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Private Equity Still Strong

Volatile markets create investment openings.

Fortnightly Magazine - June 2008


Equity Deals in 2008

Overall, the energy and utility industries are continuing to experience a high level of deal-making in 2008. So far in 2008, notable deals have included:

• Macquarie Investment Partners and Alberta Investment Management Corp. led a $7.4 billion bid to acquire Puget Energy, parent company of Washington state’s largest utility, Puget Sound Energy.

• Idealab, and Oak Investment Partners invested $130 million in eSolar, a Pasadena-based builder of utility-scale solar thermal power plants.

• First Reserve Corp. announced an agreement to buy Gamesa Solar SA, a solar-energy company with a renewable energy division, from Gamesa Corporación Tecnológica SA, its Spain-based parent, for $397 million.

While industry experts expect a significant falloff in private-equity transactions above $2 billion, as debt financing is more difficult to secure for larger transactions, midsize acquisitions in the $25 million to $500 million range continue to completion. Absent a deep recession, mergers and acquisitions activity in the energy and utility industries will remain strong in 2008 in the lower middle market, and may strengthen further going into 2009—supported by stable valuations, easing credit and a recovering economy.

Of course, the energy and utility industries consist of different markets and varying types of businesses, and private-equity firms tend to target specific sectors. The alternative-energy sector—especially biofuels, solar and wind energy companies—has received a significant amount of media interest recently, driven by high commodity prices and new renewable mandates and incentives. Most private-equity investments in this sector tend to be in less-established companies looking for growth capital as they expand their business plans.

Investors also are interested in companies producing new technologies aimed at prominent energy-related problems—such as power-plant emissions.

In the oil and gas portion of the energy industry, there is significant demand for capital to provide new supply. Concurrently, as older fields are depleting and maturing, there are significant consolidation opportunities to improve efficiencies. Both in the midstream sector and now in the exploration and production (E&P) sector, significant growth capital investment opportunities exist.

The coal market also is of interest as coal continues to play a vital role for U.S. power generation. The development of clean-coal technology to mitigate emissions will be a critical driver of the long-term growth of coal, and thus clean coal companies are attracting investor interest.

Path to Profit

Energy-related companies seek private-equity partners for many reasons—for instance, to finance growth, invest in new equipment or product lines, or to allow one or more principals to retire when no successors are in place and they don’t want to sell to a strategic buyer. In these cases, business leaders can use several methods to improve their chances of attracting private-equity capital.

Companies should have a compelling strategy for growth. The strategy needs to be sufficiently clear in the way it emphasizes differentiation from competitors. Management must be prepared with a well-crafted plan for where the company is going. Also, it’s important to have ready the often-required audited financials.

Private-equity firms are not usually interested in start-ups; instead they prefer established companies with proven products or services, diversified customer