For many investors, their energy investments did not meet expectations. Energy funds have been among the hardest hit real asset sectors due to lower oil and gas prices resulting from the price war between Saudi Arabia and Russia and a drop in consumer demand, according to a June real assets performance review by Aksia for the $21.5 billion Orange County Employees Retirement System, Santa Ana, Calif.
OCERS' real asset portfolio earned a 0.7% return in calendar year 2020, with its largest real asset manager, energy manager Kayne Anderson Capital Advisors LP, producing an internal rate of return of -3.8%.
At a June investment committee meeting, CIO Molly Murphy said when the early investments were envisioned, investors expected "very much a private equity-like experience" with funds lasting 10 to 15 years and producing midteen returns.
OCERS only earned single digits on these investments, affected by falling energy prices that have just started to rebound as well as manager selection, she said. Energy represents the largest sector in OCERS' $822 million real asset portfolio as of Dec. 31, accounting for 42%, the Aksia performance review said.
David Fann, vice chairman of OCERS' real asset consultant Aksia, noted at the same OCERS meeting that oil price volatility had a lot to do with disappointing return expectations.
Investors confronted more volatility and price drop over the last two years than they did with earlier investments in the sector, Mr. Fann said.
There were also faulty execution by managers and teams on the ground in the oil patch, Ms. Murphy said. In addition, some managers such as EnerVest Ltd. ended up taking huge write-downs because they used all of the investments in a fund as collateral. Credit lines were called by the banks that lent to the EnerVest platform, resulting in the collapse of the platform, she said.
"We have been very careful not to repeat that mistake," Ms. Murphy said.
Scott Barrington, Minneapolis-based CEO and managing director of infrastructure and impact manager North Sky Capital, said investor demand for renewable energy has been strong despite a brief pause from March 2020 through May 2020, as investors considered the potential effects of the pandemic. Some 60% of North Sky's $1.5 billion assets under management is in renewable energy infrastructure.
While there is continued interest in mainstream renewable energy — solar, hydroelectric and wind energy generation — "the keen areas of interest recently have been environmental infrastructure," Mr. Barrington said.
Those sustainable infrastructure investments include renewable natural gas captured from landfills and wastewater treatment plants, waste-to-value projects such as turning manure and poultry litter into energy and fertilizer, and water purification, he said.
Renewable natural gas strategies are relatively new and started to catch the attention of some institutional investors in mid-2020, Mr. Barrington said.
"Also, we are seeing opportunities in energy storage and think that will be a long-term trend with significant policy support at both the federal and state levels," he added.
In addition to sustainable infrastructure, the firm also has a private equity impact secondary market business that invests in renewable energy, including storage and electric vehicle charging infrastructure.
While his firm does not invest in oil and gas extraction infrastructure, other energy infrastructure managers are using carbon sequestration — a method of reducing the carbon dioxide in the atmosphere by capturing and storing it — in conjunction with fossil-fuel extraction.
"The renewable energy industry is in a transition period where the world is moving from internal combustion engine vehicles to electric vehicles" and like many technological adoption curves, this transition will be shorter than many people currently expect, Mr. Barrington said.
"It will seem gradual and then all of sudden the transition will occur at a very rapid pace," he added.