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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Mar 1, 2017

Oil Price Movements and Risks of Energy Investments


This article examines the historical relation between oil price movements and both public and private equity investments in the energy sector. By utilizing two proprietary private equity databases (one at the fund level and the other at the company level), the authors are able to show that investments in energy-focused private equity offer diversification benefits relative to similarly focused public equity and direct energy commodity investments. They find that public equity investments perform better than direct investments in energy commodities. Energy-focused private equity outperforms energy-focused public equity. A nonlinear relationship between the returns on energy-focused equity investments (both public and private) and energy prices over multiyear investment periods suggests that equity investments may capture more upside exposure to energy prices over sufficiently long holding periods. This effect, which may be related to the real and financial options embedded in equities, appears stronger for private equity. The authors conclude that investors with a liquidity preference would have favored energy-focused public equities to direct energy commodity investments. Investors willing to tolerate lower liquidity and preferring greater diversification would have benefited from allocating disproportionately to energy-focused private equity.


Brown, G., Chan, R., Hu, W. Y., & Zhang, J. (2017). Oil price movements and risks of energy investments. The Journal of Alternative Investments, 19(4), 24–38. doi:10.3905/jai.2017.19.4.024


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