Private equity ready to play M&A role
The capital is there, but the amount and cost of funding may be less favourable than it has been in the past.
Much has been made of the difficulties some private equity investors have had with US shale assets given a track record of poorer-than-expected returns on capital, open-ended opex demands and few attractive exit options.
But the panellists for PE Live 2 webcast still see private equity playing an active role in any M&A that follows the current price slump. “Private equity funds are obviously well-placed in terms of the capital they have available awaiting deployment,” says Anthony Patten, oil & gas group head at law firm Shearman & Sterling. “And they have moved away beyond just their traditional midstream oil and gas infrastructure and embraced the upstream across multiple jurisdictions.”
“In a lot of cases, they are sitting on significant volumes of dry powder,” agrees Greg Zdun, managing director and head of oil & gas, power and utilities Asia at bank JP Morgan. But he cautions that private equity players “typically use leverage to enhance returns”, and the size and cost of funding available in the current environment may be less favourable than in recent years.
“While asset prices may be more attractive, this could be partly offset by the terms being offered on the debt side,” says Zdun. But he still observes an uptick in appetite, particularly from funds less active in the last few years who now see an avenue to deploy capital that has been sitting unused. Private equity funds with existing positions and portfolios will, on the other hand, be necessarily focused on their existing operations and try to preserve as much value as possible.
In the midstream, Zdun sees private equity facing a lot of competition from specialist infrastructure funds, pension and sovereign wealth funds who also have money to spend and an appetite even for operating these assets.
Moreover, infrastructure “tends to be more resilient in a low-price environment”. Thus, it is unlikely any potential private equity buyers would be picking up assets at bargain prices. Nonetheless, Zdun still expects “discussions, largely revolving around sellers that may see better alternatives to monetise infrastructure assets and redeploy capital, or avoid more expensive forms of capital raisings”.
“The marketplace for infrastructure investments, and the financial backing from the infrastructure lending community, is still very strong,” agrees Chris Rachwal, M&A/strategy adviser at consultants GaffneyCline. “There may now be a few questions to be answered by lenders on just how heavily they want to go into the sector, but I do not expect much holding back.”
Rachwal’s bigger concern is in potential private equity investment in the upstream, particularly around an exit strategy. “I do not think the IPO route looks terribly effective this year or next,” he cautions.
“So, we may see some more innovative strategies for these private equity portfolios. More may go down a merger route, either with other private equity portfolios or with existing producers to create a new hybrid company, as we have seen in places such as Norway.”