While growth equity deals of taking minority stakes in more mature companies gain traction by outperforming venture capital, firms specializing in energy sector transactions in the middle market remain less common, according to one sponsor.
Big shops such as Riverstone LLC, First Reserve, Apollo Global Management, Kohlberg Kravis Roberts & Co and Blackstone Group are hard-wired for traditional energy sector buyouts. Meanwhile, other energy sector incumbents such as EnCap Investments LP and NGP Energy Capital Management are known for sponsoring new enterprises.
“There’s not a lot of equity capital oriented toward growth-capital investing in the energy sector,” Frost Cochran, managing director and a founding partner of Post Oak Energy Capital, told peHUB.
About half of the seven-year old Houston-based firm’s investments amount to “transformative capital” rather than buyouts.
“We look for private companies in the oil and gas, or oil service businesses with good track records and exploration assets, but they just don’t have enough cash to take themselves to the next level,” Cochran said. “They’re not going to do it with bank debt because the energy business is too cyclical for most traditional lenders. Incremental growth equity is fairly uncommon in the energy business. It’s under served so we like it.”
In the firm’s most recent transaction, it invested $75 million and Goldman Sachs Asset Management contributed $25 million for PetroEdge Energy III, an energy company with acreage in the Eagle Ford of Texas that had already exited other positions with EnCap Investments LP.
On the challenging side in some deals, Cochran said Post Oak has to face “brain damage” of managing entrepreneurs’ price expectations. “You have to tell somebody their assets aren’t worth what they think, so there’s an anger-denial-acceptance process,” he said.