With leverage scarce in the current investment climate, Paul Smith, senior managing partner at Tenaska Capital Management, is seeing increasing interest in co-investment among LPs who have participated in his funds.
Tenaska Capital closed its second US energy fund, TPF II, on $2.4 billion yesterday. The fundraise included LPs from TPF I, many of whom enjoy co-investing alongside the fund, Smith told II.
To satisfy this appetite for co-investment, Tenaska often invites its LPs to participate in co-investment tranches parallel to its investments, Smith said.
“One of the features of the energy space is that the transactions tend to be very large, so co-investment has been an important feature of TPF I and we expect it to be an important feature of TPF II as well”, he said.
The Nebraska-based affiliate of Tenaska Energy, a power company, once had an exclusive co-investment agreement with Bain Capital for its first fund, which closed on $838 million in 2005. The two parties eventually agreed to scrap the agreement in order to preserve their flexibility.
Although seeking co-investment partners for deals has been one way for private equity firms to deal with the scarcity of leverage in the market, Smith is optimistic that leverage isn’t gone for good.
“We think leverage will come back to the energy space because these are real assets with significant intrinsic value”, Smith said.
He cautioned that Tenaska doesn’t seek leverage in every deal that it does and that even before the onset of the credit crisis the firm did deals both with and without debt.