Billions of dollars are pouring into private equity energy funds as oil prices plummet, just one reason some industry insiders say investors should expect lower returns in parts of the oil and gas sector.
On Nov. 5, the cost of oil from OPEC, which produces about 40% of the world's supply, fell below $80 per barrel for the first time in four years because of declining global demand.
Much of the private investment in oil and gas had been in exploration and drilling, so-called upstream investments. Falling oil prices could cut investors' returns in those areas. As a result, managers are expanding into other energy-related investments, including pipelines and oil field servicing.
Energy has been a high-returning investment for quite some time, returning close to a net 17% internal rate of return for the 10 years ended June 30 and a net 20% IRR for private equity funds that solely make upstream investments, said Stephen Nesbitt, CEO of Marina del Rey, Calif.-based alternative investment consulting firm Cliffwater LLC. Those returns could suffer should oil drop to as low as $70 per barrel, according to Cliffwater research.