The recovery in oil and gas prices has not driven energy fundraising back to full strength.
Fundraising for energy buyout vehicles was up 13 percent in 2017 from the previous year to $15.7 billion, according to data from PEI.
That included EnCap Investments’ latest fund, EnCap Energy Capital Fund XI, which closed above target at $7 billion.
But this is still a far cry from 2015 when $47 billion was raised, and EnCap, which wasn’t available to comment, took about a year longer than anticipated before holding a final close at the end of last year.
“Some of the big names needed to spend a lot more time on the road fundraising,” says Jeff Eaton, a partner at placement agent Eaton Partners. “They needed to go to a different set of LPs. Some of them had to access the high-net-worth channel because the institutional investors were coming back either smaller or not coming back. Overall it was a more challenging fundraising environment.”
Oil prices have recovered from below $30 in January 2016 to more than $60 a barrel at the end of 2017, but at the long end of the curve prices are still low.
Low commodities prices in recent years have allowed private equity energy firms to take advantage of large publicly traded companies spinning off non-core businesses.
“This downturn has been a positive for private equity capital because they’ve had access to some quality management teams in specific basins from publicly traded companies that they’d probably not have been able to access had commodities prices stayed high,” says Brent Burnett, managing director of real assets at Hamilton Lane.
“I don’t think we’ve seen enough recovery yet to where investors are really wanting to pile back into energy. Part of that is driven by the fact that investors committed a lot of capital to the energy space in the years leading up to the downturn and drawdown activity has been slower than anticipated.”
He says Hamilton Lane has been more selective about where it puts capital to work and has focused in part on smaller funds because they are well positioned to pick up some of the assets that aren’t core to large players.
Adams Street Partners, another fund investor in the energy space, has committed to both small and large managers and is constantly studying the changing market.
“What we’re really looking at today is how much capital does the industry need for some of these projects and how big of a fund size is actually necessary,” says James Korczak, a partner at Adams Street Partners. “We have a preference for the smaller funds right now as a result of that view but we keep a balanced approach in our portfolio so we have both.”
Another large factor contributing to a lower fundraising environment is slower exits and distributions.
“I think a lot of investors have a lot of money already committed to energy managers and they haven’t seen a lot of money back,” Eaton says. “Whenever that happens, they’re less inclined to invest more because they’re already allocated. Even though there was a compelling argument to invest into a lower-priced environment, there was less of a sense of urgency from LPs that they had to invest more money in 2017 as they felt they were already getting exposure to the vintage from earlier commitments.”
Once prices increase further and realisations pick up, investors will rethink their exposure to energy. But it won’t happen in 2018.