Old world, new energy

Energy deal flow in Europe is coming from a number of simultaneous trends. Even more so than in the US, European utilities are possessed of non-core assets in need of divesting. On the oil and gas side, the spate of recent mega-mergers, such as the 1998 British Petroleum/Amoco tie-up and the 1999 Royal Dutch/Shell merger, are still spawning spin-off opportunities.

On the exit side, in liberalising Central and Eastern Europe, national oil companies such as Mol and OMV are becoming increasingly acquisitive as they jockey for position, as are Russian and Middle Eastern conglomerates.

The European private equity market does have a handful of energy experts. UK-based 3i, for example, has long maintained an interest in the sector, beginning with its oil exploration investments in the North Sea.

Candover recently joined 3i on the €729 million ($925 million) buyout of the oil and gas business of Swiss-Swedish engineering group ABB. Other occasional European energy investors include PAI Partners and CVC Capital Partners.

One reason that the US private equity market is flush with energy players while Europe is not has to do with taxes. US tax laws allow oil and gas investment partnerships to be structured in ways that are extremely advantageous to investors. As a result, US investors have been involved in energy-related partnerships for years, and a community of investment managers have sprung up around them.

Still, European private equity is showing signs of grown on the energy front, but mostly from US-based firms. Connecticut-based Lime Rock Partners now maintains an office in Aberdeen, Scotland, led by former 3i energy specialist Lawrence Ross. First Reserve, the largest energy specialist investor in the US, is planning to open a London office.

Generalist firms like KKR, Warburg Pincus and JP Morgan Partners have all been active in the region's energy market lately.

But homegrown specialists are few. Norway's HitecVision raised a $100 million energy venture capital fund in 2002. Late last year, Societe Generale Asset Management backed a new group, Paris-based 4D Global Energy Advisors, in their debut fund, which raised $81 million. According to 4D partner Tighe Noonan, his firm is seeing robust flow of deals, many as a result of generational changes. As head of oil and gas project finance at Société Générale, Noonan says he saw many investment opportunities but didn't have the appropriate vehicle to pursue them. He and the other 4D partners decided to launch a firm to take advantage of these. ?We haven't seen a spontaneous generation of dedicated private investors in the European energy market,? he says, noting that there is now ?a lot of talk? among firms to dedicate more resources to the sector here.