Private equity and the tumultuous energy sector

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To invest or not to invest? Private equity has struggled with this question with regard to the energy sector for years. Back in 2013, experts like Marc Lipschultz of Owl Rock Capital were advocating a move toward investments in shale. By 2015, the oil market was suffering, and investors were scrambling to take advantage of new opportunities. And now, in 2016, private equity is returning to oil and other energy investments that have been known to bite back based on the ever-changing market.

So who was right? Where are the best energy investments for private equity?

Of course, it’s not so simple.

“You can’t really overstate how significant the change in energy—particularly here in North America, but globally by extension—is as a result of the change in shales,” Lipschultz said in 2013. He noted that investors were focusing less on the scarcity of resources and more on new opportunities.

“When you have that kind of change, there’s a great deal of opportunity if one has the ability to go after it,” Lipschultz said.

He warned, however, that private equity companies choosing to invest in the energy sector need to be nimble and able to roll with the punches in an ever-changing market.

Lipschultz’s warning proved true by 2015, when private equity firms lost more than $18 billion in value due to the declining price of oil.

Still, private equity wasn’t willing to quit.

“This is a temporary situation, and investments that are made in this low-price environment are going to look pretty good two or three years out,” said Mark Papa of Riverstone Holdings LLC.

Private equity firms learned from their initial mistakes. Rather than just investing in the physical land where energy sources are harvested, they began to look at the broader infrastructure. New drilling techniques and equipment, as well as expert advice from engineers and geologists, became de rigueur for many investors. This new tactic made their investments much more secure.

By June of 2016, an Ernst & Young survey found that 25% of private equity firm executives at 100 companies expected to invest in the energy sector within the following six months. By 2017, an estimated 45% of executives surveyed will be investing.

Market turmoil remains, but private equity is more dedicated than ever to the energy sector. Particularly as banks retreat and businesses involved in shale look for financing, private equity firms are moving forward with new partnerships and investments. Armed with more real-time data than ever, private equity firms are looking to offer minority stakes, partial asset buyouts, refinancing opportunities, and more.

Private equity has a knack for weathering market ups and downs, and the energy sector is no exception.