Inside the Mega Deals: What’s Driving Oil and Gas Consolidation?

It was a transformative 2023 for oil and gas, as a flurry of year-end mega deals drove the sector’s most merger and acquisition spending in over a decade. Major moves like Chevron’s acquisition of Hess and ExxonMobil’s purchase of Pioneer Natural Resources signaled a return to consolidation, after years of price volatility and waning investor interest.

This momentum has carried into 2024, most notably with Diamondback Energy’s $26 billion acquisition of Endeavor Energy Partners. Jefferies served as lead financial advisor on the deal.

Jefferies Insights caught up with Greg Chitty and Conrad Gibbins, two of the deal’s architects and Co-Heads of Upstream Americas, to discuss the current dealmaking and capital markets environment in oil and gas; what the Diamondback deal means for the sector’s future; and more.

Their conversation took place just before news that ConocoPhillips has agreed to acquire Marathon Oil for $22.5 billion, the latest mega-merger in the oil and gas industry.

Oil and Gas Bucked Market Trends. Can They Continue to Overperform?

Oil and gas bucked broader market trends in 2023, a year when high interest rates and recession fears dampened dealmaking. M&A volumes and values declined by 6% and 25%, respectively, and hopes for a rebound in 2024 have yet to materialize.

So, what accounts for oil and gas’s overperformance, and can we expect more dealmaking despite a sluggish M&A market?

“It’s a convergence of different factors,” Gibbins explained. “First, post-Ukraine, we’ve seen renewed appreciation for energy security, and capital has returned to the market. Second, oil and gas companies have impressed, demonstrating capital restraint, discipline, and returning capital to shareholders. Third, we’ve had price stability. When there’s minimal volatility in our business, we can always get deals done.”

The top five Western oil and gas firms — BP, Chevron, ExxonMobil, Shell, and TotalEnergies — returned over $111 billion to shareholders through dividends and share repurchases in 2023. In the late 2010s, concerns about the sector’s long-term viability and price volatility caused a decline in investor interest. Today, as the industry’s leaders return more money than ever, institutional investors are being lured back.

“The market is rewarding consolidation. Just look at the Diamondback deal: the stock was up over 20% after the announcement,” Chitty added. “With investors supporting deals, we should see more activity in public markets, but also across the board.”

Chitty elaborated on the downstream effects of large-cap M&A for the sector. As consolidation continues, smaller private companies will need to take steps to become more attractive to larger public firms, creating a ripple effect throughout the industry. Both he and Gibbins predicted a steady stream of deals of all shapes and sizes. This proved true recently, as Jefferies served as exclusive financial advisor in two deals announced in July:

• Point Energy Partners in their sale of assets to Vital Energy and Nothern Oil and Gas Inc., in an all-cash transaction for $1.1 billion.
• Total Operations and Production Services (TOPS) in their sale to Archrock (NYSE: AROC) in a transaction valued at $983 million.

What Goes Into Executing High-Profile M&A?

The timing and synergies between high-profile M&A can often seem opaque, but Chitty and Gibbins shed light on why the conditions were ideal for the Diamondback and Endeavor deal, which will undoubtedly be one of the year’s defining transactions.

“One of the unique factors in this deal was the narrow market,” Chitty shared. “You’d normally have four or five large-caps eyeing a company like Endeavor, but two of them, Exxon and Chevron, were sidelined by the FTC. Some thought Conoco was in pole position, but we were able to offer the most attractive option to the selling party.”

Gibbins expanded on some of the specific synergies that made Diamondback’s offer attractive: “both companies are Midland-based. That was very important to the seller, because it meant the employee base could be retained. The businesses also have similar cultures – very nimble and entrepreneurial. Altogether, there were strong industrial, administrative, cultural, and financial synergies to the transaction.”

Future Predictions: Consolidation Dominates

As major geopolitical events, including the Russo-Ukrainian and Israel-Hamas wars, continue to strain global oil supply, many investors expect American companies — upstream, midstream, and downstream — to continue to perform. The conversation concluded with Chitty and Gibbins’ predictions for the future, and they doubled down on one clear trend: consolidation, consolidation, consolidation.

“Today’s oil and gas companies can’t double and triple through organic growth,” Chitty said. “If they want to keep attracting investor interest, they have to get bigger and bigger. The way to do that is consolidation.”

Gibbins shared similar insights, emphasizing “investor relevance” as a driving force.

“Think about tech: there’s a handful of names that capture investor attention. Oil and gas is the same,” he explained. “A few large-cap companies appear on every index. For the other 47 or so companies that aren’t included, consolidation is how they achieve the scale needed to attract investors.”

For more insights from Jefferies, the leading advisor on M&A transactions in the energy sector for the last decade, visit Jefferies Insights.

How the UK’s Listed Real Estate Market Is Adapting to New Realities

In July, Jefferies and European Public Real Estate Association (EPRA) hosted a forum to showcase the UK’s listed real estate sector. Six CEOs, representing about a third of the sector’s market cap, discussed key issues like hybrid work, housing shortages, an aging population, the boom in e-commerce, and the urgent need for student accommodation and primary care facilities.

The UK real estate sector is dynamic and offers significant opportunities for long-term investors.

Market fundamentals are strong. The nation is entering a period of relative political stability, the impact of COVID-19 has receded, and interest rates are expected to decline, potentially in September. Brexit has become a “known known,” ameliorated by hopes that the new Labour government may foster a more constructive relationship with the EU. There are signs of substantial market momentum, with either accelerating or stabilizing rent growth and higher occupancy levels across the UK.

UK Office Market Accelerates in Flight to Quality Amid the Rise of Hybrid Working

After years of COVID-related disruptions and interest rate volatility, office specialists Land Securities and Derwent London have focused on areas of competitive advantage and maintaining robust balance sheets.

As a result of eight years of limited supply, demand is concentrated at the high-quality end of the market. Mark Allan, CEO of Land Securities, believes “the outlook for returns from the development and ownership of best-in-class properties is the strongest in 15 years.”

The shift towards hybrid and remote work has altered market dynamics, but the importance of office space remains clear. Commercial tenants now prioritize sustainability, location (proximity to transport nodes), and amenities to attract and retain their workforce. Additionally, tenants are demanding more space per employee, changing the density of office occupation.

While London remains a unique global city, Paul Williams, CEO of Derwent London, is less optimistic about areas outside the city and remains focused on Central London. He emphasizes the importance of prime locations, ‘If we can’t walk to a building, we’re not interested.'”

The anticipated disruption of demand for flexible office space has diminished. While demand exists, it is now seen as a complement to their other offerings rather than a market disruptor.

Lower Vacancy Rates Leave Room for Rents to Grow

With lower vacancy rates and higher demand, the largest property Real Estate Investment Trusts (REITs) in the UK now see an opportunity to drive rental growth.

In retail, Mr. Allan observes a similar flight to prime locations, accelerated by the rise of online shopping. This trend has forced retailers to rethink their use of physical locations to support an omnichannel approach. They need fewer stores, but those stores must be larger and better equipped — essentially showrooms that draw people in and offer a wide variety of products.

Retail vacancy rates have dropped from 9% during COVID-19 to 4.5%, driven by strong retailers and European entrants. With rents falling to 35% below pre-COVID peaks, Mr. Allan believes we’ve reached an inflection point: “We’re now renewing with existing occupiers ahead of previous passing rents.”

Today, the UK is the largest online retail adopter in the world. Colin Godfrey, CEO of Tritax Big Box, the largest investor and developer in UK Logistics, believes “We won’t see the demise of the high street, but we are going to see an increase of online demand.”

Amid de-globalization, shortening supply chains, and rising manufacturing costs in emerging economies, the UK domestic manufacturing and logistics market is becoming more compelling. A diverse range of occupiers supports the market, in addition to major players like Amazon. Tritax views current hesitancy in uptake as pent-up demand. As demand increases, vacancy rates will decrease, driving rental growth to 4-5%. Significant investments in leasehold improvements also make occupiers sticky and high-quality customers.

Rental growth aspirations are buoyed by the decreasing cost of rent as a proportion of commercial tenants’ total operating expenses. In logistics, property costs are 2-5% of total operational costs, while in the office sector, rent makes up 8% of clients’ cost structure, down from the high teens. With vacancy rates at 3.4%, Mr. Williams expects over 5% annual rental growth for offices over the next five years and Mr. Allan projects rents could grow 30% over the same period.

As a mid-market rental operator, Grainger’s performance is closely tied to wage and general inflation, with rents changing weekly. Grainger’s tenants spend 28% of their income on rent, below the charity sector’s expectation of one-third. The core demographic for build-to-rent is young professionals. Although Grainger could increase rents, they take a conservative approach. Renting remains cheaper than owning, with only 5% of tenants leaving to buy homes and 63% renewing leases. Wage inflation is currently 5%, and as it decreases, rental growth will slow but stay above inflation.

A New Labour Government Spurs Cautious Optimism in Residential, Student Accommodation, and Healthcare

Helen Gordon, CEO of Grainger, the UK’s largest listed residential landlord, expects the incoming Labour government to focus on improving the planning system over implementing rent control, which negatively impacted Scotland’s rental supply when introduced in 2022. “Not only will they not introduce rent control, but they won’t allow the devolved mayors to introduce rent control either, for fear of repeating what happened in Scotland.”

Grainger supports Labour’s intention to implement higher quality terms for renters.

There are housing shortages in most UK university cities due to increasing student numbers and a continued influx of international students. Michael Burt, CFO of Unite Group PLC, reports occupancy rates over 99%, highlighting strong and ongoing demand amid no new supply of purpose-built student housing and a shrinking private market. “All of our conversations with Labour are about how we can accelerate housing supply and make it more affordable. Positively for us, they are very open to innovative housing policy and ways to provide more affordable beds.”

Mr. Burt also believes the new government appreciates the important role that international students play in supporting funding models for UK universities.

Harry Hyman, Founder and Chair of Primary Healthcare Properties, welcomes Wes Streeting as the new health secretary. “He clearly understands that we need to deliver more healthcare outside of hospitals, which will lower costs, increase accessibility, and help tackle the incredible NHS waiting lists. However, we still need to focus on rental growth from the government.”

Mr. Hyman sees rental growth as essential for the development, modernization and expansion of facilities, which are crucial for improving NHS efficiency and providing care at a fraction of hospital treatment costs.

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If you’d like to view any of the conference panels or have any questions regarding the conference content, please contact Mark James ([email protected])

Lightspeed’s Nicole Quinn on Consumer Technology’s Resurgent 2024

It was a painful post-pandemic slump for tech, as fundraising and dealmaking tumbled far from their 2021 heights. By year’s end, however, the market seemed to have found its bottom, and investors eagerly awaited a revival in 2024.

So far, the year looks promising: VCs are armed with record levels of dry powder, and a backlog of high-quality tech companies are eyeing public markets. Tech deal value surged to $125B in Q1 2024, up from $92B in Q1 2023.

In public markets, the recovery was boosted by IPOs from Reddit, Astera Labs, and Ibotta, Inc. Investors are closely watching Stubhub and Stripe, both rumored to be eyeing public markets later this year.

Now, the big question for tech investors and industry watchers is, what can the year’s early activity tell us about the deals to come?

In April at Jefferies’ 2024 Private Internet Conference, “In the Age of AI,” Nicole Quinn, a partner at Lightspeed Ventures focused on consumer technology, discussed opportunities in the sector, how AI is reshaping tech companies, and where consumer brands fit into the equation.

There’s a lot of enthusiasm in the tech sector. Is that translating to enthusiasm around the IPO market? Has Reddit changed everything?

Reddit has definitely changed everything. It showed us that there may be more liquidity than expected this year, through IPOs and M&A.

It’s been a quiet couple of years. Companies sat on their hands – even really high quality companies, with strong growth and revenue. Now, investor appetite is back, and companies are ready to come out and raise money.

You work with a lot of great consumer brands. Do you expect them to access public markets, too?

I certainly expect consumer companies to pursue IPOs at some point. They have predictable and revenue streams from subscription customers, which attracts investors. Many of them are profitable, too.

For now, I think many consumer brands will look to private markets or M&A first to generate liquidity. Ultimately, they are building sustainable businesses, achieving profitability, and when the time is right, public markets will reward that.

How is AI helping companies move towards profitability?

I’ve been bullish on AI for a long time. At Lightspeed, we’ve invested $1.2 billion in AI across 53 companies – and we’ve been making those investments for a decade.

I’m most excited about AI-native companies, but to your point, all businesses can leverage AI to support profitability. In customer service and operations, companies don’t need huge teams. There are countless tools available to make these functions easier and cheaper.

Does it change the CAC (customer acquisition cost) equation? There’s been concern about rising CAC in the consumer internet sector recently.

Companies are thinking outside the box with marketing, and that’s very exciting. You’re absolutely right that for businesses like Facebook and Google, customer acquisition costs rose over the last few years. It is companies that have grown organically and virally through incredible products, ambassadors, and outside-the-box thinking that have performed exceptionally well – and we expect that to continue.

Regarding AI: we’re still in the early innings. As these tools develop, I do expect less paid acquisition, and that’s great for these consumer businesses.

Over the last several years, it has been harder for companies to raise money from venture capital. Business models and financials are more scrutinized. As an investor, how do companies give you the comfort to finally sign a term sheet?

I’m an early-stage internet investor, so I’m an optimist. I’m so pleased with the changes companies have made in recent years. The fundraising environment got tight, and founders said, “we need to be self-sufficient.”

When companies come to market this quarter, they’re more attractive than ever before. They always had plenty of growth, but the margins weren’t there. Now, they’re showing numbers that investors love.

At the same time, we still want an exciting product. We still want companies to be delighting their customers. When you can pair that with a sustainable business – that’s when we’re excited to invest.

Where Does Climate Investing Go From Here?

12 months ago, JEF Sustainability & Transition published an Expanding Overton Window, containing 10 bold predictions for the future of Climate Investing. One year on, we revisit these predictions to see how they are playing out, what lessons the investor community can take and importantly set out perspectives around what the next year could have in store.

Here are six predictions we believe will shape the next phase of climate investing:

1. Political swings occur in 2024 — yet only have a marginal effect on the pace of decarbonization.
2. Protectionism under the guise of decarbonization will increase.

3. First of a kind large scale climate projects will begin to scale — corporate R&D and allocations to the theme will 2x.

4. Voluntary Carbon Markets and related infrastructure will regain credibility.

5. Attention will turn to agriculture as power and transport decarbonization continues.

6. Allocations to the transition will become more tactical — reacting to the evolution of the transition.

You can watch the entire discussion below:

In The Age of AI: Tech Leaders on How Gen AI Is Changing Everything

“The consumer experience fundamentally changed with the web browser in the ‘90s. It changed again in the 2000s with the smartphone. Generative AI is another step function in the consumer experience.”

Cameron Lester, Global Co-Head of Technology, Media and Telecom Investment Banking at Jefferies

Just two months after its release, ChatGPT became the fastest-growing consumer application in history, reaching an estimated 100 million monthly users. Instagram took more than two years to reach that mark. Facebook took nearly five.

Today, more than a year later, ChatGPT and the wave of gen AI platforms that followed have transformed not just the consumer experience but the global economy.

Venture capital is flooding into the AI sector, even as it cools elsewhere. Companies everywhere are racing to integrate AI into their operations and business models. And whispers of a potential IPO from early leaders like OpenAI have everyone paying attention.

Despite the hype, questions remain.

Can these technologies meaningfully impact businesses, given their unclear enterprise applications?

Will young companies like Perplexity and Anthropic emerge as winners, or will they be overtaken by large tech incumbents with their robust user bases and distribution advantages?

How will the race for AI infrastructure and the resulting surge in power demand disrupt industries like raw materials and oil and gas?

In April, at Jefferies’ 2024 Private Internet Conference, “In The Age of AI,” tech leaders, investors, and bankers gathered from around the world to discuss these questions and more. In this video, you’ll hear key insights from the conference’s organizers and participants on how AI is reshaping everything from human productivity to B2B ecommerce.

Can Subprime Consumers Hold Up?

The U.S. economy is the fastest growing of any developed country. Monthly unemployment just clocked in at 4.1%, the first time it has risen above 4% since November 2021, while total household wealth reached a record $156 trillion last year.

However, challenges are mounting for subprime consumers, who could be hit unusually hard if the economy turns south. This could lead to significant strategic changes for the Specialty Finance and Lending Technology sector that serves them.

By the end of last year, the gap between the household wealth of America’s richest 1% and poorest 50% had grown to almost $41 trillion, a record driven primarily by the gap in home and equity ownership.

While some nine in 10 households in the top 20 percent by income own their homes, fewer than half of the bottom 20 percent do. Almost 93% of total U.S. stock market wealth is now held by just 10% of the population, also a record.

Although wages are finally outpacing inflation, consumer prices are still 19% higher than before the pandemic. America’s personal savings rate – which spiked in 2020 and 2021 amid record government stimulus – is back to 3.9%.

Add it all up, and it is no surprise that a recent Federal Reserve survey found almost four in ten Americans saying they wouldn’t use cash to cover an unexpected $400 expense, relying instead on family, selling assets, credit, or a loan.

Strapped consumers are increasingly turning to specialty finance and tech-enabled lending companies to sustain their spending, especially as more fall behind on existing payments. Nearly 9% of credit card balances and 8% of auto loans have now transitioned to delinquency on an annualized basis.

The positive momentum across the Specialty Finance and Lending Technology sector reflects its growing role in filling an essential consumer need. Fintech banks continue to increase deposits and new customers. On average, lending technology companies have seen double-digit growth in revenue, adjusted EBITDA, and earnings per share. Cash advance providers have a growing customer base and are originating more loans and cash advances.

Although delinquency rates and charge-offs in the Specialty Finance and Lending Technology sector remain above pre-pandemic levels, they are decelerating, and charge-off rates are expected to decline in fiscal year 2025 for nearly all issuers. This should provide a tailwind for equity prices across the industry, as there has historically been a strong correlation between changes in delinquency rates and total returns.

However, companies across the sector should be mindful of the risk that an economic downturn could hit subprime consumers unusually hard. Subprime consumers typically behave similarly in recessionary and expansionary periods because they are, by definition, always in some form of financial stress. But if the U.S. were to drop into a recession in the months ahead, these consumers, already living so close to the brink, may face insurmountable difficulties paying back their debts. It could create new risks for the specialty finance and tech-enabled lending companies serving them.

One way for companies in the sector to mitigate the risk would be to consider moving up market, as there are now legions of formerly prime consumers who are having difficulty accessing credit. In recent months, banks have tightened lending standards for nearly all categories of residential mortgages, while credit card application rejections are on the rise. This could create a growing group of customers seeking alternative financing solutions.

Despite recent declines in consumer sentiment, the U.S. economy and consumer are still strong. But the Specialty Finance and Lending Technology sector should start preparing now for the day when that’s no longer the case.

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Andrea Lee is Global Co-Head of Investment Banking, Global Joint Head of Financial Institutions, and Global Head of Specialty Finance and Lending Technology at Jefferies LLC.  The Specialty Finance and Lending Technology sector includes the full spectrum of consumer and commercial finance, marketplace lenders and technology enabled credit solutions providers.

How Do Presidential Transitions Impact Sustainability Outcomes?

On November 5, 2024, millions of Americans will head to the ballots, casting votes for the presidency, 468 congressional seats, and 11 governorships. Energy and environmental policy are at the forefront of the election cycle, with climate change being a key issue for both voters and candidates.

President Biden and former President Trump bring sharply different views on environmental regulation, American energy policy, and the global energy transition. Still, the potential impact of either administration’s policies on the sustainability landscape remains uncertain.

Jefferies’ Sustainability and Transition Team recently traveled to Washington, DC to discuss the 2024 election cycle with policymakers, sustainability leaders, and investors. Though uncertainty abounds in Washington — both about the outcome of the elections and their influence on the energy transition — a look at recent presidential transitions may offer clues into how these shifts influence issues like climate, energy transition, and human capital.

This summary distills our findings from the Obama/Trump and Trump/Biden presidential transitions in 2016 and 2020, respectively. For a more detailed analysis, including the impact of recent presidential transitions on trade and immigration policy, read the team’s full report.

Obama to Trump: Energy and Environmental Policy

During his first term, President Trump reversed over 100 EPA rules covering air pollution and emissions, drilling and extraction, clean infrastructure, and toxic substances and safety standards. While not inherently against renewable energy, his policies favored fossil fuel production.

Key policies included:

• Replacing Obama’s Clean Power Plan with the Affordable Clean Energy Plan to ease restrictions on greenhouse gas emissions from fossil fuel sources.
• Rescinding the 2015 Interior Department rule that lowered the risk of water contamination from oil and gas drilling.
• Easing EPA restrictions on toxic air pollution from oil refineries.

The real impact of these policies included:

• CO2 emissions per person were lower than those during the Obama administration on average (15.4t vs 17.2t).
• Annual clean energy capacity grew slower than the pace seen during the Obama administration on average (13% vs 19%).
• Oil production was higher than during the Obama administration (11 million vs. 7 million barrels per day), but oil/gas earnings were lower on average (0.7% vs. 1% of GDP).
• New onshore oil and gas leases were decreasing during the Obama administration but increased during the Trump administration until 2019.
• EPA budgets increased more during the Trump administration than the Obama administration, although there were some workforce cuts.
• Fossil fuel subsidies are lower compared to the Obama administration on average (0.05% vs. 0.07% of GDP).

Trump to Biden: Energy and Environmental Policy

Biden has shifted the direction of environmental policy, passing two infrastructure bills that invest hundreds of billions into developing clean energy until 2032. His administration overturned some of Trump’s executive orders on deregulation and created more regulations, including Multi-Pollutant Emissions Standards. For oil and gas policies, the administration raised royalty rates for the first time in 100 years to end bargain-basement fees and increased the amount of bonds for drilling by tenfold.

The real impact of these policies includes:

• CO2 emissions per person were lower compared to the Trump administration on average (15.4t vs 14.9t).
• Annual clean energy capacity grew at a similar rate compared to the Trump administration on average (13% for both).
• Oil production and oil and gas industry revenue were higher than the Trump administration, reaching their highest levels since the beginning of the Trump administration.
• New onshore oil and gas leases fell below the levels seen during both the Obama and Trump administration.
• EPA funding and workforce continued to increase from levels seen during the Trump administration.
• Fossil fuel subsidies are slightly higher compared to the Trump administration on average (0.053% vs. 0.05% of GDP).

The impact of the 2024 presidential election remains uncertain. If former President Trump wins the election, and we experience another transition, his ability to pass significant energy and climate policies will heavily depend on the outcomes of the Senate and House races. Recent presidents have been more successful in passing major legislation during periods of unified government rather than divided government.

Jefferies’ Sustainability and Transition Team will continue to closely track political and legislative developments influencing the global energy transition. Follow our team for regular insights on the presidential election and more.

Charged Up: Six Reasons Why Storage Will Power the Transition

The fragility of current grid infrastructure is now the biggest obstacle to a net-zero power system. Today’s grids, already strained by rising demand and extreme weather, are unprepared for projected electricity load growth over the next decade.

One key to addressing this challenge is better use of grid-scale storage — technologies that store energy and supply it back to the grid.

These technologies are crucial for scaling clean energy solutions like solar and wind, which, despite their effectiveness, aren’t always available. Solar power fades by evening, just as electricity demand peaks, and wind patterns are even less predictable. Energy storage fills these gaps, ensuring clean energy is available whenever needed.

Investments in storage technology are surging. U.S. battery storage capacity is expected to nearly double in 2024. California already has enough battery energy storage systems online to power 6.6 million homes during disruptions, and other states are following suit.

In this piece, we highlight six key reasons why energy storage will be at the center of the global transition, beyond the obvious intermittent issues of wind and solar.

1. Underpinning Renewables: As intermittent power sources like wind and solar increase, energy storage becomes crucial. It shifts power from times of excess generation, like during high winds or abundant sunshine, to times when generation is low. This ensures a consistent power supply, making it possible to integrate a higher share of renewables into the grid.

2. Peaking Capacity: Energy storage systems shine during high-demand periods. There are times when electricity demand spikes, such as evenings between 5-9 PM or during the AC-heavy summer months. Energy storage can provide the extra power needed to keep up with these spikes, ensuring a stable and reliable supply.

3. Ancillary Services: A fundamental rule of grids is that electricity supply and demand must match at all times. Storage systems play a crucial role in stabilizing grids by balancing power supply and demand, often referred to as ancillary services and operating reserves. These can be divided into four main categories:

• Frequency Response: Storage can respond to very fast, short-lived, and unpredictable changes in grid frequency levels, helping to maintain stability.
• Ramping/Load Following: When demand spikes unexpectedly, storage can respond to these sudden increases, known as load following, ensuring that supply meets demand.
• Peak Shaving: Storage can reduce the need for peaking power plants (often gas or coal) during periods of high demand, thereby helping to lower overall emissions.
• Voltage Support: Storage systems can help regulate grid voltage levels by providing reactive power in areas where it is low.

4. Grid Reliability: Energy storage systems boost grid reliability by providing backup power during blackouts or grid failures. In events like natural disasters or equipment failures, storage ensures uninterrupted power, which is especially crucial for hospitals, schools, and data centers.

5. Black Starts: Large fossil fuel generators often need external power to start up. Traditionally, this power came from other generators on the grid. During a blackout, however, it must come from an external source. While diesel generators have been used for this, on-site storage systems are increasingly taking over, providing a cleaner, more reliable solution.

6. Industrial Applications: Certain storage options are essential for decarbonizing and reducing costs in various industrial settings. Thermal storage, for instance, can be used in industries requiring high-temperature heat by storing energy when electricity costs are low. Sectors like cement, glass manufacturing, and chemicals can greatly benefit from innovative storage solutions such as thermal storage.

For more information on grid-scale storage technology, read Jefferies’ full report. For more from Jefferies on the opportunities to improve grid transmission and the investment opportunities they present, read more content from our Sustainability and Transition Team.

Predictions for the AI Era: Startups, Incumbents, and the Future of Work

The AI era has arrived, but investors, company leaders and technologists are still learning to navigate it. One challenge is the tension between startups and incumbents. Companies small and large are battling over AI’s application layer: how to deliver viable AI products to end users and turn them into revenue-generating machines.

Startups typically lead the way with groundbreaking technologies, but it is often the incumbents, with their limitless capital and distribution networks, that scale these innovations and win the market.

Both startups and incumbents bring unique strengths to the race for AI dominance. The key question for investors and industry watchers is: Who will be the first to commercialize these capabilities and build a sustainable business model?

At the Jefferies Private Internet Conference, “In the Age of AI,” Sarah Tavel, General Partner at Benchmark, shared predictions on the struggle between incumbents and startups, AI’s impact on the labor force and more.

Startups vs. Incumbents: Who Will Commercialize AI?

The clash between young companies and established companies is playing out across the market.

Take Perplexity, a year-old startup whose AI-powered search engine aims to challenge Google’s dominance. Its innovative product aggregates information into a single, cohesive answer rather than just providing links.

In May 2024, Google launched “AI Overviews,” a feature that offers AI-generated summaries at the top of search results. Sound familiar?

“There’s an assumption that startups will struggle to make headway in AI … for big companies like Adobe, innovation is just an API integration away,” Tavel explained. “But for this new generation of startups, AI is native to their business, and that makes a difference. They have a real chance to disrupt the incumbents.”

Tavel refers to the first wave of tech startups as the “skeuomorphic era”—a time when software mimicked and supplemented human work. In this era, it was easy for incumbents to “wrap” software over their business. With AI, where new technologies are genuinely transformative, the playing field might be more level.

How AI Unlocks Opportunity in Underexplored Industries

A key distinction between the Internet era and the AI era is their relationship to human labor. During the Internet era, incumbents used software to boost human productivity, aiming to help people work better and faster. Now, Tavel says, AI delivers a self-contained work product.

“This new wave of companies is selling the work itself,” she shared. “They’re opening up markets historically unexplored by incumbents—pricing their technology not as a productivity tool but as a work product.”

Tavel cited voice acting as an example. This industry rarely attracted incumbents, as there are few opportunities for software to streamline human work. Now, startups have the chance to revolutionize this underinvested sector with AI, which can generate high-quality voice-overs.

According to Tavel, these opportunities are often the most lucrative.

AI Is Only Getting Better. Where Does That Leave Humans?

Tavel wrapped up by discussing AI’s impact on the labor market. Specifically, she addressed fears that AI might trigger a labor crisis by replacing human jobs.

“There are many examples of technology replacing human work, but it’s never permanent. Those workers are reskilled, and ultimately, we all move up Maslow’s hierarchy,” Tavel explained. “AI automating some human labor means we all move up the chain toward more creative endeavors.”

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As Tavel highlights, AI will bring unprecedented change, and the speed and scale of these transformations remain uncertain. However, there are clear opportunities for startups to lead and win. For investors, executives and workers, these technologies could usher in a more efficient, productive and creative future for all.