Powered up

KKR’s recent East Resources exit – coupled with HitecVision’s specialist energy fund close this week – is further evidence that the energy sector remains active and vibrant for private equity investors, writes Christopher Witkowsky.

Kohlberg Kravis Roberts is never backwards in coming forward and its eager embrace of the energy sector is ready evidence of this. The global buyout group is raising an energy fund and in the last year opened an office in Houston – the de facto capital of the oil and gas industry – as it continues to power up its energy-focused activities. It’s not hard to see why.

Last week, Royal Dutch Shell agreed to pay $4.7 billion for East Resources, a US natural gas exploration firm that holds more than 650,000 acres of a major US shale formation. Reportedly the second-largest deal in the oil and gas sector this year, the sale implied a handsome exit for KKR, which confirmed it invested $350 million in the company in 2009 for a “substantial minority stake”.

KKR’s natural resources fund, which raised about $258 million in the first quarter of 2010, was launched to make direct investments in assets like oil and gas properties, according to an SEC filing. As the filing spelt out, such investments “offer investors exposure to underlying commodity prices, current cash flows from the production of acquired resources, exposure to commodity prices and thereby a means of hedging inflation”.


Energy, of course, is not a new area of interest for private equity firms and their limited partners. Warburg Pincus, LMS Capital and Morgan Stanley are among the firms that have long targeted the sector alongside specialist energy-focused groups like First Reserve, Quantum Energy Partners, EnCap Investments, Denham Capital, Lime Rock and HitecVision, to name a few.

It has proven a successful strategy even amid the financial downturn. For example, Pine Brook Road Partners, a firm founded in 2007 by a former a Warburg Pincus veteran, in May exited natural gas specialist Common Resources, for a return multiple of three times invested capital.  

And current events – namely the disastrous Deep Water Horizon rig explosion in the Gulf of Mexico and resulting catastrophic oil leak – highlight the need for both investments backing alternatives to oil as well as improvements to the infrastructure and technology servicing traditional energy businesses.

This latter point is part of the thesis behind HitecVision’s latest fund, which this week revealed it hit its $420 million hard-cap after just three months of fundraising. Different to many energy-focused strategies, this one will target operating assets in the offshore oil and gas industry, such as drilling rigs and supply vessels, and will have an emphasis on cutting-edge technology and equipment, which tend to have higher safety standards, HitecVision senior partner Arne Trondsen told PEO this week.

Trondsen also noted that the firm doesn’t consider the fund an infrastructure play, in part because some of the projects the fund will back may or may not have long-term, steady cash flow contracts associated with them. 

For KKR, what remains unclear is just how its natural resources push will affect its own infrastructure efforts. The firm has been building up its infrastructure team since last year and is raising a separate fund for the strategy. It will be interesting to see which funds are used to make certain investments and why, or if they find cause to co-invest on deals.

What is clear, however, is that private investment funds’ capital and operating expertise are a crucial aspect to transforming and further developing the energy sector – a thesis we expect to see more often in many private equity firms’ pitchbooks.