While the fall in the price of oil has been bad news for a number of institutional investors, it has created some strong investment opportunities for managers in the private debt space keen to capitalize on displacements in the energy market. Some of the largest managers in the private debt universe, including Avenue Capital Group, Apollo Global Management and GSO Capital Partners, are currently in market with dedicated energy-focused distressed debt funds. Furthermore, other large managers, including KKR and Oaktree Capital Management, are also raising capital for diversified distressed debt funds that may include allocations to energy opportunities, including Oaktree’s mega fund Oaktree Opportunities Fund X, which is targeting $10bn.
According to Preqin’s Private Debt Online service, there are currently 31 private debt funds in market that include a specific allocation to energy-focused funds, including eight funds each targeting mezzanine and direct lending strategies. Managers are clearly seeing opportunities in the falling energy market and those with ability to raise funds quickly and get their capital to work will likely have the most to gain.
The chart above shows a breakdown of the aggregate amount of capital targeted, by debt strategy, for funds on the road that are either solely targeting energy or include a specific allocation to energy. It is important to note that further funds with a diversified strategy may also look to put capital to work in the energy space. Distressed debt funds are seeking to raise the largest amount of capital, with approximately $8.5bn currently sought. To put this in perspective, only two energy-focused distressed debt funds held a final close in 2014, raising an aggregate $1.9bn. However, distressed debt funds are not the only debt funds targeting the energy market at present; direct lending funds are the second largest private debt fund type with a specific focus on energy, accounting for 27% of total capital targeted. Direct lending managers are looking to take advantage of opportunities in the market which may have arisen as a result of traditional bank lenders stepping away from energy-focused businesses; this is due to concerns over their ability to repay loans in a volatile market.
While the equities markets may experience a shock from the drop in oil prices it has certainly created opportunities for managers in the alternative credit space. Distressed debt managers in particular are well placed to take advantage of such opportunities, with a number of funds in market and large amounts of dry powder available to invest. However, it is not only distressed strategies that are looking to take advantage of the current market; given the amount of direct lending funds in market, these managers are clearly seeing opportunities as well. While macroeconomic events will likely play a significant role in the future price of oil, debt managers’ fundraising activity indicates a belief that there will continue to be opportunities in the sector over the coming years.