Mitigating Private Equity Investment Risk In The Oil Patch

Despite the current slump in oil prices, there has been a general uptick in private capital flowing into the oil patch. With the view that the worst is behind us and that prices have relatively settled, many of the biggest names have piled into the opportunity to invest in distressed energy companies. While investment opportunities abound, it is no secret that a disproportionate number of assets that sit on the market today are not up to par, and any financial sponsor seeking to deploy capital would be well-advised to conduct thorough due diligence to separate the wheat from the chaff. While critical, no amount of diligence can remove risks inherent to the oil and gas industry completely, especially in a continuing low-price environment. However, such risks certainly can be reduced through structured investments that incorporate two risk-mitigating mechanisms: diversification and staged financing.