The four biggest private-equity firms have raised about $30 billion to invest in energy deals. They don’t all agree on how to spend that money.
Carlyle Group LP is prepared to bet that oil prices have bottomed out and sees now as the best time to deploy its money, co-founder David Rubenstein said last week.
Apollo Global Management LLC says the sell-off in oil isn’t over yet and the highest-returning deals are still on the horizon.
“There will be attractive opportunities to buy now,” Rubenstein said March 23 at the SelectUSA Investment Summit in Washington. Greg Beard, who leads energy investing at Apollo, sees a different timeline: “The worst, the problems, are yet to come,” he said in an interview last month.
Private-equity firms are trying to take advantage of crude’s 54 percent plunge since June, which has made targets cheaper. Carlyle, Apollo, Blackstone Group LP and KKR & Co. raised about $30 billion in the past 18 months for energy-related deals.
How and when they spend that money depends on their view on the future direction of oil.
Apollo, led by Leon Black, has recently bought debt of companies struggling to meet their repayments because the firm expects oil will remain at multiyear lows, potentially allowing it to take control later.
Carlyle has raised billions to acquire companies in leveraged buyouts because it expects oil to start rising, allowing it to sell its holdings at a profit later.
“Oil prices will come back a bit,” Rubenstein said. “If you can buy now at relatively low prices and hold on for a few years, you’re going to do quite well”.
Blackstone, the biggest of the firms, is “scrambling” to invest more than $10 billion in energy, President Tony James said in January.
Carlyle this month finished raising $2.5 billion for its first international energy fund, which brought its dry powder for energy deals to more than $10 billion.
“People are talking about the opportunity at all different levels of the capital structure — equity, debt, drilling funding,” Trey Wood, a restructuring partner at law firm Bracewell & Giuliani LLP, said in an interview.
“It’s really a question of timing, of when the opportunity is most attractive to both the buyer and the seller. You’re going to see a lot more done in the second and third quarters of this year.”
Carlyle plans to raise an additional $3 billion to $4 billion for energy deals this year, Rubenstein said last month.
The Washington-based firm is looking to make both equity and debt investments, including buyouts of energy-related companies in which it’s targeting annualized returns of 20%.
Apollo is looking at energy-related debt designed to yield 15 percent annual returns.
The New York-based firm invests in energy from its main buyout fund, which has $18.4 billion, and in January registered an opportunistic energy credit fund, without indicating a size for the pool.
It’s also gathering money for its second natural resources fund, after raising $1.3 billion for the first vehicle in 2012.
“I don’t think we’ve seen the bottom yet because we are still in a circumstance of an increase in supply coming out of the U.S.,” Beard, who joined Apollo in 2010, said of oil prices.
“It’s tough to say things are over when we still have a supply-demand imbalance.”
Beard said buying debt of distressed companies is — for now — more attractive than buying the companies themselves, noting that the longer oil prices stay near multiyear lows, the more attractive such higher-returning buyouts will become.
“Even though company prices are cheap relative to what their peak was, it’s not a bargain,” he said.
West Texas Intermediate crude oil has slumped 54 percent since its June peak due to weaker global demand, especially in China, and a glut in oil supply.
The Organization of Petroleum Exporting Countries, seeking to defend market share amid a US shale expansion, decided in November to keep its production unchanged, setting off a further plunge in price. OPEC is responsible for 40 percent of the world’s supply.
The steep fall has hurt returns and forced private-equity firms to write down investments. The buyout industry has seen more than $15 billion in value erased from 27 public energy producers since June, according to data compiled by Bloomberg.
Companies that took a hit include KKR’s Samson Resources Corp., Apollo’s EP Energy Corp. and Carlyle’s Northern Blizzard Resources Inc.
“Everybody is unhappy that oil fell and the net impact it has on this investment or that investment in the portfolio,” Carlyle co-founder Bill Conway said last month. “I love the way we’re positioned in energy,” he said, noting the firm has 70 dealmakers focused on energy”.
Carlyle’s new international energy fund is the biggest pool it has raised for a first-time strategy in the firm’s 28-year history.
The fund has already announced four deals, including purchases of stakes in European refiner Varo Energy Group and Discover Exploration Ltd., an oil exploration company focused on New Zealand and Africa.
Carlyle has run funds dedicated to energy for 15 years, first with Riverstone Holdings and now with Irving, Texas-based NGP Energy Capital Management.
Because Carlyle shares the investments, its earnings are less affected by swings in value than by changes in its other large buyout and real estate funds.
Funds run jointly by Carlyle and Riverstone have produced annual returns after fees from 8 percent to 55 percent, according to a Carlyle earnings statement.
Apollo’s private-equity investments, despite oil’s slide in the fourth quarter, still appreciated 0.5 percent in the three months ended Dec. 31, Josh Harris, an Apollo co-founder, said last month. Excluding energy-related investments, the funds were up 5 percent.
Blackstone’s first energy fund, a $2.5 billion vehicle raised in 2012, has produced 34 percent annualized returns, according to the firm’s fourth-quarter earnings statement.
It finished raising $4.5 billion for its second fund last month.
“We’ve done pretty well in the sector, and it’s not like this is our first downturn,” David Foley, Blackstone’s head of energy investing, said in an interview. “I wasn’t surprised to see the oil price go down, though I was surprised at the magnitude of the decline.”
Blackstone is skeptical of the prospects for energy-related debt, particularly of distressed companies, with Foley saying “that opportunity will dissipate before others.” The New York-based firm is looking across the capital structure with $10 billion earmarked in its private-equity and credit units.
A similar policy is in place at KKR, where the firm has created an “energy SWAT team” to look at deals across strategies, said Scott Nuttall, KKR’s head of global capital and asset management. The New York-based firm recently has focused on drilling partnerships and credit opportunities.
“We’re receiving a lot of calls from companies seeking help and a lot of calls from private-equity firms looking to invest,” said Wood of Bracewell & Giuliani.
“They’re all very active in negotiations right now. A lot of sellers that were in denial in the first quarter are quickly coming to the realization that they need to be proactive.”
Recommended for you
