Navigating shifting sands: the outlook for energy M&A

Reviewing the latest M&A trends in the energy services sector     

The energy services sector has always proven resilient when it comes to M&A activity. It’s an essential part of our national infrastructure and is always a key component of any government’s policy.

As a result, it continues to attract steady levels of investment – something that will persist, and even accelerate, amid the ongoing transition to net zero and with fresh focus on strengthening domestic energy security.

We spoke to our Corporate Finance Partners Mark Naughton, Ryan Symonds and Adrian Alexander about the key forces driving investment and where it’s being focused.

Where are investors focusing their funds?

Ryan Symonds: “The energy services sector has entered a transformative phase, which presents a compelling backdrop for private equity investment. The continued rising energy demand, accelerated electrification, and policy-driven incentives are creating unprecedented opportunities across the value chain. The simple fact is that demand for grid connections has outpaced connection capacity, which has led to the NESO Connections Reform Programme. There is therefore a greater emphasis on the ability of service and product providers to design and deliver the connections for both feeding to and drawing capacity from the grid.

“Alongside the fact that any new asset will always need a grid connection, there is also significant investment in energy utilisation and efficiencies across both public and private sectors through significant investment into upgrading existing assets. A good example of this trend is the recent acquisition of GEV Wind Power by Bridges Fund Management, which highlights investor appetite for specialist renewable O&M businesses that play a critical role in supporting the transition to net zero.”

Mark Naughton: “From a sub sector perspective, as the UK builds more energy generating assets, the locus of opportunity is moving to energy services – firms such as independent connection providers (ICPs), renewable optimisation & maintenance (O&M) businesses and heat network developers and operators. It’s among those energy service businesses where we’re seeing the most interesting trends.

“ICP firms are becoming a focus for both trade buyers and private equity investors. Energy services and consultancy businesses are seeking to add ICPs into their portfolios, with plans to expand their capabilities and coverage through both organic growth and acquisitions.”

“But it’s not only domestic investors who realise this exciting potential within the energy services sector. European buyers are also making themselves increasingly visible in this space, targeting ICPs as well as renewable O&M and heat network businesses.”

What makes the UK energy services sector attractive for overseas buyers?

Mark Naughton: “To overseas investors, the UK energy services sector is a market where there is a great opportunity to pick up dependable delivery partners and bring new services in-house to drive long-term growth.

“But the interesting thing is that these deals are often as much about acquiring talent as they are increasing revenue. Across Europe, the energy services sector is grappling with a shortage of qualified technical talent, so some buyers are looking to the UK for skills that they can’t find elsewhere. In fact, we are aware of European buyers seeking to acquire UK firms and then deploying those skilled UK teams across their European portfolio rather than focusing on scaling the acquired assets in the UK.”

What impact is the current policy environment having?

Adrian Alexander: “The long-term nature of many projects within the energy industry means that consistent government support can often be crucial to attracting investment. This is especially true for those projects that rely on brand new technologies, where there’s often a significant degree of inherent risk because they’re yet to be proven, or they aren’t yet operating at the scale that brings reliable earnings.

Mark Naughton: “Political risk will become an increasingly important factor when it comes to assessing the value of energy assets. The degree of government support hasn’t been uniform across the sector and renewable energy subsidies have been inconsistent. Those assets that rely on continued grants or subsidies will, naturally, be the most vulnerable to any future policy shifts.

“For this reason, investors will favour businesses with diversified revenues, as they can quickly pivot and adapt to any changes in the policy environment. All of this makes it even more important for energy firms considering a sale over the coming months to allow plenty of time to develop a thorough M&A strategy.

“Time and time again, we see the best outcomes achieved by those firms that have invested in developing clear, robust financials and that can clearly demonstrate the strength of their market position – whether that’s diversification, or factors like skills – to directly meet buyer demand.”