Private equity funds are well placed to exploit major disruptions in a market, given their blind pools of patient capital. They can cherry-pick well priced assets, manage them intensively and sell into a recovery. At least that is the theory. An interesting example is the oil market.
The last time oil price volatility matched that of recent years, the private equity industry was in its infancy, but investors can still gain important insights into the character of private equity oil investments. Pevara tracks 37 oil and gas private equity funds, with 26 of a pre-2012 vintage.
At first glance, the performance of O&G private equity funds is similar to more conservative strategies such as mezzanine and real estate or infrastructure investment. But this hides a wide dispersion of returns, suggesting the sector contains highly differentiated sub-strategies, including investment across the capital structure. What does seem clear is that O&G private equity funds tend to return capital faster, with positive implications for its risk-return profile.
It’s too early to say whether today’s private equity funds have successfully exploited the recent oil price shocks. If historical data is any guide, the answer when it comes, is unlikely to be a simple ‘yes’ or ‘no’.
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