For equity-holders and lower-ranked creditors to get their payday, firms typically need to sell the business at a decent price five-to-seven years into the future—and if it’s hard to shift coal mines right now, it’s likely to be even harder in the closing years of the 2020s.
Private equity tends to shun the resources sector precisely because it’s hard to predict the price of commodities, and consequently the resale value of a business, half a decade in advance. That’s going to be even more difficult for an industry in terminal decline.
In theory, a firm could just hold an asset beyond the usual horizon and allow it to keep throwing off cash indefinitely. It’s not implausible that the decline of fossil fuels might see the commodities often fetch higher, rather than lower prices, as we’re seeing right now. Even setting aside the need for continued funds for reinvestment, however, that’s another place where private equity is not as different from the rest of the finance industry.
Far from having the keys to a magic money vault, PE firms raise funds from the same places as everyone else. In spite of the name, the biggest ones are all listed on public markets. More than a third of private equity cash comes from pension funds, rising to two-thirds if you include funds-of-funds, asset managers and insurers—the same constellation of investors who are putting so much pressure on listed businesses to divest their fossil fuel assets. The players who are likely to be most resistant to pressure on climate finance—family offices, private individuals and sovereign wealth funds—account for just a quarter of buyout fundraising. That won’t be enough to move the needle.
Siani’s not wrong that coal businesses might see some years of healthy income statements, even as demand for solid fuel continues to decline. That’s not enough for private equity, though, or for any business. What they need is sustainable income—not in the ESG sense, but in the sense of earnings that are consistent, rather than flickering between profit and loss from one year to the next. The days when coal could provide that are in the past.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.