Strategic Analysis of Thematic Investing in the Private Equity Sector

Introduction

Activities in this category have just been delisted from the EU taxonomy. However, we know that waste to energy will be part of the EU waste ecosystem as a better alternative than landfill for a long time. And for some hazardous waste, there are currently no alternatives to incineration. Moreover, there are more than 500 waste incineration plants in Europe. Incineration, therefore, needs to be decarbonized, and there are several new technologies that are economically viable and that can be retrofitted to achieve this.

The business case for brown to green is compelling. Many high-emitting businesses are undervalued. Transforming these can help avoid carbon tax, increase disposal fees because they are considered environmentally friendly, raise the value of recovered materials, and boost the supply of green energy.

McKinsey Interview

McKinsey: Why hasn’t thematic investing taken off yet? And what are the keys to success with this strategy?

Reynir Indahl: To do this well, one has to really understand all the industries that interact in this system, the value chain, as well as the changes happening—in terms of both mindset and technological tools. We have gone deeper in some of our thematic verticals, like circularity and aquaculture, and built strong, scalable platforms.

The world needs to get to more inflection points. When you look back over history, systems tend to stay static and then very rapidly change due to a disruption. Timing is critical. It is easy to be either too early or too late, which will hurt investment returns.

But Summa Equity is not speculating on future ideas. We focus on mature businesses and how to scale them while embedding new technologies and expanding the business model. These businesses are commercially successful today, but by improving themselves and cooperating with others, they can rapidly be transformed and drive more industry inflection points. So even though there is uncertainty related to the direction of green policies following the US election, this will not impact our core strategy. The reason is simple: Our financial success has come from consistently investing in profitable, essential solutions that thrive without reliance on subsidies or policy support.

Advantages of Systemic Investing

McKinsey: What advantages does systemic investing provide in the current context, where overall PE fundraising, deal activity, and performance continue to face headwinds?

Reynir Indahl: We have delivered best-in-class returns to our investors. And it is clear from our experience that companies that lead the transformation both perform well in difficult times and get a premium to their peer groups.

We believe systemic investing will unlock better returns. With a theory on how certain problems need to be solved and addressed, PE firms can guide investments across asset classes, whether venture, growth, buyout, or infrastructure. These companies can cooperate and accelerate growth easier, which will enhance value and returns.

Cooperation and Profitable Investment Opportunities

With this approach, there are more opportunities for cooperation among PE firms and “corporates,” as well as public–private partnerships. Ultimately this creates more profitable investment opportunities.

And at the end of the day, we are investors. We focus on what we are comfortable investing in during the next five-year period, regardless of external market circumstances. There could be positive surprises if changes accelerate—and the world sure would benefit from it. But our underwriting and return predictions are not based on that, which is a bit conservative, seeing that we receive positive tailwinds from accelerating changes.

Conclusion

In conclusion, thematic investing in the private equity sector holds great potential for driving sustainable growth, addressing environmental challenges, and delivering superior returns to investors. By understanding industry dynamics, embracing new technologies, and fostering collaboration, PE firms can unlock opportunities for profitable investments across various asset classes. The strategic focus on systemic investing can lead to enhanced value creation, industry transformation, and long-term financial success.

FAQ

1. What is thematic investing?

Thematic investing involves focusing on specific themes or trends that are expected to drive growth and create value in the future. It allows investors to capitalize on emerging opportunities within a particular industry or sector.

2. How does systemic investing differ from traditional PE approaches?

Systemic investing takes a holistic view of the investment landscape, guiding decisions across different asset classes and sectors based on a theory of solving specific problems. This approach emphasizes cooperation, growth acceleration, and enhanced value creation.

3. What are the key benefits of thematic investing in the current market environment?

Thematic investing can unlock better returns, drive industry transformation, and create more profitable investment opportunities through collaboration, innovation, and a focus on addressing pressing challenges.