Private equity firms investing in the energy sector are realising they need experts and engineers in the field in addition to financiers, and the best place to find them is in Texas.
This trend is reinforced by the down-cycle in the oil and gas sector that leaves the PE energy investors feeling pressure to emphasise operational value creation.
The key to achieving returns from their portfolio companies is no longer solely focused on financial engineering to see top-line growth, but rather applying operational expertise about the energy industry, sector, network of people and other factors. This kind of knowledge is best found in people with technical knowledge of the physical commodity business.
“There’s a big increase in the technical talent in the industry, particularly here in Texas,” Navigant Consulting director of valuations and financial risk management Tom McNulty told Private Equity International. “The traditional path was investment banking and then PE or hedge funds, but a lot of these funds playing in our space have learned the hard way that they need technical people on board, like engineers.”
He said the reason is that energy is a physical business, requiring technical knowledge obtained from working directly in the industry. While private equity is still a financial firm at the end of the day, the skills and deeper understanding around specific deals are becoming more important.
“We get a lot of requests for introductions to senior executives who can evaluate deals,” said Trent Aulbaugh, Houston office leader of CEO and executive search firm Egon Zehnder. “A lot of those individuals will be tapped to run the portfolio companies; help them with due diligence and industry expertise.”
Aulbaugh, whose clients are in the energy, industrial and private equity spaces, said PE firms are coming to him to hire people on both the operation and investment sides. In the former, executives are generally appointed operating partners in full-time positions. On the investment side, people tend to act as advisors looking at deal-specific aspects. In other situations, he said, they assume a position similar to a board role, when they are semi-retired.
“That’s the other trend we see a lot: private equity firms really investing dollars, time and effort much more on greater board capability,” Aulbaugh said.
Historically, PE firms have been placing managing directors or associates on the boards of their portfolio companies. But in an operation-focused PE model, he said, a “true” board member comes in with strong industry background and relative independence from the firm, not unlike the corporate environments.
In conjunction with hiring technical people, PE firms are opening offices in Texas and filling them with local people to be closer to the action. Traditionally, finance emanated from New York, while the physical commodity lay in the Gulf region, and PE firms are trying to bridge that gap.
This has been happening in the past five years or so. Hastings Equity Partners, a Massachusetts-based oil and gas services investor, opened its Houston office in September 2012 to be in “the centre of the energy industry.” In April 2014, New York-based Pine Brook opened its Houston office for operational aspects of its energy investments in the region, as reported by PEI.
Most recently, Blackstone formed an oil and gas investment platform known as Clarion Offshore Partners in Houston to pursue opportunities in special situations among existing offshore drilling enterprises, as reported by PEI.
“You’re going to hear things first here [in Texas], but capital is in New York,” McNulty said. “New York had to learn a lesson or two about supplementing their traditional talent with local and technical expertise to avoid pretty substantial energy mistakes.”