Power reserve

For a man who runs the world's largest private equity firm focused exclusively on the energy industry, William Macaulay sure doesn't fit the stereotypes: no Texas twang, no ten-gallon hat, not even the garish garrulity expected of an energy tycoon. Instead, the First Reserve Corporation chairman and chief executive officer, sitting in his Greenwich, Connecticut office space sparsely decorated with a sitting buddha and an Asian screen and radiating a Zen-like calm, is soft spoken while sipping a glass of fizzy diet creme soda. His calm is broken only when he notices that a list he's reading of the 50 largest active private equity funds does not include his firm's latest vehicle.

“They missed us – most people do,” Macaulay chimes as he pencils in where First Reserve's most recent $2.3 billion energy fund, closed in January, should be. Then again, he isn't particularly surprised: First Reserve has generally made it a point to stay out of the limelight. “What we've found historically is that publicity works against us,” Macaulay says. “It draws attention to us and our sector, and we don't want that attention. In terms of competitors coming in and looking for deals in our industry, we get very little of that. And that's how we like it.”

Who can blame Macaulay for his discreetness. Energy is the world's largest industry segment, with revenues pegged at more than $3 trillion annually. According to First Reserve, it is estimated that more than $5 trillion of investment will be required to meet energy demands in 2010. It's small wonder, then, that Macaulay and his associates want a big slice of that pie. Other major private equity players, including Carlyle/Riverstone, Texas Pacific Group, Kohlberg Kravis Roberts and Warburg Pincus, have all been active in this space. But with a new London office, its 10th fund raised – and oversubscribed after only one month of fundraising, Macaulay points out – it's safe to say that First Reserve has the biggest batteries for the moment.

LUCK OF THE DRAW
Macaulay began his illustrious energy career in a most unillustrious way – “by accident.” The day he walked into Oppenheimer & Co. mutual fund group as an investment manager in 1972, Macaulay was assigned to monitor the energy sector “just because nobody else was covering it. I became Oppenheimer's energy expert,” he recalls. “Energy was getting hot then as energy prices were starting to rise. They gave me a good area for my career, an area that got interesting and started to be a big chunk of Oppenheimer's funds. Career-wise, it was a good place to be.”

As we came into the later 80s, and people started raising third-party buyout funds, we saw an opportunity. We were building a different type of business – a buyout business with a single energy focus

Not one to let a potential investment gusher go untapped, a couple years into his new job, Macaulay leveraged his newfound energy expertise on a personal side project. After identifying the deregulation trend for natural gas prices, Macaulay, along with partner James Harpel, bought natural gas leases on 15,000 acres of land in West Virginia for a dollar a pop, or $15,000 in total. When the price of natural gas shot up over the next three years, the leases were sold off for $450,000, netting a handsome 30 times return.

Coming off this lucrative success, Macaulay went for double or nothing when he founded Peppermill Oil in 1977. With oil prices rising, Macaulay took the newly earned $450,000, and bought 6,000 acres in the middle of an old Utah oil field. As oil prices continued to rise, Macaulay says Peppermill allowed in a team to drill $20 million to $30 million worth of wells while securing a percentage of those ventures for himself. Five years after its formation, Peppermill was sold for $6 million.

STRAW INTO GOLD
By 1982, Macaulay had climbed his way to head of Oppenheimer's Corporate Finance group, the fund's private equity investment arm and one of the industry's earliest buyout funds. Around the time Oppenheimer & Co. was acquired in 1982, Macaulay left and formed his own private equity operation called Meridien Capital alongside Harpel and John Hill, now a vice chairman at First Reserve. The firm was a general deal shop, and made four acquisitions during its brief lifespan: an apparel company; a gas utility business; an oil company; and First Reserve Corporation, a money manager with three energy funds whose general partner had gone broke. Meridien set in at once to re-stabilise First Reserve, sending in Hill to run the firm.

“When we got here, we found out that the portfolio was a mess,” Macaulay recalls. “It was more than John Hill could handle by himself. So I came in for what was supposed to be nine months to fix it up and never ended up getting back out again into our previous business.”

The limited partners in one of the funds agreed to liquidate. Meanwhile First Reserve continued to manage the other two. First Reserve raised two new funds, both mezzanine pools, in the early 1980s that returned their target of twice the going rate for treasury bills. By its sixth fund, First Reserve had returned to buyout investing and is still going strong four funds later.

Of course, Macaulay had never planned on staying with First Reserve for the long haul and questioned his decision in those early years. “To be honest, we bought something and were responsible for fixing it because we said we would. It was very unrewarding at first. During that first period of three or four years, I thought to myself, “Why am I doing this when I had run a very successful shop at Oppenheimer and had had a very successful buyout shop at Meridien?” But we had an obligation. Then, as we came into the later 80s, and people started raising third-party buyout funds, we saw an opportunity. We were building a different type of business – a buyout business with a single energy focus, and it turned into a good business.”

FIRST RESERVE'S SECOND WIND
Today, Macaulay's firm, with additional offices in Houston and London, boasts more than $4.7 billion in assets under management. One of the aspects that draws large institutional investors to First Reserve is that, contrary to what its name implies, the firm diversifies its energy investing beyond natural gas and coal reserves.

“We also like service businesses,” Macaulay says. “If it were the California Gold Rush, we would have rather been the people that sold picks and shovels rather than the people trying to find the gold. With our style of investing, we have a higher chance of success and it doesn't draw as much attention.”

The firm has made a sizable business focusing on oil field services such as drilling service providers and wellhead equipment manufacturers; and energy infrastructure and power, such as firms that engineer natural gas processing facilities or install and repair electric transmission systems.

Another factor in the firm's success is the industry connections that Macaulay and his partners command. “We are very atypical for a buyout fund because almost all of our deal flow is proprietary. We discourage our guys from even looking at bank books, unless it's for add-ons. Historically, there haven't been many buyout funds in this space; there are whole sections in this space that we have completely to ourselves and that's the way we like it. We are looked upon in many of these industry segments as being strategic, and not as being a buyout fund.”

Indeed, when First Reserve recently opened its London office, it was not because the firm needed more European deal flow, Macaulay points out, but to accomodate the heavy deal flow that was already coming out of Europe. In the last five years, the firm has done 15 add-ons in European countries including the UK, Norway, Italy and Spain. In May, the firm led The Blackstone Group and American Metals & Coal in a $1 billion (€827 million) buyout of the US coal assets of Germany's RAG Coal International.

ENERGY FOR THE BIRDS
Macaulay's leadership, industry expertise and nose for good opportunities helped shape First Reserve into the entity it is today.

“Bill is a trusted partner, very loyal; he is the driver and the visionary of the firm,” says Real Desrochers, director of alternative investments at the $116 billion California State Teachers' Retirement System (CalSTRS), which has been investing with the firm since 1998. However, Desrochers is quick to note that even though his personal leadership has fuelled First Reserve over the last 20 years, Macaulay has surrounded himself with talented partners and set up a means of succession to continue his legacy. “He knows how to hire people, how to recruit senior executive teams. He's a thoughtful person, but he's forceful at the same time.”

The industry is not run by a bunch of environmental bad guys. People have started paying attention to the harmful things they didn't realise they were doing before

Despite the many opportunities for profit, Macaulay admits that one of the drawbacks to energy is the threat hydrocarbons pose to the environment. Macaulay says he continues to push for tougher environmental standards among his portfolio companies while balancing the needs of energy consumption.

“We're practical. We know coal is not the cleanest fuel,” Macaulay says. “On the other hand, it can be made a whole lot cleaner than it is. A modern coal plant still pollutes, but maybe 10 percent as much as an old plant. Not zero pollution, but the alternative would be sitting here having this interview in the dark.”

“Generally speaking, the industry is not run by a bunch of environmental bad guys. Awareness has increased over the years. People have started paying attention to the harmful things they didn't realise they were doing before. We are very conscious of getting safety statistics on all companies, on getting pollution reports. If someone is above average, we'll sit down and talk to them and ask why. We try.”

The environmentally harmful activities of his industry may also have an affect on an aspect of his personal life: bird watching.

Macaulay's wife Linda is an ornithologist and studies birds at Cornell University. In fact, the school's library of natural sounds is named after the couple thanks to their generous support. “We're very active bird watchers and go all over the world to record birds – which actually ties in to my business. One of the interesting things I've found is that a lot of places where the birds are is where the oil is. I'm probably one of a few people that can actually say I go to Angola for both business and pleasure.”

One of the conference rooms in his Connecticut office has photos of all the exotic places his wife and two daughters have traveled on their aviary adventures. “When they were little, my daughters used to ask why we had to take summer vacations in Ecuador rather than Cape Cod like their friends,” jokes Macaulay.

Macaulay particularly takes pride in a photo he snapped of a rare African Pel's Fishing Owl while trekking through the Western African swamps of Gabon. The picture is the first known photograph of the bird and subsequently was bought by a nature magazine; Macaulay says he still has the original $320 check framed at home.

Bird watching requires serious effort – some of the remote Central African locations Macaulay has ventured to require several days of travel in riverboats and dugouts. In all, Macaulay and his wife have gone looking for birds in 26 African countries, and it is probably during these many trips when Macaulay has to trade off doing what he does best: “We go out with a bunch of equipment, and I end up being the carrier, and she ends up being the boss.”