PE investment in Energy/Power industry Group 1 Morning

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1. khandaker munir
2. Dongwoo Hong

Topic: PE investment in Energy/Power industry

Sub-topic:

- Investment approach in Energy/Power industry
- Investment case research

Member participation

khandaker munir: Investment approach in Energy/Power industry
Dongwoo Hong: Investment case research, editor

Investment Approach in Energy/Power industry Part 1 written by Mr. Munir on July 11, 2009.

Private investment in energy innovation is vital, with commitments also required from corporations and public funds going forward. The day’s debate and analysis of the investment opportunities within the clean energy led to frequent participation.

Earlier this year, a consortium of private equity firms led by Kohlberg Kravis Roberts banded together to acquire TXU Corp., the Texas utility company, for $32 billion in one of the largest private equity deals ever proposed. According to private equity experts, a new regulatory climate and innovative derivatives smoothing volatility are drawing attention to energy, along with a macro-environment in which emerging economies demand a growing share of the world's energy resources.When Jonathan Farber, cofounder and managing director of Lime Rock Partners, a private equity firm specializing in energy, started the company in 1998, there were just five or six other private equity firms in the energy business with about $2 billion worth of capital invested. Now, there are 15 to 20 competing firms with $30 billion invested in the industry.
Now, some of the biggest names in private equity — Kohlberg Kravis Roberts and Texas Pacific Group — are teaming up to buy TXU. Dillavou says the new interest in energy is driven by the volume of capital pouring into private equity overall.

The world needs $20 trillion to meet energy demand. Twenty trillion dollars is nearly the equivalent of 2-years' worth of US GDP… and is roughly 10x the size of China's stock market. That's a huge amount of capital. And the select few who know where that money will be invested - and the companies that'll profit - stand to make a fortune. Through our extensive research, we know exactly where, and how, all those trillions will be invested.

Investment Approaches and Parameters written by Mr. Munir on August 2, 2009

A. General Approach

The Private Equity Program, in total, is expected to be diversified by economic sector, vintage year, number of transactions, geographic location, and by stage of company maturity. Fund-of-Funds have been identified as efficient vehicles for gaining diversified exposure to private equity investments. In particular, secondary market fund-of-funds provide diversification across prior vintage years allowing SBCERS to access limited partnerships that raised capital prior to the formation of the Private Equity Program. Direct investments in limited partnerships may be considered on an opportunistic basis once a diversified Program of secondary fund-of-funds is established.

B. Specific Risk Parameters

The Program will be exposed to specific risk parameters that are associated with investing in private equity, including, but not limited to:

1. Operating and Business Risk: Certain private equity investments entail above average operating and business risk.

2. Liquidity Risk: Private equity investments lack liquidity and typically have time horizons of 5-to- 10 years. Secondary markets for such investments are limited; and, often, there is no current income.

3. Structural Risk: Specific fundamental rights and protections are negotiated, which include mechanisms for taking remedial action. These basic protections may include specific termination provisions in partnership transactions or the removal of general partners.

4. Valuation Risk: Partnerships shall be evaluated to determine if the general partner employs an appropriate valuation discipline.

C. Quality Control Processes
The Program shall employ a quality control process, which includes Staff and Consultant, to track investment performance, manage risk, and monitor Program efficiency.

1. Monitoring Portfolio Performance: Actual returns will be compared to the benchmark(s) as appropriate, and to the expected return for the investment.

2. Risk Control: Program standards are maintained through the following processes

a. Assessing the level of diversification in the portfolio on a continual basis, including the level of diversification across investment style, geographic distribution, industry concentrations, and across other
ranges as appropriate.

b. Documenting due diligence activities.

3. Process Monitoring: monitor transaction processing to insure timely decision-making and an effective process.

D. Guidelines for Evaluating Proposals

Proposed partnership opportunities shall be evaluated relative to their fit with the Program’s Investment Policy.

E. Types of Investments
The Program is expected to initially emphasize secondary fund-of-funds. Underlying partnerships held by the fund-of-funds shall generally fall within the categories defined below.

1. Buyout and Corporate Restructuring Capital: Investments in leveraged buyouts, management buyouts, equity buyouts, employee buyouts, buy-and-build, other acquisition strategies and restructurings, and related uses of capital.

2. Expansion Capital: Investments in established companies for the purpose of growing their businesses.

3. Venture Capital: Investments in relatively small, rapidly growing, private companies in various stages of development.

4. Energy and Natural Resources: Investments in the exploration, extraction, accumulation, generation, movement or sale of energy (e.g., oil, gas, coal, electricity), and other natural resources and related service companies.

5. Distressed Securities: Debt or equity securities investments in troubled companies, under the assumption that the securities will appreciate in value following a restructuring of the company’s obligations. This includes, but is not limited to, investments in companies that are insolvent or unable to pay their debts as they come due. This may include companies subject to the Bankruptcy Reform Act, specifically Chapter 7 (Liquidation) and Chapter 11 (Reorganization), and companies’ under-going restructurings outside of Bankruptcy Court.

6. Turnarounds: Investments in companies experiencing financial or operating difficulties. These companies may or may not be insolvent.

7. Special Situations: This includes all other types of investments, e.g., mezzanine strategies, active minority positions, secondary investments, governance strategies, industry specific strategies, and unconventional investments.

8. International: Investments that are located in countries other than the United States, or have significant portions of their operations outside of the United States.
Reporting

A. Reports received from investment managers Staff shall require periodic reports (i.e. quarterly) from investment partners to facilitate monitoring.

B. Monitoring Investments
Staff and Consultant shall monitor individual partnerships as part of its process for monitoring the total portfolio. The Program portfolio should exhibit reasonable diversification across partnership types, vintage years, and economic sectors.

C. Performance
Investment performance of partnerships shall be assessed relative to the following areas:

1. Objectives established by the partnership

2. Risk undertaken

3. The long-term performance objective, with appropriate interpretation if applied to the short term.

Types of Sustainable Private Equity Industry- Focused.
SANTA BARBARA COUNTY EMPLOYEES' RETIREMENT SYSTEM PRIVATE EQUITY INVESTMENT POLICY (SBCERS)

Industry specialization gives investment firms competitive advantages over generalist firms in technical expertise and deeper networks of industry managers, experts and personnel. Industry-focused sustainable private equity firms specialize in industries such as renewable energy, sustainable/organic agriculture, recycling and resource recovery technologies, and pollution control and remediation.
Most of these funds target competitive financial returns, and on that basis appeal to financial investors. Because of their industry specialization, these funds may also appeal to strategic investors with other business interests in those industries.

A good example of this strategy is Sustainable Asset Management’s (SAM) private equity group, which focuses on emerging energy (distributed and micro-scale power generation (including heating and cooling), renewable energy, electricity storage and uninterruptible power supply, power quality electronics, and demand side energy management), resource productivity (water related technologies, biocompatible materials, and high value materials recovery technologies), and healthy nutrition (natural foods, food quality analysis, bio pesticides, and alternative medicine). SAM targets traditional private equity returns, investing in portfolio companies with the potential for returning three to ten times the capital invested within a three- to five-year time frame.

Some traditional private equity funds specializing in certain industries, such as energy and industrial technology, will also invest in sustainable portfolio companies. For these funds, however, the financial return is paramount and environmental returns are not a factor in the investment process.

KKR is a responsible, patient investor. With a vision of creating enduring value for our portfolio companies, their stakeholders and investors, KKR works with management to build for the future through prudent capital investment, increased research and development spending, and by expanding into new geographies. This approach improves the products and services that our companies are able to offer. In addition, it benefits the communities they serve, the workers that they employ, and the public generally. As a result, KKR creates value in the broadest sense.
KKR’s long-term outlook also enables us to consider the perspectives of, and offer many benefits to, additional stakeholders. For example, our recent acquisition of Energy Future Holdings (previously known as TXU) included a substantial commitment to strengthen the company’s environmental policies, make significant investments in alternative energy, and institute corporate policies tied to climate stewardship.

The We Campaign's TV ads have helped put the idea that 100% clean energy is a possibility on the airwaves and may build popular support for a New Green Deal.
In the context of our recent economic crisis, Al Gore and the We Campaign have been publicizing with renewed vigor the idea that in 10 years, America could produce 100% of its electricity through clean, mostly renewable means. While previously the environmental and energy independence aspects of clean energy were emphasized, the idea that an immense infrastructure project would also stimulate our faltering economy has now been added as an additional reason to go green.

Repower America’s Renewable Electron Economy

In his recent speeches, Al Gore has outlined the technologically fastest route to a carbon-neutral electricity sector, a proposal which I endorse wholeheartedly. In the Repower America campaign, Gore calls for a Unified National Smart Grid that links solar thermal electric plants (CSP) in the desert, with solar, wind and geothermal resources throughout the US to create a grid powered almost entirely by renewable energy.

The DOE's Solar Two demonstration solar thermal plant generated power continuously for 7 days and nights using only solar energy, storing the heat of the sun during the night in molten salt thermal storage tanks. The Repower America plan relies on solar thermal electric a.k.a. CSP with storage to substitute clean solar energy for a portion of the energy storage capacity of fossil fuels, enabling the mothballing or closure of fossil generating stations.

The Repower America plan picks what probably are the most reliable and fastest ways to replace the immense energy “storehouse” of the fossil fuels we now consume at a rapid rate with a combination of still vaster renewable energy flows (sun, wind) and clean energy storage (solar thermal storage, hydroelectric storage, biomass). The advantage of an energy store as opposed to a flow of energy is that the stored energy can be more easily controlled by people, as 19th century navies and shipping companies discovered when they switched from wind-powered sail to coal-powered steam ships. In the place of natural gas and petroleum reserves and coal deposits, the Unified National Smart Grid then taps into multiple flows simultaneously, balancing them and allowing them to generate electricity and conduct it to where it is needed, to centers of demand in towns, farms, factories, and cities.

Mo’ Money

Without readily available credit and lower fossil fuel prices, large wind turbine projects in the US are endangered despite the relatively low, competitive price of the energy they produce. New convert to wind power, T. Boone Pickens has postponed his wind projects for financial reasons.

Every construction project developer knows that you need money or credit to build a building, a factory or a power plant. To build the several hundreds of large renewable power plants and tens of thousands of miles of high voltage transmission required to switch America from polluting to non-polluting forms of energy, we are going to have to see a massive flow of capital from other uses or from bank accounts into energy related construction projects. We are not just talking about some more money we are talking about a massive shift in the investment priorities of private and maybe public entities. Some of these monies may be public funds that are the proceeds of a carbon tax or a cap and trade auctions but these instruments themselves are highly controversial and it will be a while before any revenue is generated by them.

If private investors are to put their money into this project they are going to have to see some profitable return on their investments. If there will be substantial public investment, the political leadership will need to justify the expenditure of substantial amounts of tax dollars as well as provide justification for the expansion of the area of public management or at least oversight within the power system.
However, electricity is one of the cheapest of goods and services in the United States. In the period 1985 to 2005, the consumer price index rose 81% but the price of electricity only went up 29%. While this price is rapidly accelerating now, so have the costs of other goods. Electricity is in the US, an excellent “deal” for consumers, controlled by negotiations between public utilities commissions and utilities with old, paid-for fossil or hydroelectric generation plants. Furthermore regulators see their primary mission, and the public is generally in agreement, that one of the most positive attributes of invisible, tasteless, silent electricity is that it is cheap.

Renewable Energy Payments (REPs)

The Spanish REP program for solar thermal power allowed the European solar thermal electric industry to leapfrog the American industry; despite a lower power solar resource in Spain, the first commercial solar thermal plant with storage in the world is scheduled to go on-line in Andalucia later this year. The Andasol 1 plant will be able to generate power continuously 7 hours after the sun goes down to supply the evening power usage peak, using stored solar heat in the tanks above.

A more transparent approach to spurring the market for renewable energy technologies are Renewable Energy Payments (REPs) a.k.a Feed-In Tariffs. REPs name and guarantee a feasible price for renewable power from supported technologies under a variety of conditions related to the size and siting of the generator. A successful REP system supports a variety of technologies and prices electricity to allow plant developers to recover their investment plus a reasonable profit. Another way to put it is that an REP system constitutes an open ended power purchase agreement for 10 or 20 years that allows plant builders to receive financing at favorable rates because of the investment’s security, due to the guaranteed wholesale power price. In successive generations of plants, some REP systems are designed to reduce the level of the tariff to encourage the industry to become more efficient. Some REP systems have a built in inflation factor to adjust the level of the initial tariff to reflect changes in the value of money. REPs are typically paid for via a supplemental charge attached to all power sales in the electricity system, pooled among the widest set of power users.

REP systems have been successfully applied in Germany and Spain and have recently been introduced in Ontario, France and Italy. Since the inauguration of their current REP system in 2000, the Germans, for instance, have more than doubled the fraction of electricity attributable to renewable energy from 7% to over 14%. Estimates are that German power users will pay on average a maximum of 2.80 Euros ($4.11) per account per month in 2015 when the effect of their REP law will be at its projected maximum, so the REP tariffs do not contribute much to overall power costs to consumers. If it were considered to be more politically acceptable to pay for the surplus power payments attributable to the REP tariffs in part through tax revenues rather than through electric rates, such a system could be designed.

An REP system starts out at “cost plus reasonable profit” but to counteract inefficiency in the renewable energy industry needs to “degress” the tariff levels for successive generations of plants or introduce market elements into pricing. The German tariff steps down in successive new generations of plants and recently the solar rooftop tariff was reduced a higher than usual 9% for 2009 installations while there was higher allowance made for offshore wind to encourage that industry; both moves generated their share of controversy, which is almost inevitable in such an environment. In Spain, there is a market option which encourages renewable generators to heed the needs of the electricity market through a demand-based incentives in addition to a premium paid for clean energy based on the type of technology.

Renewable Energy Investor Profile: Riccardo Cirillo, Atmos written by Mr. Munir on August 6, 2009

Riccardo Cirillo on opportunities in marine energy, on the excess of money flooding the market, on investing in a young sector and on sourcing the jackpots of the future.

Atmos is a private equity-style holding company targeting investments in environmental topics such as sustainable development, renewable energies, energy efficiency, technological innovation in the cleantech field and financial aspects of greenhouse gas sequestration.

Riccardo Cirillo is the CEO of Atmos. Previously; he was co-ordinator of the energy and environment area in IGPartners. He has prior experience in Fiat Group in the UK, France and Belgium.

Renewable Energy Investor Profile, Peter Linthwaite, CT Investment Partners

Peter Linthwaite on energy efficiency, on incubating new technology start-ups, on the accelerated growth of the industry, on the importance of a favourable regulatory environment and on the death of AIM for new fundraising.

CT Investment Partners finances emerging clean energy businesses. It specialises in identifying and investing in earlier stage technologies and management teams with the ability to create and deliver clean energy businesses.

Prior to joining CT Investment Partners in April 2008, Peter Linthwaite was chief executive of the British Private Equity and Venture Capital Association (BVCA), the representative body for the UK's private equity industry. Prior to that, he was a founding director of UK mid-market private equity house Royal London Private Equity Limited. Previously, he served as executive director of Murray Johnstone, during which time he was managing director, Murray Johnstone Asia, Singapore, 1995-2001 and director, Murray Johnstone Private Equity, London, 1990-1995.

The Electricity Economy: new opportunities from the transformation of the electric power sector

Unnoticed by most, the developed world has become utterly dependent on electricity for its lifestyle, its security and its prosperity. Our accidental addiction also makes us susceptible to many risks. Even as this addiction has been taking hold, the electric power industry has undergone a quiet ‘revolution by evolution’ as it converts gradually to a digitally controlled smart grid. These two trends are now meeting. The appetite for electricity is exploding just as we are gaining new and better ways to deliver it. Put simply, the problems brought about by the first trend are creating demand for the solutions emerging from the second. This convergence is unleashing new products, new investment opportunities and new markets of global proportion, according to this report from Global Environment Fund and Global Smart Energy.

Global trends in sustainable energy investment 2008 - analysis of trends and issues in the financing of renewable energy and energy efficiency 29 Jul 2008.

Source: Sustainable Energy Finance Initiative (SEFI), New Energy Finance.

Once again, global investment in sustainable energy broke all previous records, with $148.4 billion of new money raised in 2007; an increase of 60% over 2006.Total financial transactions in sustainable energy, including acquisition activity was $204.9 billion. Asset finance - investment in new renewable energy capacity - was the main driver for this surge in investment, rising 68% to reach $84.5 billion in 2007, fuelled mainly by the wind sector. Public market investment also raced ahead in 2007, with investment of $23.4 billion in 2007, more than double the $10.5 billion raised in 2006.

The impact of the credit crisis in the financial markets started to show through in early 2008, with few new listings on the public markets and stock prices down 17.9%. Corporate M&A surged forward, reflecting the consolidation that tends to accompany tighter market conditions.
However, by the second quarter investor uncertainty seems to have passed and overall investment during the first half of 2008 has been just above what was seen in the first half of 2007. Although asset finance is down somewhat, VC/PE investment, public market capital raising and stock prices are all healthy, indicating that the finance community still sees strong fundamentals underlying the sector and is increasingly looking to take part in its future growth.

This bodes well for the industry. Investment in the sustainable energy sectors must continue to grow strongly if targets for greenhouse gas reductions and renewable and efficiency increases are to be met. According to New Energy Finance (Global Futures 2008), investment between now and 2030 is expected to reach $450 billion a year by 2012, rising to more than $600 billion a year from 2020. The sector's performance during 2007 sets it on track to achieve these levels, with the current credit crunch testing the markets resolve, but not dislodging it.

Investment flows have not only continued to grow, but have broadened and diversified, making the overall picture one of greater breadth, depth and scale in sustainable energy. The mainstream capital markets are now fully receptive to sustainable energy companies, supported by a surge in funds destined for clean energy investment. At the other end of the spectrum specialist financing has also opened up with the development of innovative financing structures for distributed renewable generation and demand-side management.

Another aspect of this industry deepening has been greater activity in next-generation technologies, such as cellulosic ethanol, thin-film solar technologies and energy efficiency. Wind continues to dominate sustainable energy investment, but the portfolio of available technologies has both widened (as nascent technologies start to come into their own) and deepened (as existing technologies are refined). This is partly in response to changing supply/demand patterns (e.g. continuing silicon shortages, or the controversial competition between food and fuel from food-based ethanol feed stocks), but also reflects improved efficiencies and decreasing costs as renewable technologies strive to reach grid parity. Furthermore, the willingness to look beyond mature technologies suggests that investors are taking renewable energy and energy efficiency increasingly seriously.

The year 2007 also saw a geographic broadening, with renewable capacity rollout continuing to shift away from Europe and towards China and the United States. In recent years, sustainable energy investment in China has been largely for manufacturing expansion as an export industry. In 2007, however, the 2008 Beijing Olympic Games sharpened the country's political resolve and strengthened programmes to promote cleaner generation and cut energy intensity. During 2007, investment in non-hydro renewable capacity in China increased by more than four times, to $10.8 billion.

Acceptance of sustainable energy also became more widespread in the US, extending beyond its traditional heartland of California. A new administration in 2008 is expected to make renewable energy and energy efficiency a political priority and in recent months, regulatory uncertainty in the US (particularly over the possible introduction of a carbon tax) has put a number of coal-fired generation plants on hold. The financial sector is also gearing up for a major shift in political attitude. Citi, JPMorgan Chase and Morgan Stanley have jointly established a set of "Carbon Principles", which will guide how they lend to and advise major power companies in the US. The three banks expect future investment in fossil fuel energy projects to be required to supply "reliable electric power to the US market" and have developed the principles to evaluate risks in financing these carbon-emitting projects, given the growing uncertainty around regional and national climate change policy. Under the Principles the banks will also consider power companies' inclusion of energy efficiency and renewable resources in their portfolios as part of an "enhanced diligence process".

Political landmarks in 2007 included the Bali talks in December, which were attended by representatives from 180 countries, where a roadmap for future discussions towards strengthened international action on climate change was set out with a target for agreeing a way forward by the end of 2009. This was immediately preceded by a change of leadership in Australia, and with it, a dramatic shift in the country's attitude to renewable energy.

This report presents the financial perspective, or 'dollar view', of the current state of play in sustainable energy development. The analysis in this report consists of actual data on the different types of capital flows and their movement over time, combined with analysis of regional and sectoral trends. This information is intended to be a strategic tool for understanding the status of the clean energy sector's development and for weighing future public and private commitments to the sector.

O&G Deals 2007 Review

Private equity investors were major oil and gas players in 2007, according to this annual review from PricewaterhouseCoopers. Remarkably, three of the top ten O&G deals involved private equity buyers. Private equity investment was also a notable feature in the midstream and service sectors. The extent of private equity investment in the top fifty deals is something that has not been seen in the sector in recent years.

Deal activity in the oil & gas industry was characterised by a wide diversity of forces in 2007. M&A opportunities for the majors remained limited. Activity by the national oil companies (NOCs) was also relatively subdued. The unique circumstances of Russian energy industry restructuring produced a flow of transactions. Private equity assumed a very high profile and was a major driver of O&G deals. Oilfield service consolidation accelerated sharply leading to a huge increase in service deal value. International transactions replaced North American and European deals in the multi-billion dollar stakes.

2007 global power M&A soars to record levels, despite credit crunch

Global power M&A soared to new record levels in 2007, despite the effects of the credit crunch, according to PricewaterhouseCoopers’ 2007 Power Deals report, an annual review of M&A within the global electricity and gas market.

2007 was a banner year with global deal value reaching $372.5 billion, a 25 percent year-over-year increase and nearly nine times above the $43.0 billion recorded in 2003. Global deal volume jumped from 623 deals in the prior year to 768 in 2007, an increase of more than 23 percent.

There was no clear evidence of a fall-off in deal activity in the latter half of the year when the credit crisis broke. 57 percent of the deal volume, 441 of the total 768 deals in 2007, occurred in the second half of the year. The fourth quarter of 2007 saw deal value rise 73 percent above the same period in 2006.

Roll out the barrel

News that US crude prices reached $100 a barrel grabbed headlines the world over in early January, with a solitary US trader accused of deliberately paying over the odds for 1,000 barrels (the minimum amount permitted for purchase) purely for fleeting notoriety. It was sold on quickly for $99.40 a barrel.

The oil price has risen considerably since 2007, when it averaged $72 a barrel. Although prices are currently approaching $100 (late-February), experts predict an average of $87 for 2008. "Oil prices have reached a new base level," notes Mike Beveridge, managing director of Simmons & Company International, specialist corporate finance advisers to the energy industry. "Primarily, this is driven by the supply and demand imbalance in the global market. There is continued growth in demand, particularly in China, India and other developing nations at the same time as the world is facing declining production in many of the more mature oil basins."

August Equity investment manager Keith Davidson says rising oil prices have continued to drive deal activity both by volume and value. "This is particularly true in the oilfield services sector, which is being driven by growth in both demand and utilisation rates for rigs, as well as the need for service companies to create global scale in a consolidating market."

Will Rowley, director of analytical services and publications at Infield Systems, one of the definitive independent sources of information on the oil and gas industry, says because prices have been high for some time, money within the oil industry has rocketed: "Expenditure by the oil companies has increased considerably, as has the value of projects, meaning a lot of money has flowed down the supply chain. Many small and medium-sized companies have become much more profitable, too, enabling them to invest, expand and, in some cases, consolidate. Private equity opportunities have also grown."

- Against the backdrop of a contracting economy, record-high oil prices, rising home foreclosures and consumer uncertainty, clean-energy markets grew by 40 per cent from $55bn in 2006 to $77.3bn in 2007, writes Ron Pernick of Clean Edge.

- Central and Eastern European Electricity Outlook-2007 : The Central and Eastern European region’s electricity sector is entering into an exciting period that holds many opportunities for both current and future stakeholders, says KPMG. The electricity sectors of all CEE countries are very different in terms of decentralization, privatization and degree of liberalization.

- Direct Energy Investments: In the search for the perfect asset allocation portfolio construction, direct energy investments have recorded one of the lowest correlations to other traditional investment classes, say Martin J Cohen and Steven King of Petro invest.

- Powering ahead: Mergers and Acquisitions in the global power and utilities industry: The power industry is seeing a spate of major deals, finds KPMG, with some of the largest transactions the sector has seen being completed within the last 12 months. This consolidation, on both sides of the Atlantic, is driven by a number of factors: on-going deregulation; the search for secure energy supplies; and the availability of debt to support strong corporate balance sheets and potential financial buyers who are playing an increasing role in the sector.

- KPMG Energy survey 2007: Oil and gas execs say a focus on renewable energy sources is key to addressing declining oil reserves, this KPMG survey finds. But mass production of renewable fuel not a near-term possibility, say 60 per cent - while 60 per cent believe that the trend of declining reserves is irreversible.

- Investment Trends in Europe Clean energy 2003-2006: Five years ago clean energy was not recognized as a sector which could offer attractive returns to serious investors, says the Carbon Trust. The supply of venture capital funding or private equity, both in Europe and North America, was restricted to a handful of specialist funds with relatively modest amounts of capital at their disposal. Much of the available capital was supported by government or quasi government funding.

- Cleaning Up: New Energy Finance focuses on private equity and venture capital investment in clean energy technologies, companies & projects.

- Chinese clean energy development to beat targets: New Energy Finance forecasts that China’s clean energy industry will outstrip even the ambitious targets being set by the country’s National Development and Reform Commission (NDRC). Renewable energy will supply up to 19.0 per cent of the country’s needs by 2020, but will require total investment of $267bn - around 50 per cent more than forecast by the NDRC.

- Private Equity firms discover electricity – and lead the charge for energy investment: Earlier this year, notes Knowledge Wharton, a consortium of private equity firms led by Kohlberg Kravis Roberts banded together to acquire TXU Corp., the Texas utility company, for $32bn in one of the largest private equity deals ever proposed. According to private equity experts, a new regulatory climate and innovative derivatives smoothing volatility are drawing attention to energy, along with a macro-environment in which emerging economies demand a growing share of the world's energy resources. Meanwhile, other firms are making investments throughout the sector, including funds established to finance infrastructure and others dabbling in alternative energy.

- At Hiriya, Garbage is not a waste: New technologies and an innovative Israeli company have transformed Israel’s largest garbage dump into one of the world’s largest and most advanced waste transfer stations comprised of a waste sorting and recycling hub as well as a green energy center, says the Israel Venture Capital Journal. In this article, Danny Sternberg, head of the operation for the Dan Region Association of Towns, Sanitation and Waste Disposal spoke with the IVCJ’s Rachelle Gershovitz about their plans for the future.

- Cleantech needs Government Support: Government support can provide a needed boost to Israel’s clean technology industry and significantly increase its chances for success in world markets, says Dr Ofira Ayalon in this IVCJ article. Environmental technologies can contribute to economic growth as well as improve environmental quality and protection of resources. The annual world market for clean technologies (cleantech), valued at more than $200bn, is one of the fastest growing markets in the world.

Advantages of PE Investing In Energy:

Investing in energy-efficient appliances not only benefits you as the consumer, but it also benefits the environment. Here are just a few of the advantages to investing in greener appliances:

Lower utility bills: Because of federal regulations, newer appliances are less expensive to run than older ones. Consider refrigerators - according to the American Council for an Energy-Efficient Economy, a typical refrigerator with top-mounted freezer made in 1990 uses twice the energy of a modern refrigerator. Thus, replacing old appliances with new, energy-efficient ones will save you money and help finance the appliance. In the case of dishwashers and washing machines, the newer models not only use less electricity but they also use less water.

More money in your pocket: In these uncertain economic times, being able to keep more of your hard-earned money is a definite advantage. While the purchase of a new, energy-efficient appliance will probably be a significant expense, it will pay for itself long before its average lifespan (15 years) is over. Also, there are federal tax credits available to green consumers, according to energystar.gov.

Support of energy-efficient manufacturers: When you spend money on an energy-efficient appliance, you are helping to secure the future of the company that manufactured it. The consumer dollar speaks, and this sort of purchase sends a message to other manufacturers to produce more energy-efficient models. As the demand increases, the supply will also increase, and ultimately the price for such appliances will come down. Your purchase helps ensure that these appliances will be available and affordable in the future. Less use of fossil fuels: Fossil fuels such as coal are burned to make electricity, and these fuels will not last forever. We are, however, still dependent on them as our primary source of energy. As researchers continue to seek alternative energy sources, you can help “buy us some time” by investing in appliances that require less energy, and thus use less fossil fuel.

Fewer emissions and less pollution: The burning of fossil fuels to make electricity produces emissions and pollutants, such as sulfur dioxide and carbon dioxide. Sulfur dioxide is a by-product of burning coal, and when it rises into the atmosphere it mixes with moisture and forms acid rain. High levels of carbon dioxide in the atmosphere have been implicated in global warming.
In fact, the Environmental Protection Agency officially declared fossil fuel emissions a health threat this past April. If your appliance uses less electricity, then it is ultimately using less fossil fuel, and that means fewer emissions, cleaner air, and a more stable climate.

When you decide to make your purchase, look for the yellow Energy Guide that is required on every new appliance. This will tell you exactly how much energy the said appliance is expected to consume. You can fully expect that your household utility bills will decrease, and your peace of mind will increase – because investing in energy-efficient appliances is an investment in the future

Disadvantages of PE Investing In Energy

In fact, many people wouldn't even consider anything except an electric car as their main mode of transportation. However there are various pros and cons that should be kept in mind before taking the alternative energy leap.

No Constant Supply: The very first disadvantage that holds true for most of the alternative energies is that there supplies are dependent on nature and thus are not constant. For example, solar energy can be generated only at the areas that receive ample sunlight. For other areas that receive below moderate to little sunlight, solar energy would not be of much use.

Implementing Issues: This is one of the main reasons alternative energy isn’t popular: Many organizations decide to use alternative energy sources. However, they back out as soon as they find out that it’ll incur huge costs. Alternative energy is especially difficult put into effect in an infrastructure that is already set up. Most of the forms of alternative energies require a certain type of system. This system is very different from the one that they use currently. Therefore, a major infrastructure/system overhaul is essential before incorporating alternative energy.

Expensive to Use: Considering the monetary factors, fossil fuels are less costly to use than alternative energy. Fossil fuels are readily available, can be stored at any location or transported using the regular means. However, in the case of alternative energy various changes and thus huge investment is required to reap benefits.

Disadvantages of Alternative Energy / Solar Energy: Energy can be trapped only during daytime and only at places receiving desired amount of sunlight. Efficiency of solar panels is generally low, around 10-15%. Therefore, for a good power supply, large surface area is required. For a household supply of let’s say 100KWHs, solar panels on at least 400 square meters of land are needed. Solar power is costly to use in daily life. Cost can be anywhere around 20-25 cents per KWH.

Disadvantages of Alternative Energy / Wind Energy: Wind energy is a clean fuel. However, it does cause significant amount of noise pollution. Initial investment is quite high and efficiency is low, around 30%. And many feel that wind towers ruin the scenery of the adjoining place.

Disadvantages of Alternative Energy / Bio Fuel & Bio Mass: Areas which gather bio fuels can sustain soil erosion. Biodiesel is an excellent solvent so it generally dissolves the deposits in the filters. Because of this, the engine may need to be replaced more often. Biomass is a good alternative to using fossil fuels. However, it ends up doing the same thing as fuel. Combustion of biomass produces carbon dioxide and similar greenhouse gases. Another disadvantage of biomass is that it’s generally produced from corn, wheat, barley, and similar crops all of which are seasonal. Thus biomass can only be produced only in certain seasons.

Disadvantages of Alternative Energy / Hydropower: Hydropower often damages the surrounding environment. Its impact on fish is well known. Many call hydropower stations as an imposition on ecosystem. Levels of oxygen dissolved in the water also decreases due to damming.
It would be incorrect to say that disadvantages of alternative energy don’t exist. However, it would also be wrong to imply that fossil fuel is better than alternative energy. With people growing more concerned for the environment, alternative energy is gaining popularity. And as we incorporate the advantages more in our daily life, the disadvantages of alternative energy will slowly fade away.

Environmental and Social Impacts:

Despite the fact that, in interviews, staff expressed concern that some of the funds could be used for hydropower projects which could have significant social and environmental impacts and which have also been found to be key sources of greenhouse gas emissions, the President’s report to the Board does not present analyses of the potential environmental and social aspects of each fund and instead groups all five “clean energy” funds together and classifies them as “financial intermediaries” in terms of environmental category (i.e. Category C) and as “Category B/C” for involuntary resettlement and indigenous peoples.

The Korea-based Asia Clean Energy Fund is associated with the Korean Technology Investment Corporation (KTIC) and KPMG Korea/ Samjong Investment Advisory (SIA). Planned investments include “palm oil plantation projects in South East Asia, a waste to-energy project in Korea” and “bio-diesel companies in Korea and Indonesia.” SIA has advised on “transactions in energy, renewable energy, oil and gas, mining, and infrastructure” and “maintains deal sourcing offices in Central Asia, the PRC, India, Viet Nam, Cambodia, Laos and the rest of Southeast Asia.”

In April 2008, the Board of the ADB voted to approve commitments of up to $100 million for a group of five new “clean energy” private equity funds for “60 - 80 clean energy projects” by 2014. According to the ADB President’s report, “The funds will provide management advice to companies in … environmental and social issues, and international best practices in corporate governance, thus raising the quality of individual companies.”

Investment Case

Carlyle and Riverstone's investment in Ensus, written by DW Hong on July 13, 2009

1. Deal overview

In March 2007, Carlyle and Riverstone Holdings acquired Ensus Limited and provided funding for development of Ensus' first biorefinery facility, to be based in the U.K.

2. Ensus Group

Headquartered in Teesside, U.K., Ensus is planning to establish itself as a leading provider of fuel grade bioethanol to the European transport fuels industry and high protein animal feed to the food industry. It plans to build a number of world-scale facilities across Europe. Bioethanol is a renewable and environmentally friendly alternative for petrol driven vehicles and is produced using farm crops as the raw material.

In Ensus Group, approximately £40 million of capex and R&D investment took place in 2007. The sustainable bioethanol produced by Ensus will result in carbon savings of approximately 70% relative to the fossil fuel displaced.

3. Opportunities for Ensus

Construction began in May 2007 on Ensus' first biorefinery facility, based at the Wilton International site in Teesside. The Ensus facility will have an annual production capacity of more than 410 million liters of bioethanol and approximately 350,000 tonnes of animal feed. It will be the largest biorefinery in Europe, with full production expected to begin in mid-2009.

4. Carlyle's value addding in Ensus

- Significant job creation of up to 800 employees in construction and 100 during full operation
- recruitment of a number of additional key personnel
- support of both local and national political communities for its sustainable biorefining model
- realization of European environmental and green energy objectives.

5. Financing

- Equity participation by Carlyle and Riverstone Holdings
- Debt financing by Royal Bank of Scotland, Société Générale and Calyon
- Information not available about valuation

6. Evaluation of the investment decision

- Talented management team with good experience in energy industry
- Company position with potential of further improvement
- Global trend towards renewable energy innovation
- Growth strategy for international market
- Possibility that Ensus is able to go public in U.K. stock market
- Uncertainty in demand growth

Carlyle and Riverstone's investment in Midstream Partners Ltd., written by DW Hong on July 31, 2009

1. Deal Overview

In July 2003, Carlyle/Riverstone, in concert with Madison Dearborn Partners, purchased a 54.6% ownership interest in Magellan Midstream through a newly-formed and jointly-controlled entity, MMP Acquisitions, L.P.

2. Magellan Midstream

Formerly Williams Energy Partners, L.P., Magellan Midstream was renamed as part of its divesture from former parent company The Williams Companies, Inc. Magellan Midstream stores, transports and distributes refined petroleum products. Headquartered in Tulsa, OK, Magellan Midstream employs more than 950 people.

3. Carlyle/Riverstone's Value Creation

At the time of Carlyle's purchase, Magellan Midstream held more than 8,500 miles of pipeline systems. In 2004, Magellan acquired Shell's Southern Pipeline, expanding Magellan's asset portfolio by approximately 2,000 miles of pipeline in the Gulf region.

4. Magellan Midstream's Performance

Through the first quarter of 2006, unit sales, recapitalizations and Magellan's initial public offering in February 2006 (NYSE: MMG) have resulted in approximately $261 million in gross proceeds.

5. Status

Carlyle/Riverstone has partially exited the Magellan investment.

6. Evaluation of the investment decision

- Successful $261 million return on investment (successful exit)
- Investment in the energy sector having longterm stability with global assets

Carlyle and Riverstone's investment in Seabulk International Inc., written by DW Hong on July 31, 2009

1. Deal Overview

Carlyle/Riverstone purchased marine transport service provider Seabulk International, Inc. in September 2002 through a partnership with CSFB Private Equity. In 2005, Seabulk announced a merger with Seacor Holdings, Inc., a global provider of marine support and transportation service, primarily to the energy and chemical industries.

2. Seabulk International

Seabulk provides offshore energy support, marine transportation and towing support to operators of offshore oil and gas exploration in the Gulf of Mexico, the Middle East, offshore West Africa and Southeast Asia. In addition, Seabulk's marine transportation fleet carries petroleum products and industrial chemicals within the United States.

3. Opportunities for Seabulk

At the time of Carlyle's investment, Seabulk suffered from relatively poor investment liquidity as well as from competition in the offshore supply vessel industry.

4. Carlyle/Riverstone's Value Creation

The merger between Seabulk and Seacor resulted in a new and more efficient competitor in targeted markets, with a strong balance sheet, which supported growth and provided security in the event of a cyclical downturn. Seacor and its subsidiaries operated a fleet of offshore support vessels and river barges, while Seacor's environmental services segment provided consulting services and oil spill response. Seabulk offered a much more diverse portfolio of services, occupying a stronger competitive position in the process.

5. Status

In January 2006, after two prior partial exit transactions, Carlyle/Riverstone fully exited the Seabulk investment.

6. Evaluation of the investment decision

- Probably low ask price in a cyclical downturn
- Good growth strategy through horizontal M&A
- Successful exit of two partial exit transactions (LBOs)

References

- http://www.altassets.net
- Global Environment Fund, GlobalSmartEnergy.
- Sustainable Energy Finance Initiative (SEFI), New Energy Finance.
- Source: PricewaterhouseCoopers
- August Equity. Mark Williams
- Source: Clean Edge. Ron Pernick.
- KPMG. KPMG Energy & Natural Resource team (Budapest).
- PetroInvest. Martin J Cohen, CFP And Steven King, President Petroinvest LLC.
- The Carbon Trust.
- New Energy Finance
- Knowledge Wharton
- IVCJ. Danny Sternberg.
- IVCJ. Liron Neugarten, Reut Harar
- Augusta & Co..
- Knowledge@Wharton
- SANTA BARBARA COUNTY EMPLOYEES' RETIREMENT SYSTEM
- KKR world class enterprise.
- World Press
- WE Campaign by Michael Hoexter
- Mo’ Money
- Renewable Energy Payments
- ADB Website.
- Renewable Energy Investor Profile: Riccardo Cirillo, Atmos
- Energy-Efficient Appliances By dannykeyes
- Ensus announcement in March 15, 2007
- http://www.carlyle.com/Fund/Buyout/Europe%20Buyout/item10027.html
- http://www.carlyle.com/Fund/Buyout/Global%20Energy%20Power/item7583.html
- http://www.carlyle.com/Fund/Buyout/Global%20Energy%20Power/item7582.html

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