The days when private equity fund managers and investors could make out-sized returns through plain vanilla, debt-fueled buyouts are over. Some of the best opportunities today are in specialist private equity funds that stretch the boundaries of the asset class.The first area mentioned is litigation finance
A growing number of private equity funds follow niche strategies such as Longford (Capital Management’s litigation finance) and specialization is increasingly seen by wily finance professionals like Longford's Bill Strong (formerly of Morgan Stanley) as the best way to make double-digit annual returns from the activist, long-term investment approach that best defines private equity. “Litigation finance today” is where the buyout industry “was in the early 1980s,” says Strong. “The demand for the capital greatly exceeds the supply.”Niche strategies in the 1980's provided seed money for The Carlyle Group's startup. The niche was Alaskan Native tax losses and David Rubenstein the legal specialist. Fast forward to yesterday when Alaska's largest daily newspaper joined the Rubenstein family (through his wife's ownership).
Niche strategies come and go, with some having cyclical patterns. That leads to the second area Forbes identified, energy. Forbes stated:
The oil industry is currently looking to sell more than $300 billion in assets as stock market investors press oil companies for lower capital expenditure and higher dividends after years when free cash was spent developing deep offshore wells and shale projects. Marcel van Poecke, an oil industry entrepreneur with over 25 years of industry experience, hired last year by private equity fund manager Carlyle Group, said at the recent FT Commodities Summit: “I’ve never seen the market with so many good assets for sale. It is the buyers’ market.”
The article should have said "rehired." Poecke founded and worked for European refiner Petroplus, which became a Carlyle affiliate in 2005. After making five times their original investment in two years Carlyle jettisoned a debt bloated Petroplus Holdings. Petroplus carried its heavy debts for five years before imploding, i.e. declaring bankruptcy.
Energy cycles and Carlyle and company are ready to reenter refining in part to lock up supplies for commodity trading. If Carlyle's staid pipelines can explode from bad energy bets, I expect refineries to be even more volatile.
Update 6-17-15: Reuters missed Carlyle's and Poeke's connnection to Petroplus' bankruptcy as Carlyle seeks to build a mini-major energy company in Europe.