Alternative Asset Investment Opportunities to Diversify Your Portfolio

As America continues to reopen its economy and the promise of a vaccine becomes more of a reality, you might be wondering if clarity increased in the markets? Why are sophisticated investors increasingly reallocating from the public markets to grow their exposure in alternatives? And how does the upcoming presidential election affect different industries, if at all?

On August 7 2020, Brian Adams, Founder and President of Excelsior Capital, moderated a conversation with Ryan Strawn, President of Appalachian Mineral Partners, Jessica Ginsberg, Head of Business Development for LFM Capital, and John Pontius, Director of Capital Alignment Partners to discuss what is happening within the alternative or private equity area. With public markets, debt markets, and fixed income becoming more unappealing, investors with cash or capital on hand are looking for alternative opportunities to deploy capital.

In this webinar they discussed:

• The energy world today and mineral rights
• The state of play right now within the private equity sector
• Where debt is pricing out right now
• How investor relations or communications have shifted due to COVID
• Changes on an operational level or a portfolio company deal level due to the upcoming election
• Present mindset that comes with being a boutique niche manager

A Look Inside the Webinar

What is happening in the energy world and what are mineral rights?

COVID has hit oil and natural gas demand hard. According to Ryan Strawn, “the biggest culprit here has been producers outspending their cash flow. They take every dime that they get in revenue and put it back in the ground”. This has caused extraordinary growth in the United States production levels, and we are now the leader of oil and gas production. However, on the other hand, this has really hurt the balance sheets of producers.

Mineral rights are underground real estate and are essentially bankruptcy proof, but there is always the question of how to monetize it. Ryan used Exxon Mobile as an example for how they lease the mineral rights. By using Exxon’s model, you can make money by the lease bonus on the front end, and then if they do drill, you can also get top line royalties from that. Also, if there are multiple drilling zones, each well that the producer drills provides more revenue to the mineral rights owner.

The Current Impact of COVID on The Private Equity Sector

“We really felt the world stop in late March. A lot of transactions that were in the market flipped to pause, and no new deals came to market until about May. In early June, we started to see the lights flicker back on, and it feels like the market is now awake,” was how Jessica Ginsberg described the effects COVID had on the private equity sector. June, July, and now into August, new deals are being launched, and activity is starting to pick back up, but with more starts and stops than the usual steady increasing month over month deal flow that the private equity sector was used to seeing for years leading up to the pandemic. Structures are looking a little different as well as lenders are more conservative and pricing is a little higher.

As for how this is affecting the advising of management teams, Jessica says not much has actually changed as they “have been focused on sticking to their knitting”. By sticking to what they know and having a focus on the deep operational expertise that they already have has really helped them. On the portfolio level, other than putting safety procedures in place, like wearing masks, strategies have not really shifted either.

Where Debt is Pricing Out Right Now

As John Pontius mentioned, one of the biggest question marks coming out of the onset of COVID was how are big banks going to react. What if senior lenders dry up? But, we have actually been pretty fortunate. Banks entered into this crisis with better balance sheets than they did with the global recession. The government is also giving trillions of dollars to companies. This has allowed banks to feel confident to continue to lend.

In most reports, particularly in the lower middle market, banks’ senior leverage has declined in at least half a turn, sometimes a full turn. However, this is industry specific as some areas have been more affected by COVID than others. When playing in the debt markets you don’t have unlimited upside like the equity so it is likely to be hypersensitive to any downside scenarios. Overall, “anytime there is uncertainty and question marks in the markets, investors are going to price that in”, John said.

Changes in Investor Relations and Communication

As Jessica mentioned for her company, they are not in the fundraising mode right now, but they are always in the networking mode. However, for her and her company, they pride themselves on transparent communication. With COVID, they upped their communication by changing their monthly newsletter update to a weekly newsletter update. This change supports one of their best practices which is “being open and available for conversations”.

The guests on the webinar also mentioned the importance of continuing communicating with LP’s despite not being able to meet in person. There has been a pivot to virtual conferences and getting used to the Zoom world. However, challenges are still there. John acknowledged how it is difficult to focus on business development and getting new opportunities when things have shifted to being virtual and you can’t always be face-to -face with people. “It is hard to replace in person meetings and conferences by going virtual… If you are meeting someone for the first time over Zoom, it’s just not the same”. Because of this, John and Capital Alignment Partners have relied more heavily on their deeper relationships they have had for many years because new ones are harder to come by now.

Changes Due to the Upcoming Election

Brian Adams posed a question that deals with the election. Not the politics of the election, but he was wondering if the panelists and their companies were making any changes on an operational level or a deal level based on whether Biden or Trump wins.

It is evident that the election is looming pretty large for a lot of the investor base out there. For Jessica and LFM Capital, they view it as an opportunity. For some businesses, tax pictures could change drastically after November depending on who gets elected. Because of this, some businesses may want to sell. For Jessica, she says it could be a mix of opportunity and also exit planning. But for now, they are staying hopeful.

As for John and Capital Alignment Partners, he began answering the question by saying, “It is tough because there is obviously a huge fear factor, but there is also only so much you can do”. There are a lot of variables like timing and price uncertainty. From John’s perspective, some businesses will just have to take the risks. Overall, there is uncertainty weighing heavily on both buyers and sellers.

Lastly, from Ryan’s companies perspective, they are approaching it by preparing for the worst. He discussed the possibility of banning fracking of federal land and how if it were banned nationwide, prices would rise rapidly. He also touched on how possible tax changes would lead to increased deal flow.

Present Mindset that Comes With Being a Boutique Niche Manager

With a huge swelling of private equity capital, there are many opportunistic funds. Brian made the observation that all the panelists and himself were all some sort of boutique niche managers. But, it seems like the big guys keep getting bigger. He was wondering if because of this, if any of the panelists were seeing any possible exit scenarios based on the huge amount of capital that has to go somewhere.

John saw the situation as a positive for him and his company. They partner with smaller managers and put less capital to work. They try to be incredibly conservative and they see bigger exits because of it. The bigger companies writing huge checks help create a spread that benefits smaller companies.

Jessica added to the conversation stating that they have seen “bigger funds come down fishing in our waters.” They are always on the lookout to differentiate themselves in order to explain why partnering with them would be a better option than “one of the bigger dogs out there”. For

Ryan and the mineral sector, the lower the yields are, the more entrance will come in the space. He thinks there is room for a public pure play natural gas royalties company. However, for this to happen a lot of different groups will have to merge together.

To hear more of what our panelists had to say, be sure to watch the full recording and subscribe to our newsletter to be notified of upcoming webinars!