March 7, 2023
Part 1 of a 2-part series explores this rapidly-evolving market, and some of the challenges investors must weigh
Traditional OEM vehicle manufacturers and their suppliers have struggled to grow profit margins over the past decade, with shareholder return notching half of the S&P 500. In that same time, the number of EVs on the road has skyrocketed from 22,000 to over 2 million in the US, and over 11 million globally.
The combined global private equity and venture capital investments in EVs and components rose 33% YOY from 2020 to 2021, and was on pace to meet and exceed the historic 2021 performance in 2022. Further supporting the attractive nature of EV investments is a steady 9.45% CAGR (compound annual growth rate) projected through 2029.
Durability in this sector has created strong tailwinds for the investment community, as massive capital is required for new players to enter, and gain sustainable traction, in the market. Traditional automobile investments are muted by the volume of capital pulsing into the electric vehicle sector.
Source: S&P Global Market Intelligence
Investment trend summary and challenges
“Electric vehicles are shattering the barrier to adoption that could matter most,” states Christopher Mims in his March article in The Wall Street Journal. Recent price declines serve as the primary factor, spurred by significant gains in economies of scale in battery technology. This has amounted to an 89% decrease in cost to produce an EV battery pack over the past decade, according to the US Department of Energy.
Source: US Department of Energy
Market adoption is on a sharp incline. As battery technology has made EVs more financially appealing, extensive improvement in charging infrastructure and software have made EVs more practical and desirable.
Worldwide, Southeast Asia (SEA) leads the electrification of the automotive market, with Singapore at the tip of the spear, where all new vehicle sales by 2030 will be EVs. In a never-ending chicken-and-egg debate of adoption or infrastructure, the country is installing more than 60,000 charging points.
In the US, market adoption of EVs is projected to be 90% of all vehicles sold by 2050.
Source: Morgan Stanley
Major automotive OEMs in the US have committed to eliminating ICE (internal combustion engine) vehicles by 2050 (2035 in California and New York). Tax incentives, subsidies, and grants are being doled out generously, and benefits (such as carpool-lane access) have created sweeping momentum that attracts investment funds.
Legislation and activism continue to support this shift. In the US, the federal investment bill will stimulate investment in EV infrastructure development. Weak oversight and execution of new public policy in the EV space has served to only increase manufacturers' dependencies on private investment.
Considerations for investment in the EV sector
The maturation of this sector, along with a healthy array of related businesses across the ecosystem, have created a deep bench of opportunities for PE firms. As record numbers of companies arise in the EV sector, investors are continuously evolving their risk and valuation models to account for these challenges, making strident efforts to execute surgical investment strikes that drive profitable growth.
As with any emerging market, firms recognize the need to pivot quickly, given the rapidly evolving nature of the space. Some of the challenges investors must weigh include:
1. Volatility: As the sector settles, consolidation and standardization will define the leaders and laggards. It can be very difficult to correctly identify the companies best positioned to succeed.
2. Diversification: Related markets, such as battery manufacturing, battery recycling, charging infrastructure, and software development, present a variety of opportunities.
3. Rapid innovation: Keeping pace with the latest trends and technologies is a massive undertaking, leaving little space for costly delays in manufacturing, digital infrastructure, and business execution.
4. Supply chain considerations: The raw materials required in the EV ecosystem—led by EVs and their batteries—are complex, leaving the ecosystem vulnerable to rising supply chain costs and disruptions.
5. Governing factors: Policies, regulations, and incentives will continue to be significant factors in driving demand for EVs.
Eric Bragg, Senior Managing Director, Infor Private Equity Practice
Ben Bacon, Managing Director, Infor Private Equity Practice