[Editor's note: A version of this story appears in Capital Formation 2021, a supplement to Oil and Gas Investor magazine.]
The energy private equity secondary market’s transaction standstill is estimated to be $2 billion to $3 billion annually, and several challenging steps from all secondary market participants will be required to eliminate the impasse. Underpinning any progress is an accelerating fossil fuel divestment trend. A small liberation of the market could cause a wave of transactions, enabling the quicker achievement investment goals and objectives for sellers and a potential rewarding gain for patient, long-term buyers.
During the past decade, investor annual allocations to private equity have more than tripled and peaked at nearly $650 billion in 2019 before declining approximately 25% last year. The global pandemic pushed investors to the sidelines waiting for market and asset valuation clarity.
Private equity’s massive $7 trillion capital stockpile owes to institutional investors shifting their portfolios toward typically higher returning private equity from lower returning public equity and bonds in a sustained depressed interest rate environment. For institutions with underfunded obligations, such as pensions, the move helps clear required return hurdles.