Private equity is hoarding $971 billion --  here's where they're going to spend it

The oil market is wobbling, and that spells good news for private equity firms.

That’s according to Ernest & Young’s latest report led by Jeremy Barnes and Charles Berkeley, which surveyed 100 private equity firms around the world. Altogether, private equity firms are sitting on a $971 billion cash pile, citing data from research firm Preqin, and they’re ready to plow money into the oil and gas sector.

“Access to financing is arguably the biggest challenge facing oil and gas companies. While many expected PE funds to swoop in with capital during the oil price downturn over the last 18 months, investment has fallen short. But the tide may be turning,” said Andy Brogan, EY global oil & gas transactions leader. “Greater consensus over the oil price future and more favourable asset valuations are improving the conditions for PE, and we expect to see an uptick in deals before the end of the year.”

Indeed, private equity giants such as Carlyle Group and Blackstone Group
are eager to jump into the distressed energy credit area. And in the larger scheme of things, these alternative asset managers are beefing up their lending arms as large banks retreat amid intensifying regulatory pressure.
The over-supply may be setting up oil prices for another fall, according to David Bianco and the strategy team at Deutsche Bank. Limited access to financing, coupled with reduced cash flow, has triggered a wave of energy bankruptcies in the US. In fact, that number is nearing the size of the telecom bust of 2002 and 2003, and more is likely to come, Reuters reported.

That means an increasing debt burden and more creative deal structures for private equity-backed oil and gas companies.

“PE-backed companies are looking to joint ventures to help them cut costs, while others hope contingent pricing will offer much-needed price stability,” said Michael Rogers, EY global deputy private equity leader.

One in four surveyees are planning for acquisitions by this year and 43% of them plan to do so by the first half of 2017, according to the report. Among emerging markets, all surveyees said they expect to see more private equity activity in Asia’s growing energy market, thanks to its low cost and ease of doing business and production potential.

That is not to say private equity firms are going all in, as most respondents see a persisting valuation gap.

“The valuation from the sell side is higher, which is not acceptable to the buyer as they are linking the valuations to the low price of oil,” a managing partner at a Canadian PE firm told EY.

They are also hesitant to invest because of the current market volatility and waiting to see if oil has hit the bottom. We’ve seen crazy swings in oil prices this year, and even the smartest minds on Wall Street have a hard time making sense of it. Steve Schwarzman, co-founder of private-equity giant Blackstone, had said the oil market is making everyone a bozo.

Bottom line: private equity firms are going to make a lot of noise in the fortunes of oil and gas early next year.

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