In brief: Verus warns LP off oil and gas as transition gathers steam

Alameda County will be shown an energy transition fund this month – as Verus says attractive returns in the space are 'difficult given competition'.

Investment consultant Verus considers investing in oil and gas funds a “formidable” prospect as the energy transition gathers steam. “The exit risk is too high for us to gain comfort,” Verus said in a presentation to Alameda County Employees’ Retirement System earlier this month.

“Older oil/gas funds are still struggling for liquidity and, absent a complete reversal of a low-carbon future, we think that will only get worse seven to 10 years down the road as funds investing today look for an exit.

“There was a time when investing in oil/gas funds was a reasonable strategy, albeit highly cyclical. Today, the challenges in liquidity, regulatory policy and demand uncertainty make underwriting formidable.” Verus has a similarly negative outlook for midstream infrastructure funds, on which it said: “Longer-term, we think the unknown risks remain too high for our comfort.”

Verus will propose an energy transition fund this month for ACERA, according to the presentation. Verus has a “neutral” outlook on energy transition as an asset class: “Tailwinds for the strategy make for interesting opportunities, though we are seeing risk underpriced in the marketplace, so backing the right manager will be critical… the opportunity to achieve an attractive return remains difficult given competition.”

ACERA has assets worth $10.7 billion and a 20 percent allocation to private markets.