A tough market for merchant generators could be a fertile field for private equity investors.

The merchant power business model is distressed and headed for a “second round of bankruptcies,” a recent study by Wilkinson Barker Knauer LLP and the Power Research Group finds. Merchant generators like Calpine, Dynegy and NRG Energy are struggling with heavy debt loads and low power prices. That has prompted asset sales by the likes of Dynegy and NRG Energy, with private equity again stepping up as a buyer.

In July, Dynegy reached an agreement to sell three plants totaling 935 MW, one to Rockland Capital, and two to Starwood Energy Group Global. That same month, Dynegy closed on the sale of two plants to another private equity group, LS Power. And, in an effort to shed $13 billion of debt, NRG in July said it plans to sell 6,000 MW of its conventional generation and 50% to 100% of its renewable energy assets.

It is a cyclical pattern, a function of the forward curve for gas and power prices, Paul Maxwell, a director in the energy practice at Navigant, told Utility Dive. When these assets become distressed, “private equity steps in for the short term,” he said.

Private equity firms are known for their relatively short term outlook — typically about five years — but for the most part they also do not labor under the quarter-to-quarter earnings pressure of publicly traded companies. They can afford to make a bet on the commodity cycle and wait it out. Right now the commodity cycle favors private equity, not merchant generators.

In April, a report by Moody’s Investors Service said the PJM Interconnection could join California and Texas as the next wholesale power market to see distressed power prices. Low natural gas prices have forced many coal plants out of the market in PJM, but a new crop of even more efficient gas plants could begin to force older gas plants to retire, Moody’s analyst Toby Shea wrote.

Utilities are increasingly shying away from the weak demand and low prices of the merchant market, but for private equity it spells opportunity, one they have been building up to for years.

Over the past several years, private equity firms have amassed billions of dollars in funds aimed at the energy sector. Energy Capital Partners in April 2014 closed a $5 billion fund that will target a range of energy sector assets. ArcLight Capital Partners, which targets North American energy infrastructure assets, closed a $5.5 billion fund in July 2015. Riverstone closed a $7.7 billion fund in June 2013. Starwood Capital in January 2014 closed a $983 million energy fund. LS Power Equity Advisors in February 2014 closed a $2 billion energy fund. And in May 2016, Brookfield Asset Management of Canada raised $25 billion, including $12 billion for its infrastructure fund and $3.5 billion for its private fund.

Other private equity houses appear to be gearing up for power sector investments.

Pegasus Capital Advisors in June hired former Environmental Protection Agency Administrator Gina McCarthy and an operating advisor. At the time, Pegasus founding partner and chairman, Craig Cogut, touted McCarthy’s expertise in two sectors the firm focuses on — sustainability and wellness. And last year, Pegasus hired David Crane, the former head of NRG Energy, as a senior operating executive. Crane led NRG’s creation of its renewable energy yieldco that is now being sold.

If private equity’s steps into an investment at the bottom of the commodity cycle, the other part of that strategy is being able to exit at the top of the cycle. In some cases an exit is effected when another private equity firm steps in. There are several power sector assets that have traded hands multiple times. Otherwise, it requires an investor with different objectives.

Maxwell said those entities are likely to be investors with longer term outlooks, such as pension funds and foreign investment funds, that are willing to pay a premium in order to earn a higher return. Among them he sees investment funds from South Korea, Japan and Canada.

The next tier of buyers, Maxwell told Utility Dive, would be utilities. For a regulated utility, fuel prices are not as much of a concern because those costs are a pass-through to customers. And, depending on the market, some utilities are interested in adding capacity. He mentioned utilities in the Southwest and possibly the Southeast. But in jurisdictions where there are organized power markets, such as California and PJM, buying generation assets may not be as attractive because there is less control over capacity prices.

The group that Maxwell puts at the bottom of the list of possible buyers are the investor owned merchant generators. By and large, he said, “they are not in a position to buy. They are retrenching to improve their financials and are going to be sellers.”