With bankruptcies mounting in the North American oil and gas industry, the part of the sector backed by alternative asset managers is staring down a phase of consolidation and contraction as energy investors lose their trust in private equity.

From asset management giants like Ares Management Corp. and Apollo Global Management Inc. to energy-specific firms such as Riverstone Holdings LLC and First Reserve Corp. private capital has seen some of its portfolio companies file for Chapter 11 bankruptcy protections alongside publicly-owned firms. Industry researchers, consultants and bankruptcy attorneys that spoke to S&P Global Market Intelligence disagreed over the extent of the risk of private companies going under, but most acknowledged that the number of players is already significantly smaller than it was and will continue to dwindle.

"I think you are going to see the energy private equity world shrink ⁠— their next funds are going to be smaller as institutional investors are abandoning the energy sector," Pickering Energy Partners LP founder Dan Pickering said in an interview. "The irony is this is happening into the teeth of what's going to be one of the best opportunities to deploy capital that we've seen in a long time because of all the energy stress and distress."

Pickering said he believed that the number of public and private equity-backed restructurings will likely be similar.

However, Baker Botts LLP attorney Larry Hall said in an interview that this has not been the case so far from his vantage point. "I'm not getting contacted a lot about bankruptcy filings by the private equity portfolio companies I represent or the funds I have relationships with," he said. "They're all just trying to … wait to fight another day" by reining in general and administrative expenses.

Both Hall and Haynes and Boone LLP attorney Buddy Clark noted that private equity firms are also putting the brakes on standing up any new portfolio companies.

This is reflected in an enormous decrease in fundraising detailed by research and data provider Preqin. During the first half of 2020, ⁠only two North America-focused oil and gas funds closed ⁠— raising just a combined $2.8 billion ⁠— compared to the first half of 2019, which saw 16 funds close and raise an aggregate $17.1 billion.

Over two-thirds of the private equity firms Preqin surveyed said "fundraising from potential investors has been negatively impacted by COVID-19," while nearly one-third said it has "significantly slowed," Justin Beardon, Preqin's global infrastructure and natural resources market director, wrote in an email.

This was not surprising to Haynes and Boone's Clark, given widespread criticism of how both private and public oil and gas companies react to commodity price down cycles and handle their balance sheets.

"The private equity guys have been burned just like the public markets have been burned a couple of times … so they're not enthusiastically jumping into this market with both feet," Clark said in an interview.

On the flip side, as Pickering mentioned, insolvencies can be an opportunity for bargain hunting. Producer Tapstone Energy LLC, sponsored by The Blackstone Group Inc.'s GSO Capital Partners LP, offered to buy Templar Energy LLC's assets in a bankruptcy sale for $65 million, despite a Wall Street Journal report that Tapstone was potentially preparing to file for Chapter 11 itself.

"We're probably going to see a lot of these cases where one private firm is just replaced by another," refining and midstream industry consultant Andy Lipow said in an interview.

But if crude oil prices nosedive again, some of these buyers could get cold feet. In mid-March, as demand collapsed, a group of investors that included Apollo reportedly backed off from a commitment to finance EP Energy Corp.'s exit from Chapter 11 bankruptcy protection due to energy market turmoil. Alta Mesa Resources Inc.'s bankruptcy sale hit a snag when a partnership between Bayou City Energy Management LLC and Mach Resources LLC said it could no longer finance a $320 million acquisition of the company's assets. However, that sale closed in April after the court gave BCE-Mach III LLC a deadline of April 2 to get creditors to accept a deal for the reduced price of $220 million.

Alternative asset managers whose oil and gas portfolio companies do not survive, meanwhile, might decide to pivot to an adjacent sector such as infrastructure, only to find that those spaces are already crowded, according to Preqin's Beardon.

"Competition is fierce ... at the moment," he said. "An example of this is [Brookfield Asset Management Inc.'s global] Brookfield Infrastructure Fund IV, closing in February at $20 billion, which accounted for two-thirds of capital raised in the sector in [the first quarter of 2020]."

Brookfield, along with Global Infrastructure Partners Inc. and other investors, is part of a consortium that recently agreed to acquire a 49% stake in Abu Dhabi National Oil Co.'s gas pipeline assets for roughly $10 billion.

In the U.S. midstream-focused Energy Spectrum Capital closed its eighth fund in May, committing to four new portfolio companies with a fifth in documentation. Competitor EnCap Flatrock Midstream is also looking for deals.

"Some of the best deals in midstream have been made in difficult markets," EnCap Flatrock managing partners said in May. "We are already starting to evaluate a range of options that may come out of this downturn. We also expect opportunities may come to us."