Friday Letter: The biggest opportunity in the world

Private equity, like everyone else, has got caught up in the oil price crash. Rig counts are down, capex is down, and general partners are having to survey recently purchased oil and gas assets with an eye toward what they might have to divest if prices stay low for much longer.

However, far from being spooked by the vertiginous tumble in the global price of crude oil, many managers, including some of the largest, are seeing the down cycle as an attractive buying opportunity.

This is entirely as it should be: private equity isn’t necessarily a counter-cyclical asset class as far as its performance correlation with the public markets is concerned, but because of its long lock-ups, it does have the ability to be greedy when others are afraid. Some say this is its raison d'être, and the current dynamic in the energy sector really does look like one that tactical buyers with money in their pockets ought to be able to take advantage of.

No wonder that firms are lining up to do just that. For example: last week Blackstone announced it had raised $4.5 billion for its second energy-focused fund, nearly double the size of its predecessor fund, a $2.4 billion 2012 vintage. We don’t know if there was a late surge of investor demand as the firm prepared the final close, but we wouldn’t rule it out. “We are hearing from our LPs that they want us to get them as much exposure as possible right now,” is how Frost Cochran, managing director of Dallas-based Post Oak Energy Capital, described the investor mindset to us recently. It seems very plausible that Blackstone has been hearing the same thing of late.

Over at Carlyle, the mood is also upbeat. During a February earnings call, co-founder Bill Conway said he “loved” how the firm was positioned in energy, in spite of a 65 percent decline in overall economic net income for the firm heading into the New Year, which was partly due to the firm’s newly depressed energy investments. At present, Carlyle is thought to have some $9 billion in dry powder ready to invest in energy, and is in market with another billion-dollar energy focused fund.

And it’s not just on the equity side that capital is being readied for deployment. Blackstone is raising its first energy-focused credit fund, citing interest in what could be a new wave of distressed energy assets and according to Reuters aiming to attract between $500 million and $1 billion. Its credit arm, GSO, is already in a $500 million rescue lending deal to oil and gas exploration company LINN Energy, as well as another $300 million transaction with Magnetar Capital to repay debts from Texas-based driller Jones Energy.

In fact, Blackstone’s co-founder Steve Schwarzman appears to be one of the most bullish of deal scouts in the sector. “Oil is the biggest investment opportunity in the world,” he told the Wall Street Journal recently.

Of course, if everyone piles in at the same, the outcome might be much less compelling than what the boosters are currently predicting. But if, as some analysts believe, the return to $100 oil will take its time, value investors with long-term capital to commit should be able to place some highly profitable bets.