LPs ‘Rejiggering’ Energy Allocations

Whether or not limited partners reconsider the timing of their energy allocation depends on how long it takes for oil prices to recover, says NEPC’s Sean Ruhmann.

As oil prices continue to hang out below where most private equity investors would like them to be, the question is whether LPs will change their energy allocation strategies.

In a private context, limited partners mainly tend to allocate to energy in one of two ways within their portfolios—in the real assets bucket or broader private equity bucket—and that’s not likely to change with oil price volatility, says NEPC partner and director of real assets research Sean Ruhmann. What is likely to change in the short term is rejiggering the pace of energy investments.

This year there has certainly been a change in investment commitment plans by LPs, Ruhmann says. Some strive to have a balanced real assets bucket—also including infrastructure, timber, agriculture, and metals and mining—with forward-pacing commitments, but the timing of investments in those real assets has been shuffled.

“The change this year has been for folks that might have had timber or agriculture or infrastructure [commitments] switching to energy commitments instead,” he says. “They’re rejiggering the pace of energy investments. Because [energy investments] look a lot better at $50 than at $100. From the summer of last year to today, given the path of oil, we’re seeing a fairly major dislocation. The natural inclination is that this is a good opportunity to invest [in energy] today.”

For example, an LP may have a $10M capital commitment of real assets for the next three years, Ruhmann says, with a plan of doing infrastructure and energy this year, and something else the following year.

“If oil rebounds really quickly and gets back up to a price that is $70 or higher groups that intend to rejigger their commitment-pacing to invest in energy this year might reconsider that,” he continues. “If oil is low for the better part of the year, the movement toward energy funds should persist.”

Despite the boom in oil and gas production in North America over the last five years, the target allocation of LPs for energy investments hasn’t changed much, whether it’s coming from the real assets bucket or more general private equity bucket, says Ruhmann.

As for the attitude of managers investing across the board—in commodities, and both public and private equities—at the end of 2014 the tone was a lot more bearish than it is currently, Ruhmann says. “The price of oil has rebounded, and there are not quite as many bears in the market today. They’re optimistic that it will rebound faster.”