Q&A: Pearl Energy Investments Rides the Downturns for 250% ROI

William J. “Billy” Quinn’s Pearl Energy Investments is the driving force of some of the nation’s most successful energy investments during the last 20 years in terms of simple net return on investments. As founder and managing director of the firm, Quinn has led a baker’s dozen of colleagues, including industry veterans and next-gen rock stars, to assemble investments in energy when it wasn’t just not cool—general interest was frozen over.

While larger funds backed out of energy or went belly up, Quinn and his team hunkered down to emerge not only capable of surviving the one-two punch at demand from COVID and the ESG movement, but to thrive. The firm closed its Fund III in 2023 with $720 million—the largest in its history—and in September 2024 began work on Fund IV, steeped in great expectations. In this exclusive interview with Oil and Gas Investor, Quinn explains what’s kept his optimism alive during the industry’s troughs and his excitement about the new peaks he envisions ahead.

RELATED

Pearl Energy Investments Closes Fund IV with $999.9MM

Deon Daugherty, editor-in-chief, Oil and Gas Investor: It seems it’s been more challenging for private equity during the last few years. There is something like 80% less private equity money in the space now than there was just five or 10 years ago. Given that, was it difficult to close Fund III? Did it take longer?

Billy Quinn, founder and managing director, Pearl Energy Investments: In a word, yes. During the fourth quarter of 2021, there probably couldn’t have been a worst time in the last 15, 20 years—as long as I can remember—to actually raise a fund. Things were just starting to turn back over post-COVID, but people still weren’t having full in-person meetings. The fundraising environment was difficult. Then, from that perspective, the venture world was on fire, so all the LPs had venture funds that were coming out and they were having to reup. Whether you were general buyout or oil and gas, whatever you were competing with, there were astronomical venture returns that, as we know now, were not sustainable. But that didn’t matter, and so there was that competition.

In September of 2021, Harvard [University] came out and said, “We are divesting from all oil and gas, not making new commitments, not making new investments, and we’re going to sell everything off over the course of the next couple of years.” And, so, when Harvard came out and made that claim, the entire oil and gas investing world, if they had capital to invest, was almost a big chunk of it, and almost 70% of it was put on pause.

In the oil and gas private equity world, between 2021 and today, we’ve had a ton of exits, but those didn’t really kick in until mid-to late ’22. There were a lot of investors who in late ’21 and through ’22 that said, “We committed to all these funds, 2014 through 2020, and nobody’s returned us any money.”

Even if they liked energy, they were full, they were at their allocations and they didn’t have any money to put in it. So, for an oil and gas fund, 2021-2022 was as hard as it’s ever been.

DD: You still had some success with the closing of Fund III’s raise of $720 million. And then, in September 2024, you launched a fourth fund, suggesting some optimism. What was your thinking about that launch?

BQ: The simple answer on fundraising is, it’s never just one thing, right? It’s always a handful of things. I will say the combination of a revisiting of the longevity of oil and gas in this world, and whether you’re saying it’s an ESG push or that what you need to make power demands work what you need from security of energy resources … Ukraine gets invaded by Russia … all of these little things on a macro level [lead] people to revisit [the industry] and say, “Well, wait a minute, if we put oil and gas investing on pause, was that the right decision?”

Now I would say there are three camps there. There’s a camp that has gone public with a hard line like Harvard, saying they’re not doing fossil fuel investing—they’re not changing their minds. They made that decision three years or three and a half years ago. And if they change their mind, it’s going to be like turning an aircraft carrier around, it’s going to take 10 years for them to reverse that.

There was a big middle camp of people who said, “Oh, let’s just pause. We don’t know, but let’s not make any bold statements.” A lot of that group has come back and said, “OK, we need to be smart investors. We need to really think about what our fiduciary obligations are and who they’re to and should we revisit investing in oil and gas?”

And then, because of some of the macro variables, there’s been a large universe of people revisiting and being more open to investing in oil and gas.

DD: And exits in recent years have proven to be quite profitable for investors.

BQ: The private equity returns, meaning cash back whether it’s us or Carnelian [Energy Capital], EnCap [Investments] or Quantum [Capital Group]—you name it—there have been exit markets for our companies that have been really good the past two years. A lot of cash has been sent back to LPs that injects more liquidity into our system. So now, [answering] the people who said, “Oh, I’m overallocated. I haven’t seen any money in the last eight years.” But in the last two years, they got a ton of it back. With that component, there’s more money in the system.

[For] a lot like the public markets, it’s become clear that they don’t just want to invest in oil and gas just to have an allocation. They want to generate differentiated rates of return. And if they’re going to invest in oil and gas, in energy privates, the returns need to be there.

Our returns have been best in class. We stack our returns against, not only on an absolute basis, but against everybody else. And they look very different from the rest of the market. Carnelian looks very good, and we look very good. And then candidly, amongst the big funds, the best performers are EnCap and Quantum, and you saw in recent months that both of those firms came out with big fund raises.

DD: Apart from returns, are there other things at play? Has the ESG movement lost all of its momentum? Do they realize the energy transition is going to take longer than expected or that oil and gas will never really go away?

BQ: I say yes and yes to the last two questions. They realize oil and gas isn’t going away anytime soon. What’s the decision point here? “Who’s our fiduciary obligation to, and how do we generate returns for fiduciary?” There’s that component of it. And so, they’re revisiting the ESG component.

It’s not that these institutions are saying, “Oh, that was silly, let’s blow off the environmental aspect of this, and we’re just going to dismiss it.” It’s more of them acknowledging that, “Wait a minute, ESG is environmental, social and governance. If you … take action on the E, … does it have a negative impact on the S? Are we doing more good than bad, or more bad than good?”

There’s not a crystal-clear answer. For example, if we do things to hurt the oil and gas business and it makes hydrocarbons more expensive, are there people on this planet that are a lot worse off because the cost of energy just went up?’ And the answer is yes, there are, especially people in the developing world.

DD: So, you’ve got to strike a balance?

BQ: I think there’s a balance now where people are at least thinking through that there’s a negative in that because you have carbon emissions, but what are the consequence of not having carbon emissions and what do we get for that in exchange for quality of life?

I ask the question on the energy transition: What does that mean? What are we transitioning to? If you’re going to transition anything else you do in life, if you’re transitioning from one thing to another, you’re at point A and you’re going to go to point B. But nobody knows what point B is.

Nobody can explain it, nobody can quantify it. What are we transitioning to? I think that realization is becoming more and more profound every day where people just say, “We don’t know.” And that just changes the attitude behind investing in oil and gas. It may not say you have to do it or love it, but I think it takes the edge off of ESG. It’s not going away.

But it brings in questions, enough to where people have to sit back and say, “Are we doing the right thing? And what should we be doing?” Then that takes some of the pressure off of for some of these institutions from going “no” on fossil fuel.

Most of these institutions that go toward no on fossil fuel investing, it’s not the investment staff that is sitting back saying, “We shouldn’t be investing in oil and gas.” I have yet to meet somebody who works on the investment team at any of these institutions saying, “We don’t want to invest in oil and gas.”

They want to generate returns. What happens is at the board level of these organizations where they’re not necessarily thinking financial returns, they’re the ones making that decision,

DD: How much are you hoping to raise with Fund IV and then, where are you going to deploy the capital? What’s your plan for it?

BQ: We look for great management teams who have an expertise, which usually means deal flow and technical knowledge in a particular basin, whether it’s in the Midland Basin or the Delaware Basin or in the Appalachian Basin. There’s a real niche focus.

We look for great teams, and they really lead us to the opportunities. We are not macro in how we look at the fund and say, “We want 80% of the dollars in oil and 20% in gas, or vice versa.” We look for good risk-reward investment opportunities. That’s what our focus is and finding teams that lead us to those.

DD: Following the consolidation trend of the last 18 months or so, it seems like there are significantly fewer private equity-backed players. Do you expect a flurry of new ones to enter the market?

BQ: No. Since we were formed in 2015, we’ve always said—and always done it this way—that we manage a concentrated book. We have in any one fund, plus or minus seven or eight investments, and most of the money’s probably going to be in three or four of the companies at any one time. Maybe there are 10 portfolio companies in our entire portfolio. Maybe that peaks at 12, but then it dips back down.

We like to have a concentrated portfolio, and I think with most, like us and Carnelian, that’s what you see with the smaller funds. We like that approach and we’re going to continue with that.

Historically, what you saw with the management team proliferation that came, you had the compounding effect where you had the large-cap private equity funds—EnCap, NGP [Energy Capital], Quantum and you could even throw them in with Riverstones (Riverstone Holdings), the Apollos (Apollo Global Management) and the Warburgs (Warburg Pincus)—you had the generalist funds. Well, a lot of those firms would have 25 teams in a fund, not seven or eight.

Today, I think you’ve got two things going on, and in part this is when you look at gross dollars. We’ve talked about the market being better today than it was three years ago, but there aren’t near the number of dollars today as there were 10 years ago for oil and gas private equity. It’s a combination of a lot of the bigger players no longer exist ... They’re not in the oil and gas investment business anymore from a deploying new capital and raising new funds [perspective].

And then, the EnCaps and Quantums, the NGPs of the world have basically said, “Hey, it’s harder for us to raise larger dollars.” And their fund sizes are not what they were the last go ’round. They’ve shrunk from fund-size perspective. They look and say, “Well, wait a minute, we don’t want to back 25 teams. That doesn’t get us where we want to be,

return-wise.”

So, they’re running more concentrated portfolios. If you take half the firms that were around 10 years ago and they don’t exist, and then the large ones that still exist that are surviving, they’re going from 25 teams to eight or 10 in their portfolio, you just don’t have as many teams running around.

There’s been a dramatic contraction, and I don’t know scientifically what the number is, but we always try to estimate, and it feels like today there’s probably somewhere between 30% to 40% of the number of teams active out there than there were 10 years ago.

DD: How does this impact the exit strategies? Does it mean you intend to hold on for a long time? Pearl still has some ownership in Permian Resources, and Infinity Resources has filed for an IPO.

BQ: The simple answer for us is, there’s no one formula. There’s no one recipe for how we exit. When we make investments and when we manage our portfolio companies, we make the assumption that we’re going to own these companies for forever, even though we know we’re not.

What are the cash-on-cash rates of return of holding these businesses forever? That’s where we start as far as we build them out. One of the things we love about our size, not being a mega cap fund, is that it allows us to think through exits in a way where maybe it’s breaking up a company and selling it in five or six different asset packages. Maybe it’s selling it as one company, maybe it’s reverse merging it into another public company or selling it to a public company for stock. Maybe it’s taking it public on our own. What we look at is, you can never predict where the market’s going to be when you’re ready to have an exit.

What we try to do is build in as much flexibility as possible, and this way we can manage and pivot as needed to generate the best rate of return possible on our investment.

DD: Let’s talk about your rate of return on investment, which is significant at 250% across all three of your previous funds. How do you do that?

BQ: I always say we’re patient. We’re just patient capital and we’re opportunistic in how we go about investing in the business. And what that means is we don’t programmatically invest. We don’t think, “Oh, we have to invest $200 million this year.”

We are evaluating opportunities constantly. We’re looking at investments and deploying capital with some of our teams; with others, we’re talking about exits, but we’re still remaining opportunistic across the board. And what that means is there are periods of time where we’ll go 12, 18, 24 months, and we won’t deploy a whole lot of capital.

We’re active. We’re the proverbial duck floating around the pond.… (Y)ou’re expending a lot of energy, you’re looking at a lot of things, but you just don’t get a lot done because you’re patient.

You can go two years without doing anything, and then one year you deploy $500 million. It’s about being nimble and opportunistic. I’ve been doing this almost 30 years now, and I think it leads to generating better investment outcomes.

DD: Billy, as you’ve noted, there are a lot of shops that no longer invest in the energy business or those that tried have gone away. Was it hard to stick with energy during the COVID and post-COVID period? Did you ever contemplate going into aviation, healthcare or taking another avenue?

BQ: No, but that’s a good question. I never thought about it. But there’s that moment in time when, if one of my kids said they want to go into this, what would I tell them? Is this really the best decision for them?

For me, there was never the thought of pivoting away. In fact, I tend to be contrarian in how I think about investing and deploying capital. When the entire world was basically talking about writing this business off, my answer was, “Wait a minute. We’ve got good fundamentals from a price perspective, capex projects, the market’s disciplined and all this money’s going the other way. That should lead to better value opportunities.”

I was actually thinking more the opposite, that selfishly, if we have capital and that dynamic’s going on … it’s never easy investing capital, but that should make our lives a little bit easier in generating returns we want to generate.

DD: Because there’s less competition for those assets?

BQ: Exactly. We’re in business with teams that lead us to opportunities. We don’t look around and say, “We need to be in the powder.” We just don’t think that way.

More than anything, we look at the market and ask, “What’s going on fundamentally that we think is positive from an opportunity set?” I think that the starting point is, we think there’s been real capital discipline, both with the publics and the privates, which leads to a constructive price environment. People are disciplined on capex. The rates of return on most capex projects look pretty attractive.

There are some nice development opportunities out there when you’re buying assets. But I think where this all kickstarts is the consolidation that has gone on in the business over the past couple of years. Whenever you see these large consolidation waves happen … you see very material exits.

DD: We’ve already started to see some of that, right?

BQ: Apache [has done] a big deal. They buy Callon [Petroleum], and then on the backside of that, they sell out of the Central Basin Platform. Exxon [Mobil] buys Pioneer [Natural Resources] and they start selling. Exxon has been a very active seller over the past year. You look at all these companies that are consolidating, and what happens is on the backside they wake up and they say, “You know what? When we were at the size of our company of X, we had the bottom 10% on the drawing board to sell. For whatever reason, we weren’t selling. Now we just bought another company and we’re 50% larger. You know what that bottom 10%, let’s get rid of it. Let’s get it out the door. Now’s the time to do it.”

For us, where we think the opportunity is, it’s the combination of what we’re seeing and what we expect to see with some real good asset turnover velocity. Assets on the market and then a very disciplined and balanced capital markets. There’s still not a lot of money in our business. It’s very disciplined capital, which means if assets at the market, people are disciplined, we should be able to make some attractive long-term investments. And I think that’s where we see the opportunity. The opportunity is in that macro overlay.

There’s nuance in business strategy across every basin. If you said, “Hey, I want to go start a business in the Central Basin Platform,” we’d say you can make some good chunky acquisitions there, and there’s a lot of good conventional stuff you can buy, and there’s some asset turnover.

If you said, “Hey, I wanted to go start in the Delaware Basin,” I’d scratch my head and ask how you’re going to start. Are you going to start looking at $50 [million] and $100 million deals? And if the answer is yes, well, how are you going to compete with the offset operators who are big public companies who can drill and operate way more cost effectively than a private company can? How do you pay them in an environment where some of those publics in the shale basins, they’re looking to add inventory, not get rid of that type of inventory? So, how do you build a business there? And our opinion in certain places is, you have to be prepared to play really small ball.

DD: How small?

BQ: We’re talking about building a $400 million business or a $500 million business, but it starts with doing $300,000 and $500,000 deals that maybe build up to $5 [million] and $10 million deals. And you wake up after two years and you’ve done $50 [million] or $100 million worth of deals, but your biggest deal was $10 [million] or $12 million.

DD: So, that is quite different.

BQ: In some basins, that’s the way you have to go.

DD: Another thing that seems to differentiate Pearl from other private equity firms is that you do invest so much of principal capital in these funds.

BQ: Yes, we as the GP (general partner), I think relative to other funds, we invest a lot more as a percentage of the fund. We like to act and think like investors, not money managers. We have belief and conviction of what we’re capable of doing from a return perspective and think that that’s better than doing anything else with your money.

Remember, we invest with our portfolio companies. We have governance and controls, and so we’re involved in all the decisions and how things get done, and we work closely in partnership with the management teams. It’s what we do every day. I feel so much better having a lot of my money in our funds where we know everything that’s going on in the businesses, and we’re partnered with great management teams and we work together. You spend your entire livelihood driving the outcome of that investment.

Whereas, if you have something in public stock, how much influence can you have? You don’t have any influence and you have limited knowledge; it’s only what’s publicly disclosed. It’s just a very different investment opportunity when you’re talking about what we do day-to-day. We just have conviction in that and how we do things and think that’s the best use of our own personal capital.

DD: Your passion for this business really comes through. What drew you into investing in oil and gas? Why are you still so excited about it?

BQ: I was lucky. I’ve been doing this almost 30 years. I got in very early and became one of the managing partners of Natural Gas Partners (NGP) at a really young age and was just fortunate enough that before going back to business school, I was in investment banking for a few years.

I knew I wanted to be in the investment business. I grew up in the Dallas area but didn’t have any oil and gas experience. All the stuff I did in investment banking was anything but oil and gas. And then I got the opportunity to go work in Richard Rainwater’s office. And back then, really, there were only three or four investment professionals in his office in Fort Worth. I was one of them and so was Ken Hersh. I worked closely with Ken on a lot of things for Richard, and those were the early days of NGP. And I almost laugh when I talk about it. We were a couple of $35 million funds, so we were tiny.

But I was fortunate enough in the mid-’90s to be in that office and be around really smart people, and ended up co-managing NGP from ’97-’98 through until I left there in early 2014.

DD: Why did you want to open your own shop?

BQ: I was basically co-running the firm with Ken and David Colt, and we got big, and I tell this when I have conversations with LPs and everyone else: a multi-billion-dollar private equity fund is too big to generate the returns that we expect to generate.

I think it’s really, really hard deploying that amount of capital. And we’d reached the size of NGP, where we are going out and raising for plus-or-minus billion dollars at a clip, and it’s really hard to invest. And the simple answer is. when you become a multibillion-dollar fund complex, you don’t choose to go back to being a billion-dollar fund or an $800 million fund. The only time that happens is when the market forces you to do that.

And so, as much as I loved all the people at NGP, my partners there from A to Z, it was a fantastic place … we were not going back to where we were from ’95 to 2007. We had already made the decision to go big. That wasn’t going to change, and I just didn’t want to do that anymore.

DD: So now, going forward, what’s exciting to you now or what’s keeping you up at night?

BQ: What’s exciting is our team at Pearl. We have an awesome team that has evolved incredibly over the last 10 years. Now we have 13 going to 14 or 15 employees. We’ve maintained a nice small size, everybody knows each other—the investment team, the real investment deal team, and our general chief operating officer, office manager, CFO—everybody’s been there since day one.

DD: So now the question: what’s keeping you up at night?

BQ: I have to laugh because in our world, I feel like your head is always on a swivel. You’re like, OK, where’s the next thing to go wrong? Are we going to have an issue at a portfolio company? Whether that’s drilling a well and operations, or is there an HR issue at a company? You have enough companies, you have enough employees at these companies, you get HR issues from time to time. Are we going to be able to find some great investments over the next year?

We think we will. We have confidence [that] we will, but you never know. And so you’re just constantly looking and it’s never easy. It’s never easy. The second you think it’s easy, you’re done because there’s somebody who’s going to outhustle you. But because it’s just never easy, it’s always a lot of work and you’ve got to grind. But if you keep doing those things, they usually work out. But it’s not easy to do.

DD: If it was easy everyone would do it, right? What else is out there that we should be talking about when we think about private equity in the energy space this year?

BQ: I think it’s more of a next five-year question. You’ve seen the push on the energy transition side and we now are really starting to learn and know what, and some people had opinions and maybe knew beforehand the limitations of that, but there’s still a lot of money out there chasing those deals. And it’ll be interesting to see how the investing side of that happens.

We don’t think the returns are there; we don’t think they’re good enough. We think there’s a lot more risk in those businesses. And it’ll be interesting to see how all of that plays out in the next four to five years. There’s a lot of capital chasing not too many opportunities. When all it started, I thought it could be one of the greatest destructions of capital that we’ve seen in our lifetime.