Why 2017 Could be the "Silver Lining" for Energy Fundraising
With Jeff Eaton of Eaton Partners
Q1: How is the amount of dry powder sitting in energy funds going to impact fundraising in 2017?
Jeff Eaton, Eaton Partners:
There’s no doubt about it, there’s a big capital overhang and it is impacting fundraising. We talk to a lot of GPs who are looking to maybe raise their first fund and they’re often saying, "Look at how good a time it is to invest right now with $40, $50 oil." And the first response we typically have to them is, "It’s not as easy as you think," because the reality is a lot of these LPs committed to funds in 2013, ’14 and ’15. And, if the manager’s doing their job right, they haven’t invested all of that money yet. So, that sense of urgency that I think the GPs assume the LPs have—that they have to be putting money to work now—in the LP’s mind, for a lot of them, they’ve already put money to work and they’re just waiting for it to be invested.
There have been some recent exits and realizations, so I believe that 2017 should be a much stronger fundraising year than 2016. That’s the sort of silver lining.
Q2: What did you see in terms of money deployed from energy funds in 2016?
Eaton: If I think through energy services, for a while there, there was still this feeling, "Are we catching a falling knife? Do I really want to be taking that risk?" There was not a lot of activity on the services side the first half of this year. That sector typically lags the recovery we’re starting to see in the upstream side. So there’s still some pain that those service companies are feeling. The banks are still applying pressure, so we’re starting to see a real uptick in deal flow on the services side the second half of the year.
I’d say, on the upstream side, it was pretty consistent throughout the year. We talked to several LPs who had already fully committed themselves to oil and gas by June or July.
Q3: Did the amount of distressed opportunities in 2016 live up to expectations?
Eaton: There’s no doubt there were fewer bankruptcies or well-known public events of companies going out of business. That said, I actually think there was a lot of activity on the distressed side. Whether it be banks burying their positions, managers buying debt on the secondary market or distressed values trying to get into companies who were in some form of distress, that’s definitely taken place. And a lot more than people realize.
The other thing to think about is how you define the stress. There’s financial distress, or companies that are likely going bankrupt, but there’s also commercial distress—companies that may have perfectly decent balance sheets but their industry is out of favor. They’re struggling to make ends meet. They might be motivated sellers or motivated parties who are interested in finding equity investors. So, I think the short answer to your question is, while we haven’t seen a lot of big, public, highly recognizable distressed situations or bankruptcies, there’s actually been a lot of activity on the investment side in distressed situations.
Q4: How does the perceived lack of distressed opportunities impact fundraising?
Eaton: They’d have to tweak their story a bit, right? Because if they raised their fund under the premise that there was going to be the ability to take advantage of these big, distressed bankruptcy situations, the reality is, like we’ve said, there’ve been few of those. Maybe it’s a bit of tweaking here and there, but there have been several mangers who have said all along, "Listen, we don’t know if that’s going to happen. But we do know there are opportunities to buy distressed paper in some of these companies or to find some out-of-favor assets because the companies themselves are facing some commercial distress." Those groups have been probably pretty successful and will probably be able to raise more money to continue doing that.
Q5: How do LPs view the energy market now?
Eaton: Talking to the LPs is a good sign. I think there was a lot of uncertainty over the last year and a half in fundraising. It’s still a very crowded market. There have been a lot of new people who have come to the market to try to raise money. The trick now is to figure out which are the best groups to back. But I’m pretty bullish on fundraising for next year in the energy space.