* Private equity can outperform commodity strategies
* Asset class boosted by emerging market demand
BOSTON, June 7 Private equity investments in energy offer rich pickings for investors willing to take a long-term view and capitalize on global trends, despite recent market volatility, the energy chief of Blackstone Group LP said on Thursday.
Investors are worried about poor oil demand amid slowing global growth and bloated crude oil inventories in the United States, while record increases in U.S. natural gas production over the past year have swelled inventories and pushed prices to 10-year lows in January and again in April.
"Some of the volatility, what's going on with Iran, what's going with Greece, these things create a lot of volatility on the demand side, up and down," David Foley, CEO of Blackstone Energy Partners, told the SuperReturn conference in Boston.
"Public equity markets alternatively love and hate energy. We like the regulatory changes that the government makes, technological innovations, high operating leverage - all those things cause assets to be mispriced."
Rapidly growing economies such as Brazil, China and India, as well as power-hungry regions such as the Middle East and Africa, now account for a greater portion of global economic output and are driving energy demand, Foley said.
Such trends, fueled by long-term population growth, were well aligned with the long-term investment horizon of private equity.
"The consistency of the returns is pretty good too. If you look at five, 10, 15 years, it's kind of mid-teen (percentage) returns net of fees, pretty consistent," Foley said, citing Thomson Reuters data for private equity investments in energy.
Historically, private equity investments in energy have outperformed the general U.S. stock market, as well as pure commodity returns strategies such as following the Goldman Sachs Commodity Index and hedge funds investing in commodities, Foley said.
The oil and gas sector has attracted some of the largest leveraged buyouts of the last 12 months, including the $7.2 billion acquisition of Samson Investment Co by a consortium led by KKR & Co LP and El Paso's $7.15 billion divestment of assets to an Apollo Global Management LLC -led group.
But Foley said that over 50 percent of his fund's capital had been behind management teams building businesses and just less than 10 had been traditional leveraged buyouts within the energy sector. Blackstone said in April its new energy fund had accumulated about $1.5 billion in committed capital.
In February, Blackstone agreed to invest $2 billion in Cheniere Energy Partners LP, a deal that will help Cheniere finance construction of a gas-liquefaction plant in Louisiana for export markets. Foley cited it as an example of a shale-related investment in the midstream energy sector.
"It's a derivative play on gas shales in the U.S. that actually does not require continuously low gas prices to work because the output is contracted," he said.
The shift away from dry gas in the U.S. to higher-value shale oil and shale gas liquid plays still produces plenty of associated gas that ends up in the market after processing. That has slowed the overall drop in dry gas output.
"We were bearish on dry gas for a while. As a result we don't have any dry gas companies in our portfolio. We just recently signed an agreement to do our first dry gas deal and it's a good opportunity," Foley added.