Tough macro-conditions make it hard for managers to put money to work in the energy sector, so LPs are entrusting their capital to familiar hands.
In a sector closely tied to macroeconomics, only the most resilient firms can stay in the upper echelons of the PEI 300 consistently.
The ebbs and flows of fundraising in the energy private equity space rely on many moving pieces, such as unpredictable fluctuations in oil prices.
The price of Brent crude oil, for example, plummeted from $112.40 a barrel on 1 June 2014 to $34.73 a barrel on 4 January 2016. As prices fell, limited partners expected energy-focused fund managers would be able to deploy capital at attractive prices, leading to a spike in fundraising.
However, many companies resisted selling at low prices, causing slower-than-anticipated dealflow, according to Kelly DePonte, a managing director responsible for research activities at placement agent Probitas Partners.
As a result, dry powder has built up among energy funds, and LPs are being selective about committing new capital.
"Despite the downturn in the energy sector, investor appetite remains strong for the most experienced general partners," says Adams Street Partners’ Chicago-based partner James Korczak, who specialises in buyout and growth capital and energy fund investments. "This is driven by real asset investors’ ability to take a long-term view and recognise the cyclicality inherent to investing in commodity-driven businesses."
The 2017 PEI 300 indicates 18 months of downward pressure on oil prices has had a negative effect on fundraising for funds in the sector. EnCap, Riverstone and NGP secured spots in the top 30, representing $44.6 billion in aggregate fundraising total in the preceding five years. This is a 14 percent drop from the amount energy-focused managers in the top 30 – the same trio, plus The Energy & Minerals Group – represented last year.
"[It] has been a very volatile fundraising market for the last five years and [a] negative outlook going into 2017," DePonte says, noting that annual figures have been even more volatile for the private equity energy sector as a whole.
"Even with oil prices showing some signs of stability over the past half of a year and some meaningful realisations and exits taking places in the Permian [Basin], the reality is that demand from LPs to make commitments to energy funds is not robust enough to match all of the supply," placement agent Eaton Partners partner Jeff Eaton says.
"The above being said, we believe that the best and most consistent performing managers should continue to attract capital even though the competition between managers to secure that capital is going to be as fierce as we’ve seen it."