A recent report from McKinsey although we've had fantastic performance in the market, investment returns are likely to come back down to earth over the next 20 years.
Oil and gas investments can decrease volatility and increase returns when added to your current portfolio of stocks and bonds. Even more substantial to this thesis is the fact that commodities are a good investment during a recession as demand is not purely driven by the U.S. economy, and commodities are traded on a global basis.
It’s important to know the many types of oil and gas investments you can make because each one will have an impact on your overall portfolio. Recently we had an investor ask us why they should buy into a Honeyguide Fund instead of the public markets or a public oil and gas royalty trust?
While investments in the public markets have a lot going for them such as, a proven long-term record, a dividend yield, and liquidity, the answer isn’t “either-or” but rather “and”. These are different types of investments and both can be beneficial to your portfolio.
Private Equity Is Not Tied To Certain Elements Found In Public Markets
The most popular method for investors to introduce oil and gas into their portfolio is through oil and gas stock or a royalty trust. This is certainly an effective way to gain exposure, however, it has a relationship to the stock market.
When the overall stock market begins to contract, your holdings could begin to experience negative pressures from investor sentiment in the market. With private equity, however, there is less volatility due to the significantly lower number of outside forces pressuring a sell off. Also, in private equity, many people are investing for the long term thus keeping the investment stable and resistant to investor fear volatility in liquid markets.
A Reduction In Risk Exposure
When investing in the stock market, it can take quite a bit of energy and research to compile a diversified portfolio. You may want tech exposure in your portfolio but purchasing one tech stock will not give you the proper diversification within that sector.
Private equity funds can offer exposure to a certain portion of the market while offering diversification. Many funds achieve diversification by investing in multiple opportunities that meet their specific investment criteria and mandate. This provides overall risk diversification, while gaining exposure to a particularly focused part of the market – in our case, lower-risk oil and gas equity investments.
Consider Whether Incentives Are Aligned
We started Honeyguide after seeing that there were limited options for us to invest in private equity oil and gas. The industry commands that you have hundreds of millions of dollars to make purchases. The opportunities to retail investors are not led by technically experienced personnel, and they usually place most risk on the investor. At Honeyguide, the manager’s do not make any profit until the investment pays itself back plus brings investors a return. You will be hard pressed to find an investment vehicle such as this in the public markets.
Is private equity oil and gas a part of your portfolio? With its inverse correlation to bear markets, robust returns and managed risk, it can prove to be an essential part of your portfolio.
Sources: Origin Investments; origininvestments.com
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Honeyguide Energy Partners
Finding value in lower-middle market of oil & gas assets