Baupost, Elliott Guess Massive on Personal Fairness’s Growing old Vitality Belongings

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(Bloomberg) — A booming market to inject fresh money into hard-to-sell energy assets owned by private equity firms is drawing interest from hedge funds and other investors, leading to big wins and steep losses.

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Oil and gas and other energy assets snapped up over the past decade are increasingly being rolled into so-called continuation funds, backed by opportunistic investors such as Baupost Group and Elliott Investment Management — with volatile commodity prices, ESG concerns and shrinking asset values making it harder to sell aging investments.

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Continuation funds, a sort of monetary engineering that strikes belongings from one non-public fairness car to a brand new one backed by contemporary capital, have grown in recognition lately as a manner for companies to carry onto belongings for longer.

Kayne Anderson Capital Advisors redistributed its possession in vitality producer Kraken Sources throughout three funds right into a $911 million continuation car led by Baupost, in accordance with individuals with data of the matter. The fund priced at a ten% low cost, the individuals mentioned, asking to not be recognized discussing confidential data. Jefferies Monetary Group Inc. is advising on the transaction.

Ridgewood Vitality rolled Gulf of Mexico vitality belongings held in its second fund right into a roughly $500 million continuation car backed by Elliott, in accordance with the individuals. Elliott additionally served as a lead investor on Riverstone Holdings’ roughly $815 million continuation fund for ILX Holdings and a Quantum Capital Group fund for pure gasoline producer HG Vitality, the individuals mentioned. 

Representatives for Baupost, Elliott, Jefferies, Kayne Anderson and Quantum declined to remark. Ridgewood and Riverstone didn’t reply to messages in search of remark.

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Vitality continuation automobiles are a rising area of interest inside the broader marketplace for extending possession on fund belongings which are nearing the tip of their lives, which generated greater than $50 billion of deal quantity final yr, in accordance with Jefferies.

A few decade in the past, huge vitality non-public fairness funds have been raised to chase offers when oil traded for about $100 a barrel and buyers have been desperate to wager massive on US vitality manufacturing.

Since then, nevertheless, risky commodity costs and fewer oil-and-gas buyers have left companies with belongings which are tough to promote — simply when they need to be winding down their funds. As well as, pensions and endowments that spend money on the funds are starved for returns. Larger rates of interest additionally contributed to a slowdown in dealmaking, compounding the ache.

“Over the past a number of years, exit alternatives have been laborious to come back by,” Mike Suppappola, co-head of secondary transactions and liquidity options at regulation agency Proskauer Rose, mentioned in an interview.

Many conventional secondaries buyers have averted vitality continuation automobiles due to the riskier nature of the belongings or limitations on investing within the sector as a consequence of ESG issues. Present restricted companions may be constrained from committing to an energy-focused non-public fairness agency’s subsequent fund.

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Capital raised by non-public fairness companies in vitality, which averaged $21 billion a yr from 2010 by 2019, has tumbled since, averaging about $3 billion yearly, in accordance with information compiled by Quantum. 

Getting into the void are opportunistic buyers on the lookout for methods to get publicity to grease and gasoline and who’ve a better tolerance for the cyclical, boom-bust nature of vitality investing. Due to the dangers and lack of sturdy demand, they’re in a position to negotiate steeper reductions than is typical for personal fairness buyouts. Sponsors, in flip, get much-needed money at hand again to their buyers and to shore up belongings which may want somewhat extra work earlier than they’re prepared on the market.

“The most important factor that we’ve seen over the previous few years is the emergence of a brand new set of buyers to pursue the offers,” mentioned Spencer Gyory, a managing director in Lazard Inc.’s non-public capital advisory group. “That’s unlocked deal move that was there however wasn’t actionable as a result of the investor base wasn’t there.”

BlackRock, Goldman

In July, Amberjack Capital Companions raised $415 million for a continuation car for eight current investments, led by BlackRock Inc., Banner Ridge Companions, LSV Advisors and Goldman Sachs Group Inc.

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There are positive aspects available for consumers prepared to finance the belongings. Final yr, Goldman backed a roughly $350 million Riverstone-led continuation car for Meritage, a midstream firm that helps producers transfer oil and gasoline, in accordance with individuals with data of the matter. That funding has already led to a two-times a number of on invested capital, which means buyers doubled the cash they put in, the individuals mentioned.

However the technique isn’t with out its dangers.

Riverstone rolled Enviva, a provider of wooden pellets for vitality manufacturing, right into a continuation car in 2020 as a part of a recapitalization with greater than $1 billion of fairness commitments. The fund was anchored by Goldman, Abu Dhabi’s Mubadala and BTG Pactual. Enviva filed for chapter in March.

In 2022, Amberjack moved Innovex Downhole Options, a maker of oilfield tools, right into a continuation car backed by LSV Advisors. Innovex merged with Dril-Quip Inc., a publicly traded agency, in September. In reference to the deal, Innovex shareholders have been paid a $75 million money dividend. Shares of the newly mixed firm, Innovex Worldwide Inc., closed Wednesday at $15.54 apiece. That’s down 35% from Dril-Quip’s inventory value on the time the deal was introduced in March.

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Goldman, Mubadala, BTG and Amberjack declined to remark. LSV didn’t reply to messages in search of remark. 

Continuation automobiles are additionally controversial with non-public fairness’s conventional investor base corresponding to pension funds and endowments over the perceived conflicts of curiosity that may come up when a fund is each the vendor and purchaser of an asset. Some buyers want to see their sponsors maintain onto belongings and await higher circumstances to promote the old style manner.

Nonetheless, the marketplace for divesting vitality investments by mergers and acquisitions may enhance following Donald Trump’s re-election. He nominated trade government Chris Wright as vitality secretary and prioritized growing US vitality manufacturing throughout his second time period. Debt that greases the wheels of transactions can also be getting cheaper because the Federal Reserve cuts rates of interest.

Whereas it’s tough to say precisely how the vitality trade will fare beneath Trump, “there may be not less than a way that the regulatory setting will cool off somewhat bit,” mentioned Proskauer’s Suppappola.

—With help from David Wethe.

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