A New Frontier: The Industrial-Technology-Energy Transition Nexus

Sovereign wealth funds have extended their investment focus from software and services technology companies to those focused on hardware and industrials. They invested over $6 billion across 68 investments in the industrial sector, marking a significant departure from previous years.

In 2023, we noted a new trend in sovereign wealth fund investments: the nexus of industrials, technology, and the energy transition.

The allure of this theme has been magnified by the advent of technological innovations, including automation, artificial intelligence, and the need to decarbonise. These innovations present sovereign wealth funds with enticing opportunities for high growth and innovation, enabling them to tap into the potential for substantial efficiency and productivity improvements within various industrial domains. For example, when sovereign wealth funds invest in technology, they want exposure to artificial intelligence, semiconductors, and hardware, followed by infrastructure focusing on renewable energies. Notably, Mubadala co-invested with funds advised by private equity firm KKR in the acquisition of CoolIT Systems. The Canadian company, which operates across North America and China, specialises in scalable liquid cooling solutions for the world’s most demanding computing environments, like data centres.

Sovereign wealth funds’ interest in this trend appears to result from them diversifying their investments in a more uncertain, higher interest rate environment. They are moving away from more volatile, cyclical sectors like consumer goods and software, which they have favoured for the previous five years, towards more capital-intensive industries, in which, as long-term investors, they have a competitive advantage over shorter-term asset allocators.

Solar panels with glowing connections at sunset.

In 2023, industrials were the busiest sector for sovereign wealth funds with the most transactions: they invested over $6 billion across 68 direct investments and co-investments. These investments were spread over both developing and developed markets, with 16 investments in the former and 52 in the latter. In technology, we note $2.33 billion in emerging markets and $9.96 billion in developed markets across 61 deals.

Chart 2.1: Sovereign Wealth Fund Direct Investments by Sector in 2023'

Source: IFSWF Database, as of 10/04/2024.

Sovereign development funds view this theme as a critical component of broader infrastructure development and economic enhancement strategies, especially in developing regions. Investments in industrial projects are seen as pivotal for driving modernisation, expanding manufacturing capabilities, and fostering socio-economic benefits such as job creation and skill development.

Sovereign development and funds with a hybrid mandate were particularly active in the sector, as a significant 40% of deals in industrials were domestic, compared to an 18% average across all sectors, indicating a strategic commitment to contributing to national economic growth through the industrial sector.

Transport & Logistics EV Batteries Energy Transition Diversified Industrials Construction & Cement Business Support Aereospace & Defense

Source: IFSWF Database, as of 10/04/2024

The Impact of the Inflation Reduction Act and Europe’s Green Deal

While sovereign wealth funds are financially motivated investors, a supportive policy environment for specific sectors appears to have an important role in attracting their investment. For example, sovereign wealth funds exhibited a particular interest in American industrials, closing 27 deals amounting to $3.2 billion, over half of the total investment in this category. The 2023 US Inflation Reduction Act (IRA) has been a catalyst for many long-term investors to look at the US industrials market, foreseeing significant implications for both the domestic and global economy. The provisions of the IRA are designed to trim the cost curves for technologies such as clean hydrogen and sustainable aviation fuels on a global scale.

After the implementation of the IRA, similar industrial policies gained traction among longstanding US allies. For instance, the European Union’s Green Deal Industrial Plan and Net-Zero Industry Act concentrate on bolstering strategic net-zero technology manufacturing capacity by 2030. Consequently, sovereign wealth funds have dedicated equal attention to Europe, closing 25 direct investments in industrials in 2023 versus only three deals in 2022.

Energy Transition Opportunities

In recent years, our climate survey, which we undertake in partnership with the One Planet Sovereign Wealth Fund Network, has also shown that sovereign wealth funds have overwhelmingly favoured renewable energy generation as an energy-transition-related investment opportunity. However, 2023’s survey revealed that they were now looking at a wider range of areas, such as energy storage and efficiency and water management.

Renewables EV Batteries Agritech Energy Transition Forestry & Paper New Materials

Source: IFSWF Database, as of 10/04/2024

This trend is starting to be reflected in investment data. In 2023, sovereign wealth funds' direct investments across renewable energy, agritech, energy efficiency and transition, new materials and forestry reached an all-time high of $9.7 billion invested across 40 deals – the largest amount invested in green sectors to date. Sovereign wealth funds executed 16 transactions in renewable energy and infrastructure projects, amounting to $5 billion, representing just over 50% of total investments in climate opportunities. As shown in the chart above, investments across all climate opportunity sectors are burgeoning, particularly in energy transition, electric vehicles (EVs) and batteries, with 19 transactions totalling $3.9 billion in these industries.

Green industries1 and technologies present opportunities to support companies at the forefront, including clean energy projects, EVs, smart batteries, eco-friendly manufacturing processes, and new materials. Significantly, sovereign wealth funds invested in 18 companies active in the energy transition and EV and battery sub-sectors, 25% of all activity in the industrial sector. For example, the Qatar Investment Authority (QIA), Singapore’s Temasek Holdings and venture capital firm Decarbonization Partners co-led a $550 million series D capital raising for Ascend Elements, a US-based manufacturer of sustainable, engineered battery materials for electric vehicles.

Some sovereign wealth funds, particularly those with a development mandate, are pursuing the UN Sustainable Development Goals, which is also evident, with investments in the energy and materials sectors recovering to over $7 billion in 21 deals globally, with a higher concentration within frontier and emerging market regions. For example, in April 2023, the Nigeria Sovereign Investment Authority (NSIA) and Vitol forged a collaborative venture, embarking on a mission to invest in diverse projects dedicated to carbon avoidance and removals. Their inaugural investment was in a household energy efficiency programme facilitating clean cooking and water filtration solutions. Approximately 1 billion individuals in sub-Saharan Africa depend on wood and charcoal for daily culinary needs and water purification. This reliance significantly contributes to the nearly 4 million hectares of annual deforestation and degradation across the continent.

Footnotes

  1. Starting from 2023, the IFSWF Database has introduced a new subsector category titled ‘Energy Transition’ to better reflect the evolving landscape and commitment to sustainable energy practices.