Hunter Watts Source: Tomorrow Fund

“We’re at an inflection point for oil and gas,” says Hunter Watts. Demand for fossil fuel-based energy is not falling – “our LPs generally agree with us on that”. Yet raising capital for oil and gas production funds is “much more difficult” as the global transition progresses and gathers support, Watts tells New Private Markets.

The Tomorrow Fund, where Watts is chief investment officer, has raised $1.04 billion for its debut vehicle, a strategy of acquiring oil and gas production assets in the US. This is just a fragment of its fundraising ambitions: the fund has a $5.25 billion target and a $10.5 billion hard-cap.


Now is a surprising time to launch an oil and gas focused fund. As the energy transition gathers steam, many of the largest energy fund managers are either pivoting their strategies to transitional or low-carbon themes, or expanding their portfolios to include these themes alongside traditional fossil fuel-related investments. For example, after Blackstone closed its third energy buyout fund on $4.2 billion and its second energy debt fund on $4.5 billion – both of which focused on traditional energy and closed slightly below target in 2019 – the firm is now raising funds focused on the energy transition for these strategies. Energy Capital Partners (ECP), which had its roots in traditional energy and is now targeting $4 billion for its fifth flagship fund, has tilted its strategy into transition themes over successive funds.

Raising the Tomorrow Fund’s first billion dollars has been “much more difficult” than traditional energy funds five years ago (Watts worked as an independent fund placement and strategy adviser for energy funds between 2014 and 2022). This is due to a combination of tighter fundraising conditions across private markets in the macroeconomic environment, and shrinking LP interest amid the energy transition.

“I thought it was going to be like taking candy from a baby” to raise capital late last year, while the Russia-Ukraine conflict put energy security and independence concerns into the spotlight. “That turned out not to be the case. Investors really wanted to see what the true impact [of the energy crisis] was going to be, and whether existing renewables can meet everybody’s needs.”

But going into this summer, “the conversation is very quickly changing” as energy bills have risen to cool buildings down in recent heatwaves, says Watts. “Folks that really didn’t want to talk to us in December are now reaching back out.”

Moral motivations

“We support the energy transition and renewable energy,” says Watts. But with recent energy supply constraints and the rising cost of energy, the energy access argument is a moral motivation for the Tomorrow Fund, says Watts: “If we care about people’s quality of life, oil and gas still needs to be part of the conversation. We don’t see [the global economy] as close to the transition as we would like. We don’t see demand for oil and gas falling.” And without more financing, “We don’t see production of oil and gas increasing. We see it stagnating or falling”.

The fund can also support the energy transition, president Chris Hardy adds. Renewables cannot supply electric grids with sufficient baseload energy, particularly at night. And electric cars are typically charged at night – so as they receive wider adoption, “they will put tremendous strain on the grid”, says Hardy. “There’s only once source of electric generation that is scalable in time to support that: natural gas.” Some investors have been drawn to the Tomorrow Fund because it has a capacity to “lean into natural gas”, says Hardy.


Falling oil prices and lower valuations for producing assets over the past year present opportunities for the Tomorrow Fund. “We see this as a great opportunity to buy at a discount,” says Watts. Many private equity funds in this sector are coming to an end of their term, and are either selling their assets cheaply or are setting up continuation funds in the hope that they will be able to ride out the lower valuations.

“Over the next 10 years, oil and gas producers will be in high demand,” says Watts. “However, as regulation continues to tighten, the ability to explore new fields will reduce significantly. [Increasing oil and gas production] is not going to be in the exploration of new fields. The only way companies will be able to increase production will be to acquire existing production and turn those wells upside down. We foresee a future in which production can increase and new rig count does not necessarily have to follow that.”

Other private equity firms are also seeing new opportunities in the traditional energy sector. IKAV, for example, a renewables specialist fund manager, recently partnered with CPP Investments to acquire oil and gas producer Aera Energy, with a view to transitioning its assets. And Houston, Texas-headquartered EnCap Investments resurrected its oil and gas strategy by launching Fund XII five years after Fund XI closed. In the past five years, EnCap raised a $1.2 billion energy transition fund and launched another.


The Tomorrow Fund also plans to reduce the greenhouse gas emissions associated with oil and gas drilling. “We’re going to be mitigating all of the waste,” says Hardy. “We’re not going to be carbon neutral on every bit of carbon footprint.”

The main strategy for reducing waste relates to limiting leakage of oil wells. When an oil well’s production rate drops and it is no longer economically viable to run the extraction processes, many oil companies abandon it. The oil well continues to leak, releasing high quantities of methane into the oil or atmosphere. The US’s Environmental Protection Agency and some oil-producing states have introduced regulation in recent years requiring owners to plug these wells once they are retired – but many owners ignore this or take a while. “We’re going to plug our wells early, while they’re still producing,” says Watts.

To incentivise the early plugging of oil wells, the American Carbon Registry approved the certification carbon credits associated with avoided emissions from plugged wells earlier this year. This certification converts avoided methane emissions from each barrel of oil left in the ground to 0.8 tonnes of CO2-equivalent credit. “This will allow us to generate carbon credits to be as close to carbon neutral as possible, but also to give our LPs the ability to trade and utilise some of those carbon credits to offset their own emissions.”

Certifying organisations have not yet started accepting carbon credit claims from plugged oil wells – but if this goes ahead, the Tomorrow Fund could look something like carbon capture-based strategies introduced by Manulife and Carbon Asset Management, which generate returns by monetising nature-based carbon credits or distribute credits in place of financial returns.

The positive impact of the Tomorrow Fund’s strategy should not be overstated, however: the fund has no plans to mitigate the carbon emissions associated with the industrial process of pumping oil or gas from these wells, or the combustion of oil and gas to power vehicles or generate electricity.