Several top U.S. alternative investment managers are poised to boost
investments in energy and natural resources sectors, according to Fitch
Ratings. However, given the uncertainty about how long downward pressure
will remain on energy and commodity prices, there is the potential that
Fitch-rated alternative investment managers may overextend into energy
and natural resource risks at the wrong time. While the direct
investment risk would be largely borne by fund investors, alternative
managers that have material missteps could experience reduced fee
generation, impaired balance sheet co-investment and reputational
damage. As a result, future fundraising may be affected.
The collapse of commodity prices has resulted in the most significant
drop in energy and natural resource firm valuations since 2009.
Consequently, there will be a point in the cycle that presents
attractive, risk-adjusted, investment opportunities for lenders and
investors. The unknown is the timing of this entry point. Alternative
investment managers appear well positioned given their long investment
horizons which generally provide ample time to wait out market
volatility in order to meet target returns. But, this structural benefit
can't overcome investments that are materially overpriced or poorly
timed, particularly if vintage and/or energy subsector concentrations
are elevated.
Alternative investment capital ready to invest in energy and natural
resource sectors has risen materially in 2015. According to Preqin,
approximately $32 billion of capital had been raised for natural
resources funds, year to date through Aug. 26, 2015. The amount already
exceeds the 2013 record, when $30 billion was raised. The average fund
size of $2.2 billion far surpasses the approximately $700 million raised
per fund in 2013 and the prior peak of $1.5 billion per fund in 2009.
While energy-focused managers top the league tables for capital raised,
the large diversified managers have also increased their focus on energy
investing.
Fitch believes these numbers understate the total investment capacity
for the sector, as many of the largest managers' buyout funds invest
alongside natural resources funds in energy deals or on their own. For
example, in November 2012, Blackstone invested $1.2 billion in LLOG
Exploration Company. The capital was committed from Blackstone Capital
Partners VI and Blackstone Energy Partners. Conversely, in August 2014,
Blackstone made an investment in Siccar Point Energy, with the
investment capital coming solely from Blackstone Capital Partners VI.
Alternative investment managers have a mixed track record in the natural
resources space. According to Preqin, the median IRR on natural
resources funds ($140 billion), with a vintage 2002-2012, is 7% with a
standard deviation of net IRR of 17%. The risk measurement is in line
with buyout funds, but the returns are 400 bps below. That said, limited
partners often commit capital to natural resource funds not for absolute
returns, but because returns are expected to be uncorrelated with
equities, and investments can provide an inflation hedge. Also according
to Preqin's most recent survey, about 63% of institutional investors
feel their natural resources fund investments have fallen short of
expectations over the past 12 months.
Despite uncertainty around the performance of current and future energy
investments, the outlook for the alternative investment manager industry
remains stable reflecting strong franchise positions of Fitch-rated
alternative managers, large, diversified investment platforms,
meaningful FEBITDA generation capability and modest, albeit
incrementally higher, leverage levels. Exposure to the energy sector is
also a relatively modest proportion of overall assets under management.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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