DALLAS — Family offices worldwide are queueing to invest billions in E&Ps, capital-raisers report.
And some have moved fast—particularly in the U.S.—to fill the lucrative blank spaces made by public-facing investors’ anti-carbon exits.
In one case, Tailwater Capital raised some $900 million from six family offices in just eight weeks, Doug Prieto, CEO of Tailwater Capital’s upstream platform Tailwater E&P, said Oct. 3 at Hart Energy’s 29th annual Energy Capital Conference in Dallas.
In the deal, a fast-growing Rockies operator’s “sponsor was exiting energy in total, in favor of an ESG mandate” in 2021, Prieto said.
When the family offices stepped up to buy the sponsor out—and so quickly—“it made us realize, ‘Wow, this is something that we can really leverage at scale.’”
Savvy investors looking for low-risk, high-yield returns see hydrocarbons in demand through the life of their investments, said Keith Behrens, managing director and head of energy for Stephens Inc.
Meanwhile, oil and gas industry valuations are at historic lows, he said. Family desks have “looked at that and they think it's a good time to invest.”
And “it's pretty easy to convince anyone that's reasonable that oil and gas is going to be around for a long time—that the whole energy transition is going to take a while,” Behrens said.
Prieto said, “A lot of these family offices do not have an ESG mandate so they have more flexibility. They can be nimble and move quickly when there's … opportunity.”
Behrens said, “They picked up their pace and it kind of coincided with this [other] capital leaving the space …. We're seeing more of this capital coming in.”
Foreign family offices
“There is more foreign interest,” added Christina Kitchens, founder and managing partner for 3P Energy Capital. Parties looking at deals include family desks in Europe, the Middle East and Asia.
For now, many are watching, “studying what's going on domestically and starting to put their toe in the water.”
In the coming years, she expects the cash will flow, she said. “I think we're kind of just at the start of that process where we're seeing more of that type of inbound interest.”
3P is working with a sovereign group in the Middle East currently. “They look at a lot of deal flow. They've not done one deal yet. There are a lot on the sidelines,” she said.
When a deal already has an anchor and those joining might only need to take a small piece—"not a big check size—they are still tentative, still looking at how the asset develops,” she said.
“… They tend to want to be educated and maybe at least initially be a little bit of a follower versus a leader.”
Prieto said Tailwater is “having some good conversations in Korea, Latin America and England thus far.” There's interest, he concurred with Kitchens, “but nobody's actually jumped in yet … not a lot of execution at this point.”
Behrens said, “We've gone to Europe twice to meet with family offices there …. None of them have really made any material investments yet.”
Wide gap
The panelists said the investment gap is too large for family offices to replace all of the capital that has exited oil and gas beginning in the late 2010s.
“Meaningful replacement of that exodus of capital is not necessarily going to be done through domestic family offices,” Kitchens said.
Besides that, public equity is a large pool of capital to replace, and “there is a big percentage of domestic family offices that will not touch the space,” Kitchens said.
“They just won't bother trying to figure it out. … We would love to convince them, but they're just never going to do it.”
Prieto noted that capital is needed to fully develop even the top E&P plays. “If you look at the total addressable market … it's still going to require a significant amount of capital to develop primary basins.”
Secondary basins are wanting dollars, too. Resources are needed to meet the growing call on natural gas to fuel power generation for AI-led data center demand and for ongoing growth in U.S. LNG export capacity.
“As we exhaust [new well location] inventory, there are still a lot of dollars that need to come into the space,” Prieto said.
Unlike in-and-out public equity or 5- to 7-year private equity investment periods, family offices tend to invest for a longer term but want lower risk.
“When the deals look like heavy-drilling deals or just deals that you had to get comfortable investing in …, they just weren't as interested,” Behrens said.
He estimates 80% of the capital that has left oil and gas still lacks a replacement.
Data show PE firms raised $6 billion for E&P in the past 4.5 years, Behrens said.
“In the previous six years, it was $30 billion.”
While family offices’ investments to date are “not filling the void … we're just trying to fill as much as we can.”