Texas Endowment Finds Something to Like About Downtrodden Energy

  • Fund adds to energy sector bet with stakes in Oaktree, Kerogen
  • Money manager has $2 billion natural resources portfolio

The University of Texas saw the value of its $24.1 billion endowment shrink as oil and gas prices plunged. That hasn’t stopped its managers from making new bets on the energy sector.

The University of Texas Investment Management Co., known as Utimco, has pledged money to an Oaktree Capital Group LLC buyout fund that focuses on energy companies and others that invest in more traditional oil and gas ventures, according to documents obtained by Bloomberg. The investments were made in the year through Nov. 30.

The investment company, which is based in Austin, has about $1 billion in private energy funds, as part of a $2 billion natural resources portfolio, according to Bruce Zimmerman, the chief executive officer. Utimco said in an annual report published last month that it’s been increasing exposure to natural resources, along with real estate, as it looks to exploit market opportunities. It has $1.9 billion of commitments to the sector that it has yet to fund, Zimmerman said.

“We’ll be able to invest money at the bottom of the cycle,” Zimmerman said Feb. 10 at a meeting of the public university system’s board of regents, according to his remarks in a video posted on the school’s website. Zimmerman declined to comment further about the endowment.

Petroleum prices have plummeted in the last year, with West Texas Intermediate trading at less than $27 a barrel this month, down more than 70 percent from its 2014 high.

The decline has hurt the University of Texas, which counts on revenue from oil and gas reserves to help fund school operations. Oil companies drill on state-owned land and pay royalty revenue that is managed by Utimco. That money peaked at $1.1 billion two years ago after advances in hydraulic fracturing and fell almost 30 percent to $806 million in the year ended Aug. 31, according to annual reports. 

Texas A&M University shares in the royalties, and most of its $10.5 billion endowment is also overseen by Utimco.

Greater Exposure

“My concern is we may have greater energy exposure than we realize,” Alex Cranberg, a university regent who is chairman of exploration and energy investor Aspect Holdings LLC, said at the board meeting. “Given our extreme reliance on oil and gas income, it behooves us to take a look at what correlates in our portfolio.”

Utimco was modeled after other university investment management companies such as Harvard University’s and is overseen by a nine-member board that includes Kyle Bass, founder of Dallas-based hedge fund Hayman Capital Management, and Jeffery Hildebrand, CEO of Houston-based oil and gas producer Hilcorp Energy Co.

The University of Texas’s endowment shrunk by 5.3 percent to $24.1 billion in the year ended June 30 despite a 4.1 percent investment gain because the value of the land where the oil and gas fields are located declined, according to the school. The endowment was the third largest in U.S. higher education in the fiscal year, behind Harvard and Yale University, according to a survey by the National Association of College and University Business Officers and investment manager Commonfund.

Bright Spot

Private investments have been a bright spot for Utimco, delivering a gain of 13.4 percent in the year through August, according to the annual report.

While private equity firms have raised more than $20 billion for energy deals in the past two years, the money has largely remained on the sidelines, in part because oil producers have been unwilling to sell. That may quickly change, according to Deloitte LLP, which said more than one-third of listed producers worldwide are at high risk of bankruptcy, as their collective debt surged to about $150 billion while cash flows dwindled.

Utimco made $3.2 billion of new commitments to about 50 managers in its $8.3 billion private investment portfolio in the year through August, according to the annual report. Using Freedom of Information requests, Bloomberg identified more than 30 new funds that show the endowment investing in managers specializing in energy, real estate, technology and other sectors. In a number of cases, the amounts committed weren’t disclosed.

The biggest energy commitment disclosed was $60 million of capital invested in the quarter ended Aug. 31 in Warwick Partners III, a fund formed in December 2014 by Warwick Management Co. of Oklahoma City, according to a U.S. Securities and Exchange Commission filing. The company has $650 million invested in more than 4,100 oil and gas wells in 13 states, including Texas, according to its website.

Another recipient was Kerogen Energy Fund II and a second co-investment fund from the company, with offices in London and Hong Kong, that buys stakes in small to mid-size oil and gas companies outside North America. The capital invested totaled $15.6 million, according to a quarterly report dated Feb. 28, 2015. The endowment also made an investment of $2 million in the same quarter to GEC Partners III from Houston-based Global Energy Capital, which invests across the petroleum industry.

Utimco also committed to Oaktree Power Opportunities IV though it didn’t disclose the amount in a Nov. 30 quarterly report. The Los Angeles-based money manager, which last year said it raised $1 billion for the fund, targets investments in equipment, software and services to aid in energy generation, transmission and consumption, according to its website.

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