The New Jersey Division of Investments’ separate account with GSO Energy is already generating strong returns, according to statements made at the State Investment Council meeting Thursday.
The $74.3 billion retirement system’s $500 million commitment to GSO Energy – a component of the $1.5 billion separate account with The Blackstone Group it established in 2011 – has already generated an internal rate of return of 17 percent, the council disclosed.
“We’ve been at it 18 months, and we’ve invested about 55 percent of the fund’s capital, so we’re very excited with that process,” said GSO senior managing director Dwight Scott, who also attended the meeting. “I think we’re about on pace. We’re a little ahead of commitment amounts.”
Scott, who manages GSO’s energy practice, attended the meeting to deliver a presentation on the development of the shale gas industry over the last decade. Shale gas accounted for only 3 percent of US natural gas production in 2003. It now represents 36 percent of the country’s total production, according to presentation materials presented by Scott.
“I sit in an office full of investors … our energy business is just busy as bees and everything else is soft,” he said, adding that the bulk of the opportunity for GSO has been for drilling and exploration companies that have already developed producing wells. Providing expansion-oriented debt and equity to more established companies allows the firm to avoid downside risk associated with newer entrants to the shale gas industry, he said.
Furthermore, because shale wells drill horizontally, individual wells are able to expose themselves to a broader expanse of natural gas-rich territory. More traditional wells drill vertically, thereby decreasing the odds of striking a natural gas-rich deposit.
“You’re going to have better results in some areas, worse results in others. But you’re not going to find nothing,” he said.
The partnership between GSO and New Jersey has already invested in a number of shale related deals, Scott said. Those include a senior secured advanced line of credit provided to Foreland Resources last year; a class A preferred equity investment in River Bend in June; and a common equity investment in 3Bear Energy, according to presentation materials.
“It’s been a great investment for us,” State Investment Council chairman Robert Grady said.