Energy Investors seeks $1.75bn for fourth US power fund

The fund will invest in generation and transmission assets that have long-term purchase contracts in place for their capacity. The target exceeds its last successful fundraising by $400m.

Energy Investors Funds, a private equity firm focused on US electric power assets, has begun raising its latest and largest fund for the sector, targeting $1.75 billion in commitments.

The EIF United States Power Fund IV will invest in generation and transmission assets that have long-term power purchase contracts in place for their capacity, according to a marketing document made available to InfrastructureInvestor.

Infrastructure investors, who typically favour stable, low-volatility returns, are drawn to electric power assets due to the highly regulated nature of the industry. For example, if their costs go up, electric utilities can often adjusted their rates so that they can continue to earn the same regulated return on equity year after year with a great degree of predictability.

However, not all utilities provide the same degree of certainty. Merchant power, a segment of the market that sells its electricity on the spot market, is often thought of as a riskier bet, so infrastructure investors often prefer funds that buy assets with long-term power purchase agreements in place.

EIF’s latest fund will make investments between $50 million and $200 million in size and will feature a 5-year commitment period, according to the document. During that period, investors will pay EIF’s management team a 1.75 percent management fee on their committed capital. Afterwards, the fee will step down to 1.5 percent. It will target a net 20 percent internal rate of return and a 2.5 times multiple on cash invested.

EIF isn’t the only fund to focus on the US’ power sector. Tenaska Capital Management, the Omaha-based private equity affiliate of energy producer Tenaska Energy, also invests in power generation assets. Last year, it raised $2.4 billion for its latest fund.

And Connecticut-based First Reserve Corporation, an energy private equity firm with a long track record of investing in the sector, added an energy infrastructure team to its platform in 2008. Led by Goldman Sachs veteran Mark Florian, that team will look at generation, transmission and distribution assets, among other opportunities.

If successfully raised, EIF United States Power Fund IV would be the largest fund EIF has ever raised for the US power sector. The firm’s third fund, US Power Fund III, closed on $1.35 billion in June 2007. US Power Funds II and I closed on $750 million and $250 million in 2005 and 2002, respectively.

Across these and earlier funds, EIF says it has made 54 investments in the US and deployed $2.8 billion of equity. The return for its first power fund, as of 30 June 2009 is a 34.9 percent internal rate of return and a 2.4 times multiple on invested capital.

EIF was founded in 1987 and focuses exclusively on the US’ independent power industry. The firm is led by managing partners Terence Darby, Herbert Magid and John Buehler. It has a team of 45 professionals across three offices in New York, Boston and San Francisco.

A spokesperson for EIF declined to comment.