Aurora Borealis
1 October 2014 CFA Institute Journal Review

Global Energy: The Private Equity Opportunity of the Century (Digest Summary)

  1. Heather K. Traficanti

Analyzing literature on global energy and private equity opportunities within this sector, the author highlights the massive private equity investment opportunities in energy that are being created because of increasing global demand and shifts in the global energy landscape. Given the long-term projected increase in global energy demand from emerging markets, such as China and India, global energy private equity fund investments may provide the investing opportunity of the century.

What’s Inside?

The author’s objective is to highlight fundamental shifts in the global energy landscape and the resulting opportunities for both short- and long-term private equity returns. Currently, energy is still the most under-represented business in the world of private equity. The author discusses the shifts in the global energy landscape relating to the shale gas revolution, global demand for energy, regulation, and technology. He also considers the abundance of capital and growing pool of long-term investors, investment opportunities, and investment vehicles in the sector. Risks and opportunities are covered in terms of regulation, public resistance, volatility, and macroeconomic factors. The author uses examples from notable publications and industry reports as support for his conclusions.

How Is This Research Useful to Practitioners?

Global energy as an asset class has demonstrated its value-creation capabilities and long-term staying power. The author concludes that private equity is well placed to seize opportunities offering investors alternative investment vehicles that include energy, such as buyout funds, infrastructure funds, and other real assets. Furthermore, he identifies energy-type investments and geographies that may have the largest demand growth rates.

The author highlights three long-term drivers of the global energy market and the immediate and long-term opportunities available. First, the shale gas revolution will create access to abundant low-cost gas (and oil) and has been referred to as the most significant development in the energy industry in the last 50 years. Currently, a large shale gas revolution is unfolding across the world, one that could require $9.7 trillion in cumulative investment in gas-supply infrastructure between 2012 and 2035, according to the International Energy Agency’s (IEA) favorable scenario.

Second, emerging market economies have had an insatiable thirst for energy to continue along their rapid growth trajectories. For example, the growth rates of energy consumption in China and India are 8.8% and 7.4% per year, respectively, according to the BP Statistical Review of World Energy (June 2012).

Third, regulation and technology as well as the tightening regulation of dirtier fuels, such as coal, combined with technological advances in renewable energy, are driving a fundamental shift in the electric power mix. Environmental regulation, renewables, and inexpensive gas are all expected to significantly reduce US coal-fired power capacity, which now supplies nearly 50% of the electric power in the United States.

How Did the Author Conduct This Research?

The author gathers the data and statistics from numerous sources and incorporates them into his analysis. In the growing demand for energy, according to the BP Statistical Review of World Energy (June 2012), world energy consumption totaled 43 billion cubic meters per day in 2010 and is projected to be 55 billion and 63 billion cubic meters per day in 2025 and 2035, respectively. Although the countries in Asia that were not part of the OECD required 12.3 billion cubic meters per day in 2010, that required amount is expected to be 23 billion cubic meters per day in 2035, with China requiring the largest portion (14.8 billion). According to the IEA World Energy Outlook (November 2012), the change in power generation projected for 2010–2035 ranks China, India, the United States, the European Union, and Japan as the largest consumers of coal, gas, nuclear, and renewable energy sources, with coal making up a smaller portion than it does today.

The capital available for investment in energy is growing as long-term investors are increasingly investing in real assets, which includes energy, infrastructure, timber, real estate, and commodities. An article published in Pensions & Investments (29 November 2013) reported that in 2012, the real asset investments of the 200 largest US pension funds were in commodities ($23.9 billion), energy ($10.1 billion), and infrastructure ($8.8 billion).

The opportunities for private equity groups to invest in global energy are nearly unlimited. Two types of fund deals that have emerged are standard buyout funds and infrastructure funds. In 2013, oil and gas, transportation, and power accounted for the largest global buyout deals.

In the future, private equity risk-adjusted returns are likely to vary considerably, but historically, private equity investments stand out as having the best returns over a 10-year period.

Abstractor’s Viewpoint

The author highlights that the global energy industry from a private equity perspective is a massive investment opportunity, and the reasons behind this conclusion are well founded. He discusses important shifts in the global energy landscape that private equity investors may consider to maximize returns. For example, the shale gas boom may be a beneficial investment choice that should help to dampen volatility in the medium to long term, emerging market economies are exhibiting rapid energy growth trajectories, and fundamental shifts are under way in the electric power mix because regulation is driving growth in renewable energy.

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