Much of the distressed investment opportunities in the U.S. are in energy, where the drop in price of oil and gas has wreaked havoc on the industry.
“Distress is a contrarian trade. You buy distress on the theory that you can realize value and that the assets are priced inaccurately to what they are intrinsically worth,” Mr. Lewin said.
Investors are accessing energy in two ways — through infrastructure and private equity allocations, said Monte Brem, CEO of La Jolla, Calif.-based consultant and money manager StepStone Group LP.
Investments such as pipelines that have existing contracts but are under stress fit into investors' infrastructure allocation, while the majority of the opportunistic investments are in private equity, Mr. Brem explained.
So far this year, institutional investors tracked by Pensions & Investments committed roughly $1.1 billion to energy strategies, mostly focusing on dislocation.
But one, Orange County Employees Retirement System, Santa Ana, Calif., started its energy dislocation investment strategy last year. Last September, OCERS committed $100 million to a separately managed account with Kayne Anderson Capital Advisors LP for midstream energy, said Robert Kinsler, spokesman for the $12.5 billion pension fund in an e-mail.
Girard Miller, OCERS chief investment officer said that after a rocky period, OCERS' MLP portfolio with Kayne Anderson is now the firm's best performing account and OCERS' portfolio with Brigade Capital Management LP, a hedge fund that makes energy plays, is doing very well.
“We still have dry powder, as it's been hard to get good properties cheap .... So discipline and patience is essential,” Mr. Miller said “The irony is that we'll do better in the long run if prices wash out a second time and we get the remaining capital deployed more favorably.”
OCERS official are not “wedded to hydrocarbons,” he added. They will be exploring renewable energy such as wind and solar as well as senior debt or preferred equity in the midstream energy space as part of an exploratory RFP launched May 26 for alternative income managers.
“But we will be very picky about those now; we got a great deal on some Western Gas preferreds that popped over 50% on us from the day we underwrote them when there was still a lot of fear in the market, and I don't expect to see that again,” he said.
Thaddeus I. Gray, managing director in the New York office of private equity fund-of-funds firm Abbott Capital Management LLC, said he expects to see more deals like one earlier this year in which private equity firms acquired preferred equity in a master limited partnership, taking advantage of the drop in MLP stock prices. In January, EnCap Investments LP, EnCap Flatrock Midstream, The Energy Minerals Group, Kayne Anderson Capital and First Reserve Advisors LLC together bought Plains All American Pipeline LP, an MLP, for $1.5 billion.
“It's a vote of confidence by knowledgeable energy investors that large, diversified pipelines are the place to be,” Mr. Gray said.
It is also a bet that oil and gas prices will rebound.
“But no one expects prices to go to where they were two or three years ago,” Mr. Gray said. “A more reasonable projection might be $55 to $65 per barrel in the next 12 to 18 months.”
Marietta Moshiashvili, managing director, energy and infrastructure, in the New York office of TIAA Global Asset Management, agreed that the prevailing feeling among investors is that the energy cycle hit bottom in price terms. The exploration and production sector “has seen clear winners and losers based on the level of leverage and quality of the resource and management teams,” she said. “There are now oil and gas opportunities from distressed and bankrupt sellers, and expansion opportunities of proven resource plays.”
Private equity investments in MLPs also are helping with the continued growth in the midstream sector, she said.
Still, investors need to take care.
“The lesson of past cycles is that the damage is broad and deep, and it can take longer to recover than people think, especially when geopolitical forces are at work,” Mr. Gray said.