Private equity firms in the energy sector invest in oil and gas, transportation, and alternative energy assets. They may acquire distressed assets, partner with other firms, and participate in ongoing operations. The typical holding period is five to seven years, and the investment team should have experience in the energy industry. Leveraged buyouts may be used to acquire publicly traded energy companies.
There are thousands of private equity firms, and many of them are in energy private equity. Among those that are focused on energy, some are seen quite broadly across the industry, and others are dedicated to a subset within this category. Common areas of energy private equity are oil and gas, transportation or pipeline assets that carry energy resources, and alternative energy, such as wind power or solar power. Some of these investment firms may focus on the largest energy assets, and other firms will focus on small to medium-sized energy companies.
An energy private equity firm will comprise what is known as a portfolio of capital assets. This equity ownership can include entire companies or partial interests in an entity. Private energy equity could include the acquisition of distressed assets, which could mean that there has been a bankruptcy or other failure linked to energy assets, such as a non-functioning oil rig, which views these assets as a risky investment. Sometimes the private equity firm will complete the transaction on its own, or it may partner with another investment firm to make the purchase.
It is called private equity because after coming under the control of one of these investment firms, the shares of the acquisition target are no longer traded on the public markets if they ever were. This does not mean that the company will never issue shares or sell shares on the public markets again, but it will not do so while under the ownership of the private equity firm. The typical holding period for a private equity firm is five to seven years, followed by subsequent sale of the assets to the management team, the public markets, or another owner.
In energy private equity, it is often important that the investment management team have experience in the energy industry. Monitoring energy assets, such as oil and gas pipelines or wind farms, can be a complex task. In order to preserve and increase the value of these assets, private equity owners typically participate in the ongoing operation of the business.
In energy private equity, as in private equity as a whole, the investment firm might choose to buy an entire publicly traded energy company. The deal becomes what is known as a leveraged buyout (LBO) if the private equity firm uses the debt to make the purchase. This means that the private equity firm borrows capital to complete the acquisition and may borrow the money from another financial institution or may issue bonds to the public in the debt capital markets. Assets of the acquisition target, such as oil and gas drilling rigs, equipment or pipelines, could be used as collateral in the loan transaction.
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