Five Questions with Jim Gasperoni, Partner, FLAG Capital Global Real Assets Program

1. What’s the universe for lower middle-market energy funds outside of the mega-fund arena now compared to a few years ago?

When we looked at the upstream oil and gas segment in the U.S. a few years ago, we had a hard time finding half a dozen we would define as energy specialists. We just updated [our market map] and we found at least 20. You’re talking about a 3x increase of managers in the space in three to four years. From our perspective, that’s a function of the opportunity set.

LPs are looking to build meaningful exposure to real assets more broadly — including infrastructure, mining and agriculture. Given the market in the last year, oil looks relatively attractive when you compare it to other opportunities. Oil is certainly an area that people are looking at more closely today. Whether you have existing exposure or you’re just building real assets more broadly, you’re looking at it.

2. Are you noticing any trends in GP funds in the market in terms of fund type?

Over the last six to 12 months, there’s been a lot of chatter and appetite for funds offering debt or distressed investing opportunities. As people start to sift through the wells and basins that are better suited in the low oil price environment, people will gravitate toward those. People are trying to sift through funds to find where the opportunities are going to be.

3. Could you talk about co-investing opportunities FLAG is seeing?

LPs are actively soliciting GPs to provide co-investment opportunities. If you’re a GP and you’re at the smaller end of the deal size range, we’re seeing GPs offering co-investments, where maybe there’s a deal that’s an outlier [in terms of a larger size] versus what they typically see, and they want to put part of that in the fund. Some of these managers raising their first funds have a vested interest in showing assets to LPs, and the way to do that is in a pre-fund construct with knowledgeable investors who can get their arms around deals to put together co-investments to show a track record. We’ve seen an increase in the availability and the velocity of co-investments in this space.

Investors are looking for something very specific, like access to a particular basin where a dedicated specialist raising a smaller amount of money provides them on a pure-play basis. The idea is that they’re tapping into a general opportunity set that’s too small for a larger fund.

4. We’ve seen strong fundraising for big energy funds despite lower oil prices starting last fall. What’s the impact been on smaller funds?

Most energy funds, particularly those with an oil focus, are seeing a lot of interest from LPs. Fundraising momentum is good. If you’re a manger who has raised a couple of funds, and you’ve got a track record, and you can demonstrate that you can put energy portfolios together, you have a leg up over others. First-time funds probably have a harder time to get that initial spark.

We’ve gravitated toward funds large enough to have some scale. Scale matters in this capital-intensive business — $250 million to about $1 billion.

5. Any lessons you could share for LPs?

While certain areas of the market may be interesting — in this case, the small- to mid-sized managers in energy — investors need to make sure that they have the resources and capabilities to underwrite and monitor these types of managers in a portfolio.

Edited by Steve Gelsi