Blackstone, KKR and other mega private equity firms are starting to spend large chunks of their capital on energy investments, a trend expected to heat up.
Not only is energy considered a growth sector that will generate heady returns, but also it takes a lot of capital. Private equity firms have the cash. They started the year with a collective $1 trillion in unspent capital commitments, according to a Bain & Co private equity report.
“Energy is a big trend: Shale, fracturing, natural gas, energy infrastructure (pipelines, terminals), oil field services is the rage,” said David Fann, president and CEO of private equity consultant TorreyCove Capital Partners, San Diego.
Energy is a mammoth investment opportunity. It's estimated that trillions of dollars are needed for shale gas-related investments alone, Marc S. Lipschultz, global head of energy and infrastructure at Kohlberg Kravis Roberts & Co. LP, New York, said in a recent white paper on the “shale revolution.” The investment opportunity includes $2 trillion in upstream investments for natural gas and $205 billion in capital expenditures for gas infrastructure developmentthrough 2035, he wrote.
So far, there is no concern that investors' private equity portfolios will become top-heavy with energy investments because mainstream funds are just moving into the area, Mr. Fann said. There are specialized energy funds, but they represent a fraction of overall investment activity, he added.
Energy deals have done very well for the West Sacramento, Calif.-based California State Teachers' Retirement System and officials believe the $154.8 billion system's private equity portfolio will not become top-heavy with energy transactions, said Michael Sicilia, media relations manager.
“Shale and "fracking' ventures have done particularly well. CalSTRS benefited from this trend through both private equity fund investments and certain co-investments. But we don't comment on individual co-investment deals,” Mr. Sicilia said.
As for any issues regarding the environmental safety of hydraulic fracturing, Mr. Sicilia noted all of CalSTRS' managers are bound by its investment policy on geopolitical and social risks, the so-called 21 risk factors — requiring consideration of environmental issues.