Despite the highest oil prices in nearly eight years, investors in the secondary market haven’t yet shown an increased appetite for buying interests in energy-focused private equity funds.
ESG concerns and the volatile nature of energy prices, especially in the past two years, have had secondary firms hold off on buying oil and gas assets despite the tight global energy market and a recent surge in oil and gas prices, with crude holding at over $100 per barrel for most of the past two months.
For the time being, $100 oil is not convincing fund secondaries to purchase oil and gas fund portfolios, also because some of the secondaries’ investors—or limited partners (LPs)—are pension and other funds now focused on ditching fossil fuel investments and investing in energy transition-worthy assets and funds, intermediaries have told Laura Kreutzer of The Wall Street Journal.
“There are some firms that just don’t want to go back to their LPs and have a conversation about buying oil and gas again,” Andy Nick, managing director in the private capital advisory unit at Jefferies, told the Journal.
$100 Oil Still Not Incentive Enough
Oil prices jumped to above $100 per barrel after Russia invaded Ukraine at the end of February. Despite temporary dips below $100 on certain days, Brent Crude prices have largely held above the triple-digit threshold for two months now, generating windfall revenues and profits for oil firms, including those backed by private equity. However, secondary sales of oil and gas assets have not yet taken off, following two muted years of transactions in 2020 and 2021 when the COVID-induced slump in prices and valuations sidelined buyers on the secondary market.
“You can’t trade private-equity energy funds off of spot oil prices,” Michael Dean, managing director in the real assets team at HarbourVest Partners, told the Journal.
ESG Investment Now Priority For LPs
Moreover, the focus on investing in sustainability that has been growing in recent years and the shunning of fossil fuels by a large part of investors have limited the secondary market for oil and gas portfolios.
Limited partners recently surveyed by HarbourVest Partners have said that sustainability and impact investing have become critical elements of portfolio construction across asset classes, Natasha Buckley, who is responsible for sustaining the firm’s ESG strategy and partnering with general partners and limited partners, said in an interview with Private Equity International in February this year.
“LPs are actively looking for solutions as they are under-committed according to the impact investing targets they have set,” Buckley said.
“A lot of LPs come to us as they are doing market research and thinking about how they will allocate to ESG and sustainable strategies in private markets,” she added.
Some private equity firms have also started to distance themselves from investments in conventional energy sources, including oil, thus limiting the pool of oil and gas assets in the secondary market for fund intermediaries.
Adam Waterous, CEO of private equity firm Waterous Energy Fund, said last month that the private equity sector has seen a structural change over the past half a decade.
In a discussion with PE Hub, Waterous said that the “growth investing” model that some PE firms used is “broken” and not suitable for the energy sector anymore.
Instead of a growth equity model, Waterous Energy Fund “used a value investing approach, where we set up to build a single-scale operating business that has complementary assets. That is what we have done since our founding in 2017,” Waterous said.
Private Equity Secondary Deals In Energy Slump Since 2019
Due to the plunge in oil prices and asset valuations in 2020, deals with private equity funds in the energy sector plunged, and although they rose in 2021 over 2020, the total value of such deals is still well below 2019 levels, and even 2015-2016 levels, according to data from secondary market intermediary Setter Capital. The firm’s report on market activity in 2021 showed that the secondary market of private equity funds in energy rose by 30.1 percent to $294 million last year, up from $230 million in 2020.
Despite the 30-percent rise, secondary deals were still significantly below the $1.7 billion in such transactions in 2014, 2018, and 2019. Even in 2015 and 2016—during the previous oil market crash before the COVID-induced one—secondary deals topped $800 million and $900 million, respectively, according to Setter Capital data cited by the Journal.
Still, deals on the secondary market could increase in the future if oil holds above $100 for months, especially considering recent signs that investor appetite for oil and gas among private equity is growing as prices are soaring. Renewed interest in the oil and gas sector could spur more activity on the secondary market, lifting it from the slump of the past two years.
By Tsvetana Paraskova for Oilprice.com
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