Power raiders

KKR’s 24 energy-focused investment professionals are readying for a flurry of activity.

Energy investing is nothing new to the founders of Kohlberg Kravis Roberts. Henry Kravis and George Roberts grew up in families whose patriarchs were in the oil and gas industries; Kravis’ father, Ray Kravis, was for many years a petroleum engineer in the Southwestern US, while Roberts’ father, Louis Roberts, worked as an oil man in Texas.

The cousins’ private equity firm made its first energy bet in 1985 with the $1.3 billion management buyout of United Texas Petroleum, but it only formally established a dedicated energy investment platform 10 years ago.

“It’s [been] an evolving, growing, developing business platform over the last decade, that you’ve seen

Marcellus Shale: powering up KKR’s

emerge in a much more visible way over the past two years, in particular,” says Marc Lipschultz, the head of KKR’s energy and infrastructure efforts.

One of KKR’s biggest investments in the sector came when it acquired TXU, a Texas utility, in 2007 along with Goldman Sachs. At $45 billion it was, at the time, the largest-ever LBO. Its $13 billion debt package and environmental and political protests over the deal kept it in the news long after the deal was agreed.

In June, the firm’s energy holdings again grabbed headlines with the $4.7 billion sale of East Resources to Royal Dutch Shell, netting the private equity firm a handsome return. The year prior, KKR had invested $350 million for a minority stake in the natural gas exploration firm, which holds more than 650,000 acres of a major US shale formation in the Appalachian Basin, the Marcellus Shale.

 “When we invested in Marcellus, it was a very poorly understood proposition,” Lipschultz recalls. He says that this is what will set KKR apart from competitors – the ability to “have a very granular look at which companies [are worth investment], and then have the patience and the fortitude to work through some challenging uncertainties in the near term to participate in the inevitable activity in the long term”.

The firm has been expanding its energy platform to coincide with opportunities that will be created by the sector’s “fundamental growth on one hand, and seismic changes on the other”, says Lipschultz.

The recent deep water drilling disaster in the Gulf of Mexico was an example of changing opportunities, according to Jonathan Smidt, a director on KKR’s energy and infrastructure team. “Operators are going to look for the safest and most reliable service providers or equipment and are likely to be less price- sensitive given the immense cost recently highlighted by a safety lapse or product failure,” Smidt says.

KKR makes energy investments from its core fund, but is also raising an oil and gas-dedicated fund as well as an infrastructure fund that could potentially co-invest on energy deals. The oil and gas fund, KKR Natural Resources, has collected at least $257 million, according to the firm’s second quarter earnings statement.