Private Markets Intelligence – February 2025

Strategy

Climate tech investing in a DeepSeek world

Before the release of Chat GPT in November 2022, climate tech VC was focused on EVs and big battery deals. Now that AI is everything and everywhere, investors have pivoted to geothermal, nuclear and other clean, reliable power to supply the AI data center boom (1). But this investment thesis was rocked to the core last month by the release of open-source AI model DeepSeek R1. The Chinese startup that developed it claims it trained the model for just $6 million using 2,000 of Nvidia’s lower performing chips (a fraction of the resources used to develop Open AI and Meta’s latest models (2)) yet its performance is on par with and, in some use cases exceeds, that of the large players (3).

Are we going to need all that computing power and energy after all? This question rattled the markets. Nvidia posted the single largest one-day market cap wipeout in history (4). (You’d think cheaper AI is a good thing, but that’s a conversation for another time).

So what now? There are two main threads to follow:

We still need more power

Many at the forefront of AI are not convinced with the Chinese startup’s claims. They may have actually used a large number of Nvidia’s advanced chips (despite U.S. export controls) and invested much more than stated (5). Nevertheless, DeepSeek R1 does introduce significant technological advances, yet industry leaders note that more powerful computing will still produce better quality AI; that investment in data centers must go on (6). Alphabet, Microsoft, and Meta are aggressively increasing their capital expenditure budgets this year to stay at the forefront.

Funding transition

Alongside the climate transition, we’re in the middle of a funding transition (7). The first generation of climate tech (wind, solar, batteries) has graduated from VC to private equity and project finance. VC is focused on the next generation which includes clean fuels and decarbonization.

Climate tech VC and growth investment has been down the past couple of years and, more recently, the US presidential election and expected rollback in climate-friendly policies has created uncertainty. The good news is climate tech exits hit a four-year high in 2024, up 136% from 2023 (1). This was mostly driven by M&A activity and the expectation is for IPOs and dealmaking to further pick up this year with lighter regulation under the Trump administration. One thing is for sure: the action is in geothermal and nuclear. Investments in geothermal tripled last year and nuclear almost doubled.

(1) ImpactAlpha
(2) Bain & Company 
(3) Artificial Analysis 
(4) Forbes 
(5) CNBC 
(6) WSJ 
(7) Sightline Climate 

Is your portfolio over-indexed in your comfort zone? Consider investing in funds

Family wealth is typically built through the founding, growth, and sale of a business. Selling the business (or even a portion) can leave a family sitting on a pile of cash wishing the kids had gotten finance degrees. The common progression is to simply invest in what they know – a direct investment in another business in the same sector where they may have an edge (1). This is known as home bias.

Home bias

Investors have an emotional attachment to what’s familiar and tend to stick to it (2). A common example is investors’ optimism towards domestic investments. This can lead to a lack of geographic diversification despite opportunities outside the investor’s home turf that may be positive from a risk-return perspective. Investors also tend to gravitate towards the asset classes they’re familiar with, potentially leading to a suboptimal mix.

Investing with an unchecked home bias also limits the opportunity set. There are barriers to accessing the best opportunities and access often stems from long-term relationships the investor may not have. Also, expanding one’s horizons can create valuable connections. Investing outside their network and geography has the added perk of fostering partnerships with GPs and CEOs that could add value to companies in the existing portfolio.

(1) Cambridge Associates
(2) Barclays

Latest in private markets

The private credit ETF is here

Alexander Graham Bell and Elisha Gray both filed patents for the telephone on the same day in 1876. Debates ensued as to who invented it first. As we learned in grade school, Bell received the patent and got the recognition.  

Last year, ETF providers BondBloxx and Virtus Investment Partners both chose December 3rd to release their private credit ETFs (tickers PCMM and PCLO, respectively). Both marketed the product as the first of its kind (1): the first private credit ETF. It’s no telephone, but these products give retail investors an easy, low-cost way to incorporate private credit from firms like Blackstone, KKR and Apollo into their investment strategy. 

The underlying assets in these ETFs are collateralized loan obligations (CLOs), an investment structure that’s been around since the 80’s that pools a large set of loans into one instrument. Historically, the assets underlying CLO ETFs consisted of publicly traded, broadly syndicated loans issued by large companies. Through these new products you can now access loans issued in the private markets to small, medium and large companies through a liquid security with the potential for higher returns (2).  

(1) Pitchbook
(2) Virtus