Warming up to energy secondaries

Sister publication Private Equity International sat down in April with some of the secondaries market’s leading participants for a roundtable discussion in global law firm Debevoise’s New York office. In this second excerpt, executives from AlpInvest Partners, Ardian, Greenhill Cogent and HarbourVest Partners discuss why several key ingredients are needed before energy secondaries really deliver.

With the downturn in the energy sector, some limited partners, worried the pain will be long-term, are making moves to exit poor performing funds, providing dealflow for secondaries buyers poised to take advantage in the space.

Compared to the broader private equity secondaries market, the energy-related market is experiencing more fear and dislocation, according to Jeff Keay, a managing partner at HarbourVest Partners.

“As a buyer with the expertise and the capital to put to work in that strategy, that’s an interesting place to be right now,” Keay says.

The average discount to net asset value for energy funds has been hovering between 30 percent and 50 percent since mid-2015, compared with par for some buyout funds, according to Wouter Moerel, a managing partner at AlpInvest Partners. He says there’s a fundamental gap there because the underlying assets are very difficult to analyse.

“Part of it is because NAVs are too high, so a 40 percent discount to the latest NAV is probably more like a 20 percent discount versus the real NAV,” Moerel says.

Participants noted there were a few key ingredients still need to be added to the mix for activity in energy secondaries to pick up.

NAVs from 30 September are still high because the majority of the energy firms have hedges in place that are projected to mostly expire later this year, several of the participants noted. Funds are also working through recapitalisation of portfolio company debt. “It will probably mean quite a big drop again in valuations,” Moerel says

“You would think people would hold their portfolios right now, but in fact you’re seeing quite a lot of paper on the market,” says Vladimir Colas, a managing director at Ardian, who adds that there is still a bid/ask spread that means most of these transactions are still in the “ongoing discussion” phase.

The participants agreed that actual transaction levels could start significantly increasing towards the second half of 2016 and could very well last for a couple of years.

“To the extent we begin to see oil prices stabilise, by the second half of the year, we expect an uptick in secondaries of energy-focused funds,” says Chris Bonfield, a managing director at Greenhill Cogent.

Stay tuned for the third excerpt from the PEI’s secondaries roundtable, which will be published in Secondaries Investor later this month.