BlackRock bets on energy sector rebound as GEPIF III closes on $5.1bn

As governments consider how to lift lockdowns around the world, BlackRock is targeting an energy sector rebound after closing its largest alternatives vehicle yet.

BlackRock raised $5.1 billion for an infrastructure fund investing in energy and power generation assets, counting more than 50 commitments from institutional investors in Europe, the Middle East and the US.

After two years in the fundraising market, the New York-based asset manager announced on Wednesday the final close of Global Energy and Power Infrastructure Fund III, which exceeded its $3.5 billion target and $4.5 billion hard-cap, according to a statement from BlackRock.

The firm has already invested nearly $2 billion, mostly in natural gas-related midstream and power generation companies. GEPIF is also targeting investments in solar, wind, hydroelectric and waste-to-energy assets, the statement said. BlackRock marketed the fund with targeted net returns and a cash yield in the low double digits, according to LP documents published in 2018.

However, in recent months, the energy market has changed drastically.

Demand has fallen sharply, as governments have kept workers at home to stop the spread of covid-19, and travel inside and between the world’s major economies has evaporated. Meanwhile, a production war between leading crude oil exporters has driven the price per barrel down to around $20 to $30, while natural gas prices seem to have settled at around $1.79 per million British thermal units, a 30 percent decline from early 2019.

Low energy demand combined with weak commodity prices will stretch thin the bottom lines of midstream companies, which charge oil and gas producers fees to transport and refine commodities. Power generators and utilities are in dire straits as well, with normally buzzing urban centres that are now vacant and millions of customers working from home, furloughed or unemployed.

With no end to uncertainty in sight, some asset managers are lining up to acquire struggling energy and power companies.

“Private investors become a great alternative for energy companies seeking partnerships in this type of environment,” said Mark Florian, head of BlackRock’s global energy and power infrastructure group. Roiled markets could create “great opportunities” for buyers, he told Infrastructure Investor, before warning: “I think we need to be incredibly cautious.”

GEPIF III is the largest alternatives vehicle BlackRock, the world’s largest asset manager at $7.4 trillion, has ever raised. It’s a continuation strategy led by Florian, who launched the series in 2008 at another private equity firm, Connecticut-based First Reserve. In 2017, BlackRock acquired the GEPIF funds, which managed $3.7 billion in assets at the time.

Florian said the GEPIF fund is targeting investments in the energy and power sectors “that have a very narrow range of outcomes”.

“That might be long-term contracted assets that have a fixed payment over time,” he explained. “That is a very narrow range of outcomes, and I think that’s attractive to investors.”

But in today’s market environment, some investors may be reconsidering their exposure to certain energy-related assets.

Paul Chapman, director of real estate and real return at the $26 billion New Mexico State Investment Council, which committed $100 million in 2018 to the recently-closed GEPIF vehicle, along with other energy-related allocations, said in a recent interview that NMSIC is “deselecting strategies, where we can, that have a high propensity to invest in US midstream assets”.

“The problem is the upstream energy component gives it some volatility,” Chapman explained. “You have to be prepared for a lot of ups and downs.” Still, he said he expects “interesting opportunities will shake out of the climate we’re in”.

“I don’t think anyone can be excited about the situation that we’re in, but I think our managers that are sitting on dry powder view it as a time when they will be able to make some smart buys,” Chapman said.