Apollo to Launch New Natural Resource Fund


October 23, 2014

Reuters reports that Apollo Global Management LLC APO.N is considering a second natural resource private equity fund. According to the sources close to the matter, the fund would be between $2 billion and $3 billion. This is further proof that the US shale boom is picking up again.


The company has a strong presence already in the sector. Its first resources fund, the Apollo Natural Resources Partners is close to investing the total $1.3 billion raised in 2012. Over two-thirds of the money from its multi-sector fund has also been invested in natural resources deals. The Apollo Fund VIII closed last January with an $18.4 billion equity raised. It has invested about 15% of this money already.


The launch of the new deal comes amidst a sharp decline in oil prices. Crude oil has been plunging in the recent months, although Value Walk believes the price will eventually start climbing up a bit. The fall in oil prices can be beneficial for buyout funds, as the funds might be able to buy off assets cheaper. Yet Reuters also warned that falling oil prices “could also eat into cushions that Apollo built into its earlier deals in the sector”.


The sources commenting on the new fund declined the speculation that falling oil prices are behind the launch of the new fund. At the time of writing, no official comment from the company was available.


The new fund highlights how private equity has been getting closely involved with the energy sector, especially the shale boom in the US. For example, big PE companies, such as Blackstone Group and Warburg Pincus, have been pouring equity into energy sector. Just recently, Blackstone Group announced it is teaming up with a new management team to invest in the renewable energy sector.


For private equity companies the traditional practice of acquiring debt-fuelled companies is producing fewer opportunities. Stock market performance and increased attraction to mergers and acquisitions have made it expensive and difficult to find leveraged buyouts.


The slowing down of the buyouts had made it difficult to maintain the right returns to pension funds and to institutional investors. Yet, it seems that pension funds are still faring better when they invest in private equity funds, so it seems the new rise of private equity is happening.


For Apollo the deal is the newest one among its impressive record. Although the company is still young firm in the private equity sector, its reports of gross internal rate of return at 20% in June showed signs of very positive performance.


The company’s most profitable investments have also been in the natural resources sector. Canadian Encana Corp acquired Apollo-backed Athlon Energy Inc. for $5.9 billion, which is around 7.3 times more than what Apollo invested.


Yet, analysts are cautious at what Apollo can achieve in the energy sector. Investors expect companies to invest in a range of sectors and Apollo believes the energy sector will only account around a third of its total investment. But during these rocky times, private equity seems to have a newfound interest in the energy sector.

Question: Are natural resources a lucrative sector for private equity?

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