A blessed generation

Winter may be on the doorstep of North America but the region’s energy sector is showing no sign of cooling down.

Prospects are certainly remaining bright in the power market. Last month, a subsidiary of alternative asset manager Ares Management (Ares) agreed to buy Energy Investors Funds (EIF), a New York buyout firm focused on power and energy. While the exact price of the acquisition was not disclosed, Ares said it will add approximately $4 billion in assets under management to its private equity group. The transaction is expected to close by the end of 2014.

The deal is notable in a number of respects. First and most obviously, it is of significant size at a time when leading actors in the field are jostling to reach the scale needed to get their hands on prized generation assets. Following the transaction’s close, Ares Private Equity Group will manage approximately $14 billion of assets across US/Europe corporate private equity, China corporate private equity and US energy infrastructure private equity.

Ready to spend

Ares also said that the transaction will primarily be financed with cash – suggesting the firm is ready to spend material portions of its treasure chest to advance its strategic objectives. “EIF represents exactly what we look for in pursuing accretive, strategically valuable acquisitions,” Michael Arougheti, Ares’ president, said on announcing the deal.

Founded in 1987, EIF was one of the first private equity firms to focus on the independent power and electric utility sector. Its recent investments include the acquisition of an additional 50 percent stake in Newark Energy Centre, making EIF sole owner of the 705-megawatt (MW) power plant in New Jersey; as well as a 100 percent membership interest in Starfish Pipeline, a natural gas processing and pipeline transportation services company.

As of September 30, 2014, EIF managed over $4 billion across four co-mingled private equity funds and related co-investment vehicles. Its funds own about 4,000MW of capacity in facilities that are currently operating or under construction as well as an additional 6,000MW in plants that are in various stages of development.

New York-listed Ares Management, meanwhile, had approximately $79 billion of assets under management as of June 30, 2014. It is a diversified investment company: in addition to its private equity group, it also comprises a Tradable Credit Group, Direct Lending Group and Real Estate Group. More than $7 billion of its assets are in energy-related investments across three of its four groups. The EIF investment team will join Ares Private Equity Group and maintain full day-to-day responsibility over EIF’s private equity funds.

The deal epitomises a trend that’s been shaping in the US over the past 12 months: energy-focused firms selling a stake in themselves to bigger managers. Last March, EIG Global Energy Partners sold a minority interest in its management company to New York-listed Affiliated Managers Group, which manages $625 billion, for an undisclosed sum. In late 2012, NGP Energy Capital Management sold a 47.5 percent stake to the Carlyle Group for $424 million.

A broader look at recent M&A deals seems to underline investors’ growing interest in the power and electric utility sector. According to data compiled by Infrastructure Investor Research & Analytics, the top ten energy deals worldwide closed in the second half of this year include Cleco Power, acquired by a group comprising Macquarie Infrastructure and Real Assets, British Columbia Investment Management Corporation and John Hancock for $4.7 billion; and the purchase of certain assets of EquiPower Resources, Energy Capital Partners and Brayton Point Holdings by Dynergy for $3.45 billion.

This appetite for energy deals is also apparent when looking at the list of infrastructure funds currently in the market, which include the likes of Arclight Energy Partners Fund VI (targeting $4 billion), American Global Capital Infrastructure Fund (aiming to collect $1 billion), and Abatis Energy Fund (also targeting $1 billion).

“The energy sector is an area of increasing importance across our business given the large, growing and contractual nature of the asset class and the differentiated risk-adjusted returns that can be generated by experienced managers,” says Arougheti.