In August, Quantum Energy Partners announced that its seventh private equity fund had closed above its $5.575 billion target. The new fund is 25 percent bigger than its last fund, which raised $4.45 billion. That’s unusual when a lot of firms these days have lowered their expectations for their next funds, including First Reserve and Riverstone Holdings.
Quantum’s president, Dheeraj Verma, who is known as “D,” recently spoke with The Texas Lawbook’s Claire Poole about the fundraising environment for energy funds and opportunities he’s seeing in the marketplace.
The Lawbook: Quantum has a new $5.575 billion-plus fund. What was fundraising like this go around?
Verma: Energy fundraising is at a wacky time. There are a lot of winners and a lot of losers in the energy space, a bit of haves and have nots, from the downturn in 2014 onwards. Some firms have been able to raise capital, but others have had a hard time getting to prior fund size. In general, people have lost a lot of money over the last 15 years.
We’ve been fortunate. Our returns have been very stable and quite strong. A lot of that had to do with the kinds of businesses we were attracted to pre-downturn. Our style was to buy bigger assets and develop them over the buy and flip model. Before the downturn, a lot of these management teams at companies had parcels of land that they were able to sell it quickly and make a profit. But when commodity prices came down, they couldn’t sell them. We had less of that than our peers. We had heavy cash-flowing properties with a lot of rigs and they survived a lot better.
Second, we were more disciplined about leverage. When you borrow based on Ebitda and that Ebitda is cut in half, you have a problem. None of our companies have issued a single high-yield bond. Our companies have low leverage, a lot of hedging and great portfolios. You have to get all three right.
The Lawbook: So what were your returns like on the last fund?
Verma: We’re pretty shy about returns. I’d just say, by any sort of measure, we would fit in the top quartile of all energy funds. [Preqin reports that Fund VI had a net internal rate of return of 48.9 percent at the end of last year.]
The Lawbook: When you announced the fund, you said the energy sector remains an attractive place for private capital to play an outsized role, particularly in North America. Can you explain?
Right now, the public markets are pretty tepid and the private market is more vibrant.
Verma: The public equity and debt markets are imposing a level of discipline and restraint on public energy companies. A lot of them are being asked to live within cash flow and have distributions and buybacks. The private side is seeing a big opportunity to play a bigger role in this kind of environment. Public markets could come roaring back and then people might change their minds. But right now, the public markets are pretty tepid and the private market is more vibrant. It’s a golden era for private capital.
The Lawbook: What opportunities are you seeing?
Verma: The upstream is the biggest part of our business but we see opportunities in the midstream and oilfield services, where there’s more dislocation. We’re seeing a lot more activity in midstream than historically – they’re not having a great time in the public world. There are also a lot of startup companies in renewable and electricity. Those areas are more vibrant than in the last 10 years as well.
The Lawbook: Some of your portfolio companies are moving outside of West Texas’ Permian Basin, with Middle Fork buying Uinta properties from QEP for $155 million and Rockcliff II buying properties in East Texas/north Louisiana last year. Is the Permian too expensive?
Verma: The Permian is pretty expensive for sure. On one of our recent deals, we partnered with Apollo on DoublePoint Energy, which has 80,000 acres in the core of the Midland Basin. We were able to put over $500 million to work. That was a unique transaction. A lot of things had to come together to make things work.
Deals can get done in the Permian but it’s hard for private equity to be competitive in the core of the Permian. The public companies still have a lot of interest there and have money to buy the acreage. So we’ve done two deals in East Texas and two in Appalachia and we bought acreage in the Powder River Basin. We’ve been active all over the place.
The Lawbook: You recently invested in ConnectGen, which is involved in wind power and battery storage development, and you’ve invested in technology with RigUp. Tell me about that?
Verma: The technology side of our business is core. Our sector is pretty innovative on the field side and RigUp is a great example. It wasn’t a lot of dollars, a venture capital-type investment, but it’s pretty exciting how those type of companies are innovating.
We’ve always been involved on the technology side, but today there’s more need for capital. Venture capital is always available, but they’re more attracted to people like us, who have portfolio companies and a Houston presence. We can get them in the door and closer to commercialization. We’ve been in renewable for eight years and done half a dozen transactions.
We’re one of the firms always looking ahead. RigUp was’t a big-dollar opportunity but someday it will become a bigger business. The whole renewable side, with electric cars, will become a bigger part of the value chain. We’ve become early adopters in this area, investing in companies and growing over time.
The Lawbook: You’ve also invested in petrochemicals with PetroLogistics II. What’s the idea there?
Verma: You take propane from natural gas and convert it into propylene. It’s not the typical company we would invest in, but we’ve known the management team for two decades and we admired their prior successes. It’s more of a management team-driven exercise – they’re pretty exceptional – and we wanted them. They built their prior company with someone else [Lindsay Goldberg and York Capital], took it public and sold it to Koch. They had a great exit and they’re doing it again.
The Lawbook: You’ve also done some deals in the midstream. What are you seeing there?
Verma: One of our companies, Oryx Midstream, was started five-plus years ago and is now one of the largest in Permian with a 1 million acreage dedication. They’ve grown pretty sizable and we’re thinking about several choices of how to monetize them.
It’s been hard to buy stuff. We’ve competed on auctions and gotten close. There were two cases recently where we thought we would have won and some outlier bid meaningfully higher than we did and they transacted.
The Lawbook: What are you seeing in oilfield services? You sold your interests in Global Tubing last year.
Verma: It was the hardest hit in the downturn. It’s been one of those spaces where there’s been a lot less lending and capital from banks, which has hampered the industry a bit. It’s one of those businesses where there’s a lot of volatility and it can change on a dime. Some have had negative Ebitda then positive Ebitda, so it’s hard to get your hands around it as a seller or buyer. It’s made it hard to see eye to eye and transact. One guy is looking at the past year and the other is looking at 2019, and 2017 can look negative and 2019 can look positive and vice versa. There’s a lot of less capital interested in the segment.
We’ve done a few small things, below $100 million, where we’ve seen value. Building companies organically is where we’ve had the most success. When we sold Global Tubing to Forum Energy, that was a great outcome. Then we bought Premium Oilfield Technologies. It was smaller, it’s doing small tack-on acquisitions, the latest is sub-$25 million. We’re organically growing it.
The Lawbook: Are you finding more competition for deals given new entrants like infrastructure firms and sovereign wealth funds?
Verma: There is some of that but less than in the pre-2013 to -2014 era. There’s definitely good competition today and new infrastructure funds showing up. But net net net, there’s less competition than five years ago.
The Lawbook: You recently brought on former Jefferies oil and gas banker Ajay Khurana. What’s his mandate? Are you looking to fill out further?
Verma: It’s early days, but generally it’s for him to help us grow the firm. He’s a pretty talented guy. He’s done a lot and has a tremendous amount of relationships. He can help us do a lot of things. We’re looking at a few different directions in which to add to the platform. We’re hiring a lot of people. We recently on-boarded five new people and Ajay is one of them.