Coming into 2019, a number of people told Secondaries Investor that this could be the year of the $5billion GP-led deal. Two months in and that bet may be on.
According to a report by PE Hub, The Energy & Minerals Group is considering a GP-led deal that could be worth between $4 billion and $5 billion. The Houston-headquartered GP, which has $16.2 billion in assets, is reported to be working with Park Hill on the process. Though the specific funds and assets involved are not clear, the process would reportedly involve several midstream assets from older funds being moved into a new vehicle.
Energy is a risky bet, never mind on a deal as large as this. What are the potential pitfalls and who might be willing to jump over them?
Private equity GP-led processes tend to come with a degree of diversification. Even though all assets are managed by the same GP, there is likely to be a mix of sectors and geographies to hedge against negative macro effects.
In energy most assets are to some degree correlated to the price of oil. In a way this is handy – it makes the value of an energy fund relatively transparent. But it means that in many cases, the buyer is making a binary bet on whether the price of oil is to rise or fall.
“What appetite do buyers have to go into an asset class that has seen two crises in the last 10 years? Oil came down by 25 percent last year,” says one senior London-based secondaries advisory source.
The transparency of the price of energy funds also takes away a useful advantage for the secondaries buyer – the lag between when a deal is priced and when it completes.
In 2016 energy-focused private equity firm First Reserve attempted to restructure its 2006-vintage fund. The deal was priced off a March NAV but by the time the offer went to limited partners the price of oil had risen appreciably. LPs who were once keen to sell were now eager to stay. Buyers Pantheon and ICG could not buy a big enough chunk to justify doing the deal.
If the EMG deal goes ahead, who would be likely to back it? Given the size it would probably be a consortium, perhaps including some non-traditional buyers with longer term return horizons. Some midstream assets, such as pipelines, have a weaker oil price correlation, so their inclusion could make the portfolio less risky in the eyes of some. At the same time, such a deal could appeal to a buyer with the desire and licence to place a big bet.
“I think [who backs] it depends on how pressured they are to find good returns,” says a London-based managing director. “There is so much capital out there chasing a relatively limited number of deals. Returns can look fantastic in energy if you get it right – it’s about who wants that supercharged bet.”
Even if this deal doesn’t happen, it cements that $5 billion figure in the minds of market participants. With all the dry powder, expect 2019 to be the year.
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