With tax rates raising for the first time in many years and a secular trend in which energy demand is outstripping supply, direct investments, IPOs and other energy investments are springing up and that is likely to accelerate. Be very cautious.
B.J. Willingham, who attended Yale and Wharton before embarking on a 35-year career as a portfolio manager and specializing in energy investing, says the world is in the middle of a “super-cycle” in energy prices, which lasts 10 or 15 years. It’s being driven by accelerating demand from less-developed countries, like China.
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According to Willingham, who is our speaker at at recent A4A webinar
, the previous energy super-cycle was from 1970 to 1982. Two super-cycles occurred before that. One in the 1950s following World War II and rebuilding of Europe and in the 1920s, following the advent of the automobile.
Willingham, a CFA charterholder, says energy price cycles last a long time because it takes many years for capital to pour into the energy sector and build the capacity allowing energy supply to catch up with demand. “Once you’re well into the cycle, and people see handsome returns in the energy sector,” he says, “you start getting lots of investment opportunities pitched to the public.”
At the session today, Willingham will talk about how advisors can separate out the good energy investments from the bad ones.
This session is what A4A is all about, by the way. I asked some advisors for names of energy experts a few months ago because the trend toward higher taxes made it more likely that such deals would start popping up again. (I was around in the 1980s for the last cycle of bad deals.) Willingham, who manages separate accounts, a hedge fund and a long-only portfolio for UHNWIs and clients of advisors, says just this week two advisors contacted him asking him to look at direct energy deals. He urges caution on these deals, saying most of the direct investments are bad.