Private Equity and Energy Procurement: The Valuation Multiplier Hiding in Plain SightJune 01, 2021
By Paul Shagawat, Co-Founder & Managing Partner, Transparent Energy
“With a high level of dry powder and robust credit markets, 2021 deal markets promise to be incredibly busy as investors seek to make up for lost time. Looking at 2021 data through February, global buyout deal value is 60% higher than the average of the first two months for the past five years. However, high valuations also mean that there is little room for error.”
–From Bain & Company’s 2021 Global Private Equity Report
Private equity firms are renowned for their ability to create investor value from formerly underperforming assets. It’s what PE does. But in a market of inflated valuations, and after decades of having systematically applied the same cost-cutting measures, are there really new, rich, untapped veins of value hiding in a company’s or portfolio’s daily operations?
The answer is yes: Energy Procurement.
More pointedly, the answer is: Procuring energy via online auctions will save 7-8% over other procurement methods. In the world of PE, where every dollar saved in OPEX creates a 12-20x increase in valuation (See Figure 1), dependent on cap rate, the opportunity to uncover this much savings in such a seemingly mundane process is a) shocking, and b) great news for PE firms!
Here’s what your PE firm needs to know about energy procurement via online auctions.
The Best Tool for Your Portfolio’s Energy Needs: Online Auctions
During the pandemic, energy demand fell and so did prices – in some cases to record lows. But market fundamentals have changed since, and energy prices are rising. Therefore, if you are not using the best process – one that leverages technology to stoke competition and extract the best price from the energy market in every geography in which you operate – you are wasting millions of dollars!
Online auctions for energy procurement will reduce your OPEX, increase your valuation, and get your portfolio cleaner and greener faster, which has multiple benefits of its own.
Better yet, online auctions don’t cost you a thing. They require no capital investment on your part as the cost of running the auction is priced into the winning supplier’s bid. So what’s the secret to online energy auctions’ success?:
Online auctions run by Transparent Energy increase the number of suppliers bidding for your portfolio companies’ electricity, natural gas and/or renewables contracts. That’s because hundreds of suppliers across the country are already on our platform and hungry for your business. Having more suppliers bidding for a contract – in a real-time and transparent way – means more savings for the buyer. All suppliers invited to participate in an online auction are licensed and thoroughly vetted by both the relevant utility commissions and Transparent Energy’s market team.
Transparent Energy’s online auctions typically increase the pool of suppliers bidding on a buyer’s load by 200-300%. That “liquidity,” that competition, drives down your price.
- Bullet-Proof Audit Trail and Transparency
Retail energy markets are opaque by nature. Online auctions, where every bid by every supplier is seen by the buyer and recorded by the platform, make them transparent. The auctions literally are the market. When portfolio companies use one to buy their energy, they gain price discovery that exists nowhere else, giving you 100% confidence in their final buying decision.
For the uninitiated, an online auction is really a series of auctions run in succession. Different contract terms (12-month, 24- month, 36-month) and products (electricity, natural gas, renewables, fixed price, variable, etc.) are put up for bid – one at a time – which, over the course of an hour or less, delivers a full picture of where the market is pricing.
For example, one of your holdings might find through the competitive dynamics of the auction that a 24-month, fixed-price contract with 50% green energy costs no more than a 24-month contract for all “brown” energy (i.e. no green component), or that a contract for power from 100% renewable sources can be obtained at a very low premium, or in some cases for none at all.
Recently, a portfolio owner had one of its largest buildings procure its energy through an online auction, discovering through the process that it could buy 8 years of 100% renewable energy for less per kWh than a 2-year traditional energy contract. That’s the power of the auction in a nutshell.
As an added bonus, you as the buyer receive a bullet-proof audit trail comprised of every bid on every product and term. Finance and sustainability teams at PE firms, especially those with large portfolios, love the auction’s transparency and time-stamped record keeping.
You know what else they love? The scalability of the auction process. Today’s PE decision- makers can roll out energy-procurement auctions portfolio-wide, requiring every company to buy energy this way – the right way, technology driven, highly competitive, and auditable – to drive bottom-line savings.
- Efficiency: A Replicable, Scalable Process
Many PE firms – and often the energy and building managers at their portfolio companies – lack the time and expertise to dedicate to the energy procurement process, and online auctions help tremendously. But even for those firms blessed with experienced energy professionals, online auctions provide a huge value add. The whole auction process is driven by efficiency, beginning with the planning our team does with the client months, even a year (ideally) in advance. That planning ensures we bring your holdings to market at the right time with the right expectations. And the process is replicable and scalable, meaning you can easily standardize this advanced approach across your entire portfolio.
The auction platform also enables the digital development and sharing of the RFP with the supplier community and all of the legal documents that need to be executed to streamline the final transaction. And transacting is key. At Transparent Energy, we pride ourselves on a 99%+ award rate – meaning when we hold an online energy procurement event, i.e., an online auction, it results in an awarded deal with the supplier. No one else in the industry comes close to this success rate, and it enables suppliers to reduce their risk premiums by 1-2%, which comes right off your operating line.
Online Auctions: A Procurement Method Tailor Made for PE
Still on the fence about procuring energy via an online auction? The process is cost free and risk free – if you don’t like the prices suppliers give you, you don’t have to transact. Better yet, our online auctions save 7-8% compared to energy procured the old fashioned way. On a portfolio basis, that’s millions, tens of millions, or even hundreds of millions of dollars shed from OPEX to exponentially grow your valuation.
To see how Transparent Energy can put online auctions to work across your portfolio to reduce cost, manage risk, and get you greener faster, contact Jonathan Le, Transparent Energy, at email@example.com.
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