* Private equity can outperform commodity strategies
* Asset class boosted by emerging market demand
By Greg Roumeliotis
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
"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
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.