A year and a half of lower and lower crude oil prices has laid waste to the energy sector. The O&G majors are slashing capex and expenses to protect their dividends, and many over-extended medium-sized and smaller players are scrambling for survival.
This is, of course, an ideal environment for the vultures of the capitalist economic system, private equity funds, to step in and pick up assets on the cheap. The PE funds, not surprisingly, argue they are taking substantial risks to reap large rewards and helping to recapitalize solid businesses, and there is obviously some truth to that argument. That said, any “help” proffered by private equity funds to beleaguered energy firms will certainly come at a very steep price.
Private equity funds raising funds for massive energy sector investments
Khrom Capital was up 32.5% gross and 24.5% net for the first quarter, outperforming the Russell 2000's 21.2% gain and the S&P 500's 6.2% increase. The fund has an annualized return of 21.6% gross and 16.5% net since inception. The total gross return since inception is 1,194%. Q1 2021 hedge fund letters, conferences and more Read More
Almost all of the major private equity funds have been building their war chests for some time in preparation to jump into the energy sector as it bottoms out. In the first half of this year, Carlyle Group raised more than $10 billion that is earmarked for investment in energy.
“This is one of the best periods, if not the best, to invest in global energy,” Marcel van Poecke, head of Carlyle International Energy Partners, commented in an interview earlier this year.
van Poecke continued to say that “Carlyle’s broad energy platform, plus a significant amount of dry powder, enables us to leverage current opportunities and market volatility across the global energy markets.”
Of note, Blackstone President Tony James also noted back in the first quarter that his firm was “scrambling” to raise capital for more investment in energy.
Selective investments to date by private equity funds
A November 19th research report from Credit Suisse highlights that the distressed sector — especially in energy — seems to be gaining steam, and PE managers are beginning to deploy some of their large stashes of dry powder.
CS research analyst Craig Siegenthaler and colleagues discuss the results of their recent meetings with six large PE fund managers, saying: “The companies were more positive across credit – as they are finding more distressed opportunities in which to invest as the US could be near the end of a six year credit cycle. However, with the risk of a US recession raised in ‘16/’17, the teams are still highly selective in deploying capital – but were more excited about where the market could be heading (especially in energy). Consensus from the meetings was that ‘16/’17 is shaping up to be an attractive time to invest in energy.”
Blackstone, Carlyle and KKR to grow earnings in 2016
Credit Suisse’s Siegenthaler et al. suggest that private equity funds Blackstone, Carlyle and KKR have a good chance to increase their cash earnings in 2016 if the financial markets cooperate, but also predict that earnings at both Apollo and Oaktree will remain in the doldrums until they manage to get more capital deployed
The analysts point out that the other side of the coin is “the earnings composition of both APO and OAK contain a high mix of stable (and growing) mgmt fees.”
As reported by ValueWalk last week, Fitch Ratings is sanguine about the financial situation at all seven private equity funds, with Blackstone, Carlyle and KKR all currently rated A- or above.