FTFL-GE: Transformation, Transformers and Tariffs

We recently published an energy industry report on the state of the electrical grid in the US. The world is changing rapidly, but we think that grid hardening technology companies are an attractive M&A target, even in the current chaotic environment. They meet a critical need in a large market, drive economic benefits that are independent of government subsidies, and a significant crop of companies funded 5-10 years ago is coming to fruition. The strong M&A activity in this space is a good indicator of who will be successful in 2025 – companies that solve a critical problem, have a solid economic foundation, and are not crippled by tariffs.

Increasing Demand and a Critical Market Need, Regardless of Sustainability Trends

The US (and worldwide) electrical grid is under pressure. Outages have increased, detected cyberattacks are up over 100% since 2012, and transmission capacity is projected to need to double by 2030 and triple by 2050 to meet the expected demands of AI data centers and increased electrification of transportation. Looking at the overall Energy Trilemma index from the World Energy Council, the US ranks worse than 12 of its peer developed nations. The poor finish is almost completely due to a low sustainability score. The US finishes fourth in security and a close second to Switzerland in equity.

It’s not a shock that a country with some of the lowest energy costs in the world would not lead in sustainability. The Biden administration targeted substantial funding to close that gap. However, the current administration is likely to reduce or eliminate federal funding to enhance sustainable power generation. Does this mean funding and M&A activity for grid hardening will dry up? We don’t think so. Increasing generation capacity and expanding and maintaining our aging transmission infrastructure are critical needs, whatever the generation methodology. In many cases, sustainable forms of energy such as solar and wind are the most economic.

AI is the proverbial double-edged sword. Yes, it’s driving a lot of the demand that puts pressure on the grid, but it also offers tremendous benefits in managing distributed and intermittent energy resources, or enhancing inspection of an aging transmission system.

What Does It Mean for M&A?

The data supports a bullish posture. M&A activity in the grid hardening space has dramatically outpaced the overall market, both in the US and globally. Comparing 2024 deal volume to 2020, overall US and global M&A dropped by about 25%, but grid hardening M&A is up nearly 25%.

We think this reflects the importance of the problem and a relative lack of dependence on government funding, but perhaps just as importantly, venture-backed companies are hitting maturity. Series A fundraising has dropped over the last several years, but later stage financings have held steady, indicating a maturing market and the winners approaching time for liquidity.

We’re particularly bullish on:

• Grid analytics
• Digital twins and AI
• Microgrids
• DERs
• AI predictive models for weather
• AI-assisted inspection (drones)

While we’re optimistic about the grid-focused energy space, one can’t write about M&A today without noting the turmoil in the world trade structure and the impact on financial markets. No one can predict exactly what tariffs will impact – drones and transformers seem to be good guesses in the energy space – but much of our list is software-driven and will be resilient. We expect that the tariff situation is going to mostly sort itself out by 2H 2025, leading to a very active second half. We’re already seeing some indications of calmer heads prevailing.

If you would like further detail, here is the link to our Grid Hardening report. As always, feel free to reach out with comments, questions, or if we can be helpful.

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