Time to power up

In the PEI 300, a ranking of the world's 300 largest private equity firms which accompanied the May issue of Private Equity International, the numbers were big. Together, these firms have raised $1.34 trillion in private equity direct-investment capital over the last five years. TPG, the biggest of the bunch, has collected more than $52 billion over this period.

At least, it was easy to assume the numbers were big – until reminded that everything is relative. At the PEI Global Energy Forum in London, Bill Macauley, the erudite chairman and chief executive of Greenwich, Connecticut-based energy investment specialist First Reserve, said that the capital requirement to meet the world's energy demand by 2030 is a mind-boggling $26 trillion. At the moment, energy-focused private equity firms on the PEI 300 list have between them around $80 billion of capital. Which – Macauley pointed out – was a mere “rounding error” in the overall scheme of things.


One thing's for sure: governments around the world need to co-opt the private sector into providing as much investment as possible

Energy investment is no doubt full of complexity. Highly specialist knowledge, experience and outstanding networks are vital in any area of private equity. Hearing Macauley detail a few projects his firm has been involved in made clear that these qualities are demanded in abundance if you're in the energy game. Cultural adaptability is arguably a further requirement: First Reserve has recently completed deals from Venezuela to Angola. Therefore, it's unlikely that – even if they appreciate the scale of the opportunity – mainstream buyout funds, or start-up funds for that matter, will suddenly leap on the energy bandwagon. It's just not that easy.

One thing's for sure, however: governments around the world need to co-opt the private sector into providing as much investment as possible – and private equity funds will surely play an increasing role in this. However, as speakers at the Forum also pointed out, this demands careful regulation. Of the $26 trillion total capital requirement, $20 trillion is accounted for by infrastructure (exploration accounts for the remaining $6 trillion).

But investment from private sources in regulated energy infrastructure such as power grids will only be forthcoming if the rules and regulations governing these sectors provide ample incentives to investors, without at the same time jeopardising the interests of the general public. And that's a tricky balancing act, which some governments pull off well – and others less well.

While regulation makes private investment in this area less than straightforward, there is a bigger dampener on activity. Private equity investment in the energy sector has its idiosyncrasies, but what it shares with all kinds of private equity investment is a markedly higher cost of capital than during the debt boom. Pentti Karkkainen, founder and general partner of Calgary-based KERN Partners, said a more discriminatory financing environment means “assets will ultimately end up in the hands of the most efficient owner”. It also presumably means fewer as set s changing hands at all – not good news, given the need for big numbers.

SVG Capital, the London-listed investment trust with strong ties to buyout group Permira, is to maintain its listed status and its strategy of private equity investment, but is unlikely to make any significant new commitments for the next 12 to 24 months. The decision is the result of a five-month strategic review. Any new commitments will be “minimal and limited to existing funds” or to new SVG Advisers funds.

Cipio Partners, a private equity direct secondaries investor, has bought a portfolio of 10 venture capital investments from London-listed private equity firm 3i Group. No figures on the value of the transaction were released, but a source with knowledge of the situation said the deal was worth between €17 million and €19 million. The sale comes as 3i is seeking to totally divest its venture capital portfolio. Michael Queen, 3i's chief executive, told reporters last month that the firm hopes to have disposed of its venture capital portfolio within the next 12 months.

HSBC Private Equity has completed its first exit since re-launching in 2007, with the sale of Transmission & Distribution Group for an undisclosed amount. The deal represents an internal rate of return exceeding 40 percent. The in-house private equity group backed the company's management buyout in January 2008, which was a deal sourced and debt financed by HSBC's corporate banking arm in Scotland.

UK deals done by private equity and venture capital firms totalled £19.5 billion (€21.6 billion; $29.4 billion) in 2008, down from £31.6 billion in 2007 and £21.8 billion in 2006. All regions experienced falling investment levels compared to 2007, except for Scotland, which saw £1.1billion invested in 2008 compared to £393 million in 2007. Despite the evident slowdown, the BVCA noted that “in comparison with the decade as a whole, rather than the exceptional 2006-2007 period, investment in 2008 was robust”.

AAC Capital Partners has started putting to work the near-€1 billion war chest it received from a Goldman Sachs-led consortium in November last year. The Amsterdam-based mid-market firm, formerly the captive private equity team of Dutch banking group ABN AMRO, has acquired a “substantial” stake in Viking Redningstjeneste, an Oslo, Norway-headquartered roadside assistance business.

Central and Eastern Europe-focused ARX Private Equity has bought a majority stake in Czech eye clinics network Lexum Group. The terms were not disclosed though market sources estimate the deal was worth around €20 million. The funds will be used to aid the expansion of Lexum clinics, which treat cataracts, retinal problems and provide sight corrective laser treatments. Last year the clinics performed over 11,000 cataract operations and over 5,700 laser surgery procedures.

European private equity fund managers with more than €500 million under management will be subject to new disclosure legislation, if a directive proposed by the European Commission – the body responsible for proposing and implementing laws across the European Union – is approved by the European Parliament (see p. 12). The directive states that any alternative investment fund with over €100 million under management will be subject to the new rules, but for unleveraged funds with a lock-in period of more than five years – as private equity funds typically are – the threshold is €500 million.

Firms affected include managers of hedge funds, private equity funds, commodity funds, real estate funds and infrastructure funds. In a statement Charlie McCreevy, the EU's internal markets and services commissioner, acknowledged the importance of the part played by alternative fund managers in the European financial system but said there existed “a global consensus – as expressed by the G20 leaders – over the need for closer regulatory engagement with this sector”.

The directive would require managers to provide detailed information on their funds' activity, governance, internal risk management, “arrangements for the valuation and safe-keeping of assets” and audit arrangements. Fund managers would also be required to hold and retain a minimum level of capital.