Global Oil Price Drop Hurts Private Equity Funds


January 28, 2015

The recent surge in oil prices has been welcomed by many industries, but private equity firms are finding the news somewhat mixed. The latest data from the biggest firms shows that some firms are seeing their combined earnings drop by a staggering 58% from just a year ago.


According to a Bloomberg article, published on Tuesday afternoon, the analysts are seeing a wide range of results and believe the big private equity firms will be announcing losses this coming February. The firms are entering a large sale period and most of them are still keen to protect their energy assets, but firms need to find a way to manage the problems the declining oil price is producing.


The Big Firms
The data shows that the four largest firms are not doing well amidst the oil price drop. Bloomberg’s analysts expect Carlyle Group will be the biggest loser, with an expected drop of 73% in earnings, mainly as the company has a large portfolio in energy holdings. Apollo Management isn’t expected to perform much better, with a reported drop of 63% in earnings.


Mike Carrier, an analyst at Bank of America Corp., told the newspaper, “Challenges in energy and credit are likely to damp results”. The most recent estimates have shown that oil prices have dropped nearly 58% since the start of June. This has been devastating for many private equity firms, which have had large energy portfolios. Energy companies have been doing especially badly in the stock markets, with many oil-producing companies losing nearly half of their share prices.


Diversification the Key
The Carlyle Group example shows that diversification is a key to managing your earnings in the current market condition. Many experts predict the firm will fare the worst when earnings start being announced in the coming weeks because of its large portfolio of energy companies.


Blackstone Group is not expected to do as bad, because the firm has strong portfolios in real estate. Real estate investments have been able to produce big gains for private equity firms in the past few months.


Not All Doom and Gloom
But although oil price drop may be causing the firms problems in terms of declining earnings, there is some good news for the industry. The drop in oil and gas prices also provides more investment opportunities for companies.


Bloomberg’s analysis pointed out that all the four big firms – Blackstone, Carlyle, KKR and Apollo – have been able to raise $15 billion for new energy investing funds. Blackstone has even started shedding off some of this equity, with its $500 million deal with Linn Energy.


Rob Lee, an analyst at Keefe Bruyette & Woods Inc., told the newspaper, “The sharp decline in energy-related assets, while putting some pressure on the near term, created significant investment opportunities. Most have significant amounts of committed and uninvested dry powder available.”


Despite the gloomy earnings, to be announced in February, the declining oil price can end up helping private equity firms into bigger long-term earnings. Alternative energy investments are currently another great opportunity for firms.

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