Despite Brexit, British energy businesses with impact attracting big investment
We are ecstatic with today’s announcement that Tonik Energy, a Birmingham-based independent supplier of renewable energy with nearly 100,000 members, was able to secure a £13 million capital investment led by Japanese firm Mitsui and Co., Limited. ClearlySo is proud to have advised Tonik in engaging with Mitsui and supported the management team in structuring and completing the investment round.
Despite the combination of extremely challenging conditions in the UK energy supply market, regulatory interventions in the energy sector and wider political and economic uncertainty generated by Brexit, this news proves that well-run impactful British energy businesses are still able to attract significant investment from around the world, and the right adviser can make all the difference.
Here at ClearlySo, we have been very active in advising and raising capital for businesses in the energy retail sector and in its adjacent sectors, connected energy and e-mobility. Investment deals in these sectors are unique. Businesses at their early stages of scaling require investments whose sizes commonly sit well within the private equity (PE) pipeline but resemble the risk/opportunity profiles of a venture capital (VC) deal. In addition to the risks that are typical of an early stage business (market, operational, financial, etc.), regulatory risks play a significant role. Ofgem, the UK government regulator for gas and electricity markets, has moved to tighten working capital criteria in the energy supply market and to temporarily suspend the capacity market, for example, which has shifted commercial narratives significantly, affecting timing, quantum, and who’s benefiting from them.
To illustrate this point further, let’s take a look at the energy retail market, where the investment ecosystem has seen some interesting developments over the past twelve months. Despite the ‘Beast from the East’ at the beginning of the year, most independent small and medium energy suppliers continued penetrating the market aggressively. Many of them, in fact, hit their own records of growth in customer acquisitions and revenues.
Energy suppliers spotlighted these exciting top-line numbers, and turned to their investors to support their working capital and growth capital needs. Investors responded with levels of curiosity to match the confidence of these energy suppliers. The news about Bulb Energy’s large capital raise fuelled the market interest even more. By end of Q3 of last year, investors were busy looking at investment opportunities in this space with considerable bullishness mixed with caution and a palpable spark of FOMO (“Fear of Missing Out”).
Since Q4, however, a number of these energy suppliers have collapsed. For the protection of energy consumers, Ofgem is implementing stricter rules on energy suppliers in terms of entering the market or continuing to service their consumers. This resulted in extremely challenging conditions within the UK investment market’s energy supply sector: a “survival of the fittest” showdown for both energy suppliers and investors. Energy suppliers with limited resources or short-sighted strategies were exposed. Also, investors who are less-fitting or inexperienced in the sector had to take a step back from progressing deals; some have decided to avoid the sector altogether. While this market consolidation was necessary, nevertheless the process was painful for both sides whenever trying to progress investment transactions.
I, and the team at ClearlySo, were in a unique position: witnessing, first hand, how despite such tough conditions, it was still possible to facilitate the successful completion of a sizeable transaction for a firm like Tonik.
The key was to cultivate both sides of our intermediary role. On one side, we had a funnel of investment deals from small and medium energy suppliers. We have worked hard (a) to understand the market space well and (b) to clarify what’s needed for a business to succeed in that market and to survive investor’s scrutiny: which strategies, what management team profiles, and how much traction is required. Accordingly, we were selective in choosing which business clients to work with. On the other side, we had a pipeline of investors and we took them through our careful process in order to find the ones that have the best fit strategically, operationally, and even culturally (more on this in my next blog).
Energy supply/retail, connected energy and e-mobility will continue to be at the centre of our focus in the energy sector. They are also the areas that put the energy sector (back) at the centre of the investment ecosystem. At this moment, energy is an important sector to watch: not only for energy investors, but also for those who traditionally were focused mainly on financial or consumer product investment. With our origination and execution models, our in-depth knowledge of the sector, and our track record, we are perhaps the UK intermediary best placed to deliver value in Seed to Series A and beyond processes for both our business clients and our investors.