% of the funds raised in France in the first half of 2024⁸. Private equity does hold significant potential for growth among retail investors (who currently allocate only 5% of their savings to private assets), mostly thanks to lower minimum investment tickets, the emergence of online platforms, and more favourable regulations (e.g. ELTIF29 and France’s Green Industry Law). More structurally, unlisted companies account for about 90% of all businesses and over 50% of jobs worldwide¹⁰. By investing in private equity, an investor is this gaining exposure to a major component of the economy that contributes to local job creation; additionally, such funds are less volatile than listed market funds and have little correlation with them.

Mirova’s positioning in the market

With the value of money now structurally higher, we as shareholders have paid very close attention to the way in which businesses allocate their resources and to their cash burn rates¹¹, and we have preferred those that practice financial discipline. We are also generally keeping a close eye on operational excellence, particularly in such constrained conditions; this is especially true of our holdings that have an industrial dimension and are in the scale-up phase¹², which need to be monitored very closely. We are minority shareholders in most cases and always have at least one seat on the board of directors (or similar governance body). We work as partners with company management teams and with our co-investors, the aim being to help our portfolio companies develop their industrial / technological and commercial activities but also beef up their financial, HR, impact, and ESG structures. 

2025: A NEW LEASE OF LIFE? 

Following months of hesitation and a build-up of assets earmarked for sale, a new cycle of interest rate cuts is now in progress which should make it easier for divestments and fresh investments to go ahead in 2025. Of the sectors to follow, we believe that those exposed to the world’s major transitions (environmental, societal, etc.) should fare well. These transitions require adaptation and innovation at all levels of society and offer robust growth prospects for the long term. With 1,239 deals made and $14.6 billion raised during the 3rd quarter of 2024, global financing for climate technologies is on track to overtake the amount raised in 2023, according to Net Zero Insights¹³. TechforGood¹⁴ also has a key role to play in driving these changes. It is an approach that seeks to place sustainable impact at the very heart of economic growth thanks to new technologies and digital tools. It mostly covers the sectors of healthcare, education, new consumer habits, etc. These are broad themes. As investors, this allows us a great deal of sectoral agility and enables us to take up different types of positions. We also expect environmental, social, and governance (ESG) criteria to continue gaining prominence in the private equity arena in 2025, as investors are increasingly aware of the risks surrounding ESG issues. Above and beyond the incentivising regulatory framework that is in place, businesses are also beginning to see the first signs of climate change for themselves, and this is encouraging them to take initiatives and to invest in a more responsible manner.

Natural capital

AN APPROACH BACKED BY THE CORPORATE WORLD

A top priority is to safeguard food security and secure the supply chains of large global firms, while supporting food production by independent operations in the Southern Hemisphere. Some 500 million small-scale farmers, most of whom are located in emerging markets, currently produce 70% of the world’s food¹⁵. Our Sustainable Land Use strategy is geared precisely towards shoring up their economic resilience by making sure they find outlets for the food they produce, especially among international groups. This also gives us, as investors, an opportunity to take action to promote practices that will support the preservation of natural resources, biodiversity, and human capital. This investment case is currently extremely popular among large firms as they now fully understand that the long-term survival of their business models hinges on efforts to secure their supply chains and oversee the traceability and quality of their products. Certain agricultural commodities are under strain, supply chains have been disrupted and the effects of climate change and soil erosion are being felt, all of which has already hit certain groups hard; such groups are therefore introducing large-scale measures to address these transformations. We have been working on these issues for a decade now. We note that businesses are keenly interested in our value proposition as they seek out secure sourcing solutions for supplies obtained from markets that in some cases are still very fragmented. We also promote a more evenly-balanced approach to value sharing, thereby combining economic, social, and ecological benefits. 

A FAVOURABLE INTERNATIONAL CLIMATE

Businesses are therefore addressing supply chain security because it is a strategic issue. But they are also doing so because of increasingly stringent regulatory obligations, such as those set out in the CSRD¹⁶ and in the ISSB’s¹⁷ IFRS S1 and S2 accounting standards, which now include requirements for sustainability-related and climate-related disclosures. Various major international events held in 2024 also helped to raise awareness of the issues surrounding the conservation of and access to natural resources. Prime examples included the various Conferences of the Parties, for instance COP 16 on biodiversity held in Cali, Colombia; COP 29 on climate change held in Baku, Azerbaijan; and COP 16 on desertification held in Riyadh, Saudi Arabia. The implementation of certain climate regulations was postponed, including the European Union’s Deforestation Regulation. However, there is a definite underlying trend underway towards improving traceability and making the production and sourcing of natural resources (particularly food) more resilient. This is a strategic matter for businesses, one that extends beyond ESG considerations and that will affect their resilience in the years ahead. Investors, too, have grasped the importance of these issues and can also see the potential for value creation. They appreciate the profit-sharing aspect of our Sustainable Land Use strategy, which benefits producers as much as it does listed groups. As these production industries take shape, we can see a new asset class emerging: agroecological infrastructure. Such infrastructure resembles traditional infrastructure in that it consists of physical and tangible assets, supports essential services, and requires long-term investment; in exchange, the associated income and cashflows that investors receive are predictable and have little correlation with traditional markets. Such infrastructure is clearly pertinent as it is drawing in both public and private capital in blended finance deals which serve as catalysts for the virtuous transformation of value chains.

Blended finance, a catalyst to speed up the transition

Blended finance is a concept that refers to the use of different sources of funding in order to raise private capital in support of development projects, particularly in developing countries. It combines public funds, philanthropic funds, and private investments, with the aim of maximising social or environmental impact while also generating a financial return. Blended finance is a means of pooling and managing the risks associated with projects which can often be deemed too risky for private investors alone. For example, public and philanthropic funds can help to absorb some of a project’s financial risk, thereby making the project more appealing to private investors.

TAPPING INTO THE DEVELOPMENT OF NATUREBASED CARBON SEQUESTRATION SOLUTIONS

Nature-based carbon solutions account for 30% of the potential for global greenhouse gas emissions reductions out to 2030, mostly involving the conservation and restoration of forests and mangroves¹⁸. Here again, businesses have taken the issue of decarbonisation on board and are working on it from various angles: 

• By reducing their carbon footprints along their value chains 
• By simultaneously contributing to decarbonisation efforts beyond their value chains via nature-based solutions.

This second pillar is a more recent one. Businesses are clearly keen to tackle the issue, even though there is still some debate surrounding the integrity of voluntary carbon credits. Sturdier investment methodologies and approaches, such as the Claims Code for companies in 2023, are helping to place these markets on a structurally stronger footing. COP 29 also added an operational dimension to Article 6.4 of the Paris Agreement. The aim is to reconcile the different carbon mechanisms that exist in different States and voluntary markets, evidence that States are taking a firmer position on this issue. It also shows that the market structuring process continues in a more coherent manner and with greater consultation between businesses, institutional investors and public authorities. Thanks to such progress, we are more confident than ever about the future for nature-based decarbonisation projects. The market is also taking shape on the asset side. The market for nature-based solutions (consisting of projects aimed at the restoration and conservation of natural areas, such as forests and mangroves) is maturing. We can see that top-quality project developers operating on a large scale are beginning to emerge. We are investing massively in tropical areas, primarily in the basins of the Amazon, South-East Asia, and Sub-Saharan Africa.

The information given reflects Mirova's opinion and the situation at the date of this document and is subject to the change without notice.

¹ TechForGood refers to various organisations that are working to address societal issues and that make use of technological innovation for the 
common good.
² Inflation Reduction Act: a US law adopted in August 2022 aimed at tackling inflation, supporting the energy transition and promoting certain 
healthcare initiatives. 
³ Source: “Green energy in Africa presents significant investment opportunities”, McKinsey, 2023.
⁴ See insert on Blended Finance on page 8.
⁵ The EV/EBITDA multiple is a valuation multiple used to determine a company’s total value relative to its earnings. EBITDA: earnings before 
interest, taxes, depreciation and amortisation.
⁶ The Argos Mid-Market Index® tracks the valuation of unlisted eurozone SMEs. The index was launched in late 2006 by Argos Wityu and Epsilon 
Research, an online platform for managing unlisted merger-acquisition transactions. It is published quarterly and lists acquisitions of mid-market 
companies made within the previous three months.
⁷ Source: Argos.
⁸ Source: France Invest 2024. 
⁹ The ELTIF2 (European Long-Term Investment Fund 2) refers to a revised European Union regulation seeking to promote long-term investment in private assets.
¹⁰ Source: https://www.worldbank.org/en/topic/smefinance
¹¹ Cash burn refers to the rate at which a company consumes its cash to finance its operations, particularly when it is not yet generating a profit, and is a key indicator of its viability and funding needs.
¹² A process whereby a company in the growth phase significantly increases its operational capacity and production in response to increased demand.
¹³ Source: https://netzeroinsights.com/state-of-climate-tech-q3-2024/
¹⁴ TechForGood refers to various organisations that are working to address societal issues and that make use of technological innovation for the common good.
¹⁵ Source: What Future For Small-Scale Agriculture? Foresight4Food, 2020.
¹⁶ Corporate Sustainability Reporting Directive.
¹⁷ International Sustainability Standards Board.
¹⁸ Source: International Union for the Conservation of Nature (https://iucn.org)