It has been interesting to watch institutional and family office investors’ reactions to the sharp drop in oil prices this year. This has served as another reminder to me of how important it is for investors to look around at what their peers are investing in.
While it is almost painful to write “buy low, sell high” or “invest when there is blood on the streets” as it may feel overly simplistic and a lesson pulled from Investing 101. Yet it can be easy to abandon such a time-tested principle in today’s 24/7 financial news cycle, where alarmist stories repeat in the echo chambers online, on-TV and in the newspapers. Over the last 6 months, I have spoken to over 50 institutional investors and family offices regarding their oil and gas investments, the majority of these investors manage over $1B+ in assets. My conversations with these investors took place at our live quarterly conferences, over coffee, dinners, and meetings with CIOs in their offices. When asked, less than 10% of these investors were still allocating into the oil and gas industry at all, or had a plan for navigating it, the rest were simply turning their backs, selling, or had hit the pause button for now on that portion of their direct investment portfolio.
One would think that portfolio managers would see investing after a big drop as a good time to invest, but most groups from $1B+ corporate venture funds to large endowment fund managers were more worried about keeping their jobs, and protecting their portfolio against the unknown and against a further drop in value. One endowment fund said “we follow the other big endowments funds and allocate to large asset managers, the board can’t really fire us for doing what everyone else is doing.” A $5B+ private equity fund said in response to a manufacturing business for sale that served the oil and gas space “we are over-exposed there, with the recent drop in oil prices we are investing elsewhere.” Finally, another family office literally laughed out-loud during a discussion of whether an oil and gas services business would be a good investment at this time; the executive acted like it was ludicrous to even talk about given what has just happened.
To each investor their own opinion, but as someone who gets to consistently speak with allocators, it is fascinating to see how few sophisticated portfolio managers want to navigate an industry which has taken a beating. A sparse few investors are willing to either buy at a lower price, or price risk of further oil price drops or revenue stability into a deal—or even have that conversation. Most seem more interested in waiting for another steady-and-sure momentum play led by the mega funds and allocators. There have been a few examples of large private equity and hedge funds entering the market, hoping to scoop up distressed assets like several firms did in the financial crisis and the housing collapse. Carlyle Group, for example, is looking for opportunities to buy cash-strapped energy companies, in a bet that oil has bottomed. Instead of diving into other areas, Carlyle raised a $2.5 billion energy fund so that it has plenty of dry powder available to put to work in energy. In a June interview with Bloomberg, Carlyle Group’s president Glenn Youngkin, remarked of oil’s more than 50% price plunge, “Everybody concluded it’s the opportunity of a lifetime.” (1) According to the Global Private Equity Barometer, a 2015 survey by Coller Capital, nearly half of U.S. investors in private equity expect to allocate money into oil and gas funds over the next 3 years. (2) These examples show that some investors are willing to look seriously at the sector, in stark contrast to my recent conversations with wealth managers and family offices who hardly consider the sector at all now.
Naturally, this pullback is partly due to these portfolio managers being investors in the oil and gas space, but not experts or industry veterans of it. That reluctance connects to another trend I’ve written on several times before: that out of the 70+ billionaire families I know, many of the most successful families have made their wealth in 1-2 industries and have continued to grow their wealth most aggressively by dominating those same niche industries. It is obvious that a 3rd generation oil and gas industry family could navigate the oil and gas business better than a diversified and under-resourced endowment fund CIO. What is not obvious is how a cutting-edge endowment fund or diversified family office can tap into that 3rd generation expertise the next time there is a collapse in a commodity price or shakeup within a niche industry. Sometimes piggybacking on another investor’s expertise is attempted through niche private equity and hedge fund offerings, separately managed accounts, co-investment and club deal structures, or independent sponsors. Many times though, the opportunity to collaborate is missed due to the fees, lack of credible options, and inefficiencies involved in each of those options.
In short, it is easy to talk about investing when there is “blood on the streets,” but these investments are rarely made in my experience working among institutional investors. I have no magical formula or solution to pitch, and I never make investment recommendations without considering the suitability of the investment to the investor, but it is interesting to see everyone’s reaction to what has happened in the oil industry lately. In times like these, it’s worth reflecting on the impact of having niche industry expertise on your investment team and considering how your team is allocating capital and valuing opportunities.
Please note: I have no value investing angle to push, I have no oil and gas holdings at the time of this writing, I do not represent an oil and gas fund, I have no oil and gas conferences coming up, I have no embedded interest in promoting the industry, I am just interested in seeing how investors follow market momentum into spaces in the marketplace and in direct investing.
Richard C. Wilson
CEO & Founder
Family Office Club
Qualified Family Office Professional (QFOP)
77 Harbor Drive #76
Key Biscayne FL 33149
(1) Carey, David; Schatzker. “Carlyle’s Youngkin Feels Short Next to Blackstone’s ‘Wizards.’” June 4, 2015. http://www.bloomberg.com/news/articles/2015-06-04/carlyle-s-youngkin-feels-short-next-to-blackstone-s-wizards-
(2) Reuters. “Nearly Half of U.S. Private Equity Investors Eyeing Oil, Gas Funds – Survey.” June 7, 2015. http://www.reuters.com/article/2015/06/07/us-investment-survey-coller-idUSKBN0ON15R20150607