If 2015 was the year of real estate secondaries, 2016 could be the year energy transactions come into their own.
We’ve started asking secondaries market participants to dust off their crystal balls and predict what will happen next year.
Many sources say we’re in for much more of the same: pricing will remain softer than in the beginning of 2015, but still strong historically, while deal volume will remain relatively steady around $30 billion to $40 billion.
But that doesn’t mean it’ll be a dull year. Secondaries investors often capitalise on opportunity in sectors or regions where others won’t go – and right now that’s energy. Market insiders have observed a rise in interest around energy-related transactions, a large portion of which will be fund restructurings for vehicles that made bad bets in the sector or were affected by falling oil and natural gas prices.
“There’s a lot of talk, especially around restructurings and recaps of energy funds, particularly providing mezzanine or equity tranches,” said a New York-based advisor.
But getting buyers and sellers to agree on price has been challenging to date. The discounts that buyers are demanding are substantial, with the advisor noting he’s seen some bids from potential buyers at around 50 cents on the dollar. That’s to do largely with pricing risk amid lingering uncertainty around volatile energy prices. It’s the usual story of not wanting to catch a falling knife.
“The interest level is quite strong, but the big questions is when are headline prices going to start looking a bit better,” he added. “After taking a write-down, sellers don’t usually want to take a big loss.”
This week, oil prices dropped to less than $40 a barrel, a low not seen since the end of August.
“There’s a lot of downward pressure on oil and natural gas prices,” said one secondaries investor.
Some energy portfolio companies, which have been piling on debt, will also need to refinance their loans, another secondaries advisor told me. Only then will net asset values (NAVs) of funds holding energy assets finally become steady enough for the bid/ask spread to shrink and for activity to pick up again.
NAVs of energy-related private equity funds fell 18.7 percent in the first quarter and 2.4 percent in the second quarter, according to data recently released by advisory firm Triago.
“Sellers will have to wait,” said the second advisor. “It will happen. It’s just not there yet. Maybe in a few quarters.”
PS: What’s in your crystal ball? It’s that time of year. Don’t hesitate to drop us a note with your predictions at firstname.lastname@example.org