Firms race to raise capital for energy credit opportunities

There is a mini-race of sorts in the private equity fundraising market: At least five firms of varying sizes have launched, or are preparing to launch, funds focused on energy credit investments.

The energy credit vehicles, especially those geared toward distressed investing, are seeking opportunities created by the collapse of oil prices. Many of the funds are structured with two- or three-year investment periods, reflecting the tight window of opportunity some see in the market.

“Past experience has shown this could be a quick market for dislocation and short-lived,” said Christian Kallen, a principal at Hamilton Lane.

Brent Crude, the international oil benchmark, was trading at $56.63 on March 10, down from $60.05 on Feb. 27. Oil prices have steadily fallen since last year and speculation for when prices might recover range from later this year to several years from now.

The impact on energy-based private equity portfolios has not yet been fully felt as managers are just starting to mark portfolios based on December valuations.

Still, even at December valuations, limited partners are starting to see portfolios marked down by 10 percent to 40 percent off of third quarter marks, saidMeagan Nichols, head of real assets at Cambridge Associates.

LPs may choose to hold off on committing into energy credit funds until the distressed opportunity becomes more apparent. Cambridge is recommending its clients wait until later this year to commit to such funds, Nichols said.

“If you’re looking at distressed (opportunities) in the oil patch, that opportunity hasn’t really come yet,” she said. “You can see it coming, but despite falling prices, we haven’t had mass bankruptcies. There’s a lot of capital getting raised and positioning for opportunities to come.”

Firms that will be able to take advantage of this opportunity are those with experienced energy teams in place that can deploy capital quickly. However, some vehicles in the market will be looking beyond the immediate distressed opportunity based on oil prices for other types of credit investments, like in power. Those funds will have a broader mandate than just seeking investments tied to oil prices.

“The market trend here may or may not go beyond oil – gas has been down. The power industry has been in trouble for a long time as well,” Kallen said. “If you have a long-standing track record in distressed energy, you may get LPs more comfortable.”

Several firms have announced energy credit funds in recent months:

  • Apollo Global Managementis in the market with Energy Credit Opportunity Fund. “You can expect that we will try to move quickly to capitalize on some of the opportunities we are seeing in energy, but it’s important to note we remain particularly selective in the current environment,” Apollo Senior Managing Director Josh Harris said on the firm’s fourth-quarter conference call on Feb. 6.
  • Avenue Capitalis targeting $750 million to invest in senior debt, equity securities and other obligations in North American energy and utilities companies in distress, according to a summary from Portfolio Advisors written for the Pennsylvania Public School Employees’ Retirement System.
  • Blackstone Group’s credit shop, GSO Capital Partners, is targeting $2.5 billion to $3 billion for its debut energy credit fund, with a first close expected near the end of April, according to two sources with knowledge of the fund. Earlier media reports pegged the fund’s target between $500 million to $1 billion.
  • Goldman Sachsis marketing Energy Investment Opportunities Fund, which will invest in energy-related corporate credit, including high-yield bank loans and non-U.S. debt priced at distressed levels, according to a fund marketing document, which doesn’t state the fund’s target size. The fund has a two-year term from the end of the investment period, with two one-year extensions at the GP’s discretion, according to the document.
  • Riverstone Holdingshas been talking with potential limited partners about targeting up to $1 billion for an energy credit vehicle to focus on investments in “secondary paper” like high-yield bonds. The fund also would focus on “injecting fresh capital into new or existing situations,” and buy energy debt-related assets from financial institutions, according to an LP who has heard the fund pitch. Riverstone’s fund would have a two-year investment period and charge a 15 percent carried interest rate, the LP said.

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