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May 09, 2018  

New Energy Fund Employs Machine Learning

The founders of a technology company that uses machine learning to more accurately predict the capacity of oil-and-gas fields are marketing a fund that would lend money to energy-exploration and -production businesses.

The fund manager, a Houston startup called PetroAlpha Energy, is accepting minimum contributions of $50 million for its offering, PetroAlpha Energy Principal Protected Return Fund. The vehicle will incorporate several novel features — starting with a machine-learning program developed by affiliate BetaZi, which was founded in 2012 and expanded in 2016 thanks to a venture-capital investment from Mark Cuban.

PetroAlpha is telling prospective investors that with BetaZi’s technology, it will be able to precisely gauge which exploration-and-production companies are in the strongest positions to meet their obligations to the fund. To give limited partners additional assurances, the fund will buy insurance policies that would pay out in the event a borrower’s production falls short of what’s necessary to repay its loan. Insurer Munich Re already uses BetaZi’s data and analytics to underwrite risks associated with oil-and-gas production.

The new fund would seek to originate loans of $50 million to $200 million. PetroAlpha believes it has the potential to raise as much as $2 billion for the strategy, and expects to originate $1 billion or more of loans by the end of the year. In addition to direct-lending, the fund will seek to purchase royalty rights tied to future exploration projects.

The vehicle is something of a hybrid between a hedge fund and a private equity fund, with an open-end structure but an unusually long lockup of seven years. PetroAlpha is shooting for low-double-digit returns. Starting in the second year, investors would receive quarterly yield payments generated by the fund’s book of royalty rights.

PetroAlpha is charging a 2% management fee. It also will keep 20% of investors’ profits above a 5% hurdle rate.

PetroAlpha’s management team includes three co-founders of BetaZi: Janette Conradson, who is chief executive of BetaZi and president of PetroAlpha; Heidi Kuzma, chief innovation officer at BetaZi and head of research at PetroAlpha; and Cody Jones, an executive director at BetaZi and chief lending officer at PetroAlpha. Until this year, Jones also was managing partner at Blue Flame Trading, which trades natural-gas futures.

Also on board at PetroAlpha are operations chief Vincent Collaso and Paul Hudson.