Family offices see gains after making opportunistic bets on oil

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

Iran war in action oil prices It has risen nearly 30% to more than $94 a barrel since the conflict began in late February. This rise has been a boon for investment firms from ultra-rich families who have made opportunistic bets on oil in recent years.

Since the pandemic, private equity funds and other institutional investors have moved away from oil and gas in part due to pressure from environmentally conscious stakeholders. Investors and advisors told CNBC that family offices are stepping in to fill some of that gap.

While many family offices are environmentally conscious—a September survey by Citi Private Bank showed that more than half of respondents reported they would make sustainable investments in the next five years—they are not subject to the same ESG obligations as private equity firms or foundations that face pressure to divest from oil and gas.

“Family offices are opposition players. Many investors have left the industry for non-fundamental reasons, such as endowment funds, which caused students to protest,” said Keith Behrens, head of energy and clean energy investment banking at Stephens. “Family offices saw capital flight and that created really good investment opportunities for them. They were able to come in and invest at pretty decent cash flow multiples.”

Family offices also have an advantage over private equity players because they typically hold investments longer, meaning they can ride out oil price swings and deal-making downturns, according to Gillon Capital’s Jeff Peterson.

“We support teams that want to build businesses for the long term, because that’s where we really differentiate ourselves. A fund can only really hold a business for the life of the fund,” he said. “We are investing generations to be able to study current cycles.”

Peterson has been managing investments for the grandchildren of oil tycoon HL Hunt for 14 years. About five years ago, one of the family’s personal investment firms, AG Hill Partners, doubled down on oil and gas to take advantage of attractive valuations.

Multiples in the industry typically range from two to three times cash flow, according to Peterson, chief investment officer at Gillon Capital, a family office that was spun off from AG Hill Partners a year ago.

Peterson said the family has taken the lead on major deals in the industry, such as forming a consortium of family offices and raising several PE funds for the $2 billion acquisition of natural gas producer PureWest Energy. He said the family is also the main investor in a mining and concession fund that has raised about $500 million in capital and has a prominent position in the Permian Basin, the highest oil-producing field in the United States.

According to Tailwater Capital’s Doug Prieto, the sector is increasingly attracting interest from family offices that are not affiliated with energy. He leads upstream energy funds supporting oil and gas exploration and production for a middle market PE firm. Prieto said the funds have raised about $500 million from family offices with no energy background and last week received commitments from a family office built on options trading wealth.

Family offices without energy expertise often try to diversify their portfolios with assets unrelated to stocks and bonds, Prieto said. He added that oil and gas are also attractive as an inflation hedge.

The Trump administration’s efforts to prioritize oil, gas and nuclear power over clean energy have given investors greater confidence in the industry, according to Ellen Conley, an attorney and co-chair of Haynes Boone’s energy finance practice group.

He also said the potential for cash dividends is attractive to family offices.

“Family offices view these assets as real assets that generate cash flow rather than speculative commodity gambling,” he said. “We are dealing with real assets, especially in Texas, where there is repeatable cash flow and predictive models.”

Conley said investors’ interest in energy was already growing before the recent oil rally. But headlines about oil prices linked to the Iran war have spurred inquiries from family offices looking to invest, according to Vicki Odette, global head of Haynes Boone’s investment management practice group.

However, Peterson said investors new to the space can only realistically benefit from the current price increase through hedging.

“For someone starting a drilling program today, you’re not actually looking at production this calendar year. You’re looking at next year,” Peterson said.

Analysts generally expect the current rise to be temporary.

While higher prices are good for existing investors, they make it harder to get deals done, Behrens said.

“If someone is selling a property, they will want to sell it for the highest price possible and close on the last day,” he said. “The buyer will say, ‘It’s great that oil is at $115 a barrel, but three months ago it was $60.'”

Prieto added that it is possible to have too much of a good thing. He said that keeping oil prices high for a long time poses a risk of recession.

“We want to see a strong U.S. economy. I think somewhere between $75 and $85 a barrel feels pretty good for us,” he said. “Once you get above $100, you start having negative effects that don’t help anyone.”