Oil Price Movements and Risks of Energy Investments
Posted: 26 Dec 2015 Last revised: 22 May 2019
Date Written: January 31, 2016
This study examines the historical relation between oil price movements and both public and private equity investments in the energy sector. By utilizing two proprietary private equity databases (one at the fund-level and the other at the company-level), we are able to show that investments in energy focused private equity offer diversification benefits relative to similarly focused public equity and direct energy commodity investments. We find that public equity investments perform better than direct investments in energy commodities. Energy-focused private equity outperform energy-focused public equity. A nonlinear relationship between the returns on energy-focused equity investments (both public and private) and energy prices over multi-year investment periods suggests that equity investments may capture more upside exposure to energy prices over sufficiently long holding periods. This effect, which may be related to the real and financial options embedded in equities, appears stronger for private equity. We conclude that investors with a liquidity preference would have favored energy-focused public equities to direct energy commodity investments. Investors willing to tolerate lower liquidity and preferring greater diversification would have benefited from allocating disproportionately to energy-focused private equity.
Keywords: Oil Prices, Energy Prices, Commodity Exposure, Private Equity
JEL Classification: G12
Suggested Citation: Suggested Citation