Large private equity firms are experiencing some déjà vu…
Following the 2008-2009 financial crisis, these firms launched specialized vehicles focused on both debt and equity in the beaten-up financial services sector.
Five years later, the same thing is happening again. The only difference is, this time the focus is on the energy sector.
The sentiment of many private equity firms was summed up nicely during an interview with the Chairman and CEO of the Blackstone Group L.P. (BX) Stephen Schwarzman at the World Economic Forum in Davos, Switzerland.
“Oil is the biggest investment opportunity in the world,” he said.
Everyone Is Joining the Party
Schwarzman and others in private equity are putting their money where their mouth is.
Blackstone President Tony James told analysts on January 29 that his firm was “scrambling” to invest more than $10 billion into energy companies.
“We believe the recent free fall in energy prices will prove to be relatively short term, so we view this as a good buying opportunity,” said James.
In fact, just last month the company put together a $4.5-billion fund to invest in energy equities. And the company is asking clients for another $1 billion to invest into bonds of distressed energy producers.
Other private equity firms are joining Blackstone in the scramble to pick up oil and gas assets on the cheap. These firms include Apollo Global Management, LLC (APO), KKR & Co. L.P. (KKR), and Carlyle Group L.P. (CG). These firms raised more than $15 billion recently specifically for investing into oil companies.
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Carlyle Group’s Co-CEO William Conway echoed Schwarzman’s sentiments, saying, “With our funds re-loaded, we are well positioned to take advantage of market volatility, particularly in the energy sector.”
In December, Carlyle Co-Founder David Rubenstein said his firm has about $9 billion to invest into energy, and a first-ever international energy fund and North American energy and power funds to invest it in. Many believe Carlyle will raise another $3 to $4 billion this year to invest into energy.
In January, Apollo said it was putting together a new vehicle called the Energy Credit Opportunity Fund just for investing into illiquid, distressed oil company debt.
Bloomberg reports that Blackstone will invest in U.S. shale and international oil, but not in heavy oil and ultra-deepwater drilling. Apollo said its focus will be on energy assets that are illiquid (financially). And KKR is specifically looking to provide financing for highly distressed oil companies through a special situations fund.
Plus, the $15-billion figure doesn’t count funds raised previously by private equity. In 2014, a total of $17.5 billion was raised by private equity to specifically invest into natural resources.
For example, last fall, Warburg Pincus raised $4 billion for its first-ever energy-focused private equity fund. KKR is already investing in energy through a $2-billion energy growth and income fund.
The Logic Behind the Deals
Some readers may wonder why private equity is sinking so much money into oil companies when they lost money on such investments in the fourth quarter of 2014.
There is logic behind these moves.
Take Blackstone’s set up of a fund to purchase liquid corporate bonds of oil companies as an example.
Many of these bonds are trading at distressed levels, meaning that yields are in the double-digit range.
But, if oil prices recover in a couple years, Blackstone will benefit just as private equity firms did after picking up distressed debt from financial companies in 2009.
A confidential source described the logic to Reuters this way: “If you buy something that has a 12% yield to maturity, and the maturity is for 10 years, but oil prices recover in two or three years, you will make a 25% rate of return over a two- or three-year time frame.”
On the equity side, private firms will lend money to oil companies (often in exchange for equity), so that seasoned executives can acquire assets on the cheap and develop them in time for the higher oil prices to come.
And the chase continues,