Undefeated: Energy PE Funds

An investment professional at a major limited partner recently explained to Privcap the challenge in evaluating energy fund managers: Too many of them have turned in great performances. “If I built a portfolio based only on performance, 80 percent of my portfolio would be energy funds,” says the investment professional.

The average performance of energy-focused private equity funds in the long term looks exceptionally attractive, according to Cambridge Associates. During the past 20 years, on an annualized basis, energy funds have on average delivered a net IRR of 15.29 percent versus general private equity’s 13.59 percent. Of course, both of these performances compare very well to the S&P 500’s annualized 9.22 percent over the same time period.

Investors are keenly interested in finding out whether energy’s outperformance is based in long-term cyclical trends related to commodity prices, to manager skill, or to a combination of the two.

The “shale revolution” requires unprecedented amounts of capital, and if LPs can determine that during the coming 20 years their investment in this vast opportunity might be rewarded with returns similar to the prior 20 years, that capital will certainly be delivered.