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| Risk & Reward |
Crude Investments
Eileen Gunn
11/01/2004
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Firms such as Lime Rock and First Reserve
seek security in diversification—they also invest in pipelines and oilfield
services. Service companies transport, store and process oil and gas or rent
field equipment. Their rates remain stable because they make money from the
volume of oil pumped, not the price at which it is traded. Farber cautions,
however, that if prices go down and there is less interest in drilling, some of
these companies might see their volumes decrease.
Recently, fund managers
have been under pressure to increase the size of their funds. Farber advises
investors to examine how quickly prospective funds have recently grown, and by
how much. “At some point it will fundamentally change your investment style,” he
says. “If you grow aggressively without a strategic reason, that’s
troublesome.”
In some ways, oil and gas funds are similar to other private
equity plays. Investment minimums are usually $5 million, and most funds state
they have a few affluent individuals investing alongside their institutional
clients. VanLoh notes that some of his investment bank clients are investing
money they have pooled together for their private banking customers. According
to Glen Hill, a vice president of alternative investments at JP Morgan Private
Bank in New York, it is reasonable to expect returns of 20 to 25 percent, with
most of this return coming the last five years of the fund. Annual management
fees are typically 1.5 percent, plus 20 percent of the profits.
Investment
advisors and fund mangers alike recommend limiting energy investments to 2 to 3
percent of our assets— 4 percent for those of us who may be particularly
bullish on oil. Edmonds counts himself among that group, at least until the
headlines tell a different story. “You have a combination of higher price
levels, calculated decisions on how to get the best overall returns and a better
understanding of how to use technology to get the most out of the oil patch,” he
says. “The private equity guys can sink their teeth into those
things.”
Additional Information
 Energy
Alternatives: The Master Limited Partnership
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