Power plays

Private equity firms are finding unprecedented opportunities in the energy sector

As world markets jump out of the financial crisis frying pan and into the fire of recession, private equity firms are casting around for investment opportunities in tune with the times. As they do so, the energy sector increasingly looms large – and a new fund launch by Italy's Advanced Capital only furthers that impression.

“There is increasing energy demand,”says Milan-based Advanced Capital chief executive Robert Tomei. “In developing markets, energy infrastructure is increasingly necessary and, in the developed world, it's about energy efficiency and lowering the environmental impact.”

Advanced Capital has just launched a new energy fund of funds, which is aiming to raise a minimum of €300 million and a maximum of €500 million. It will make between 15 and 20 fund investments, around half of which will target developed markets and half emerging markets. Tomei says he expects around 60 to 70 percent of the fund will be committed to the traditional energy sector, 20 percent in “renewables and alternatives” and 10 to 20 percent in “cleantech”.

PEI's recent Energy Forum in New York backed up Tomei's optimistic outlook, with many speakers pointing to higher levels of activity despite the frozen credit markets and economic turmoil. “In the last year, we've seen an unprecedented amount of deal flow,”said Will Honeybourne, a managing director with US energy specialist First Reserve, which is currently investing its latest $7.8 billion fund.

At the same conference, Scott Gieselman, managing director with another energy-focussed private equity firm, Natural Gas Partners, said the lack of liquidity is causing company managers to panic and driving them to private equity for help. He said: “A couple of calls we've had in the last three to four weeks have been [motivated by] fear. Public companies or private companies are dealing with a market they didn't expect and weren't prepared for and they need capital.”

This fear of the present combined with a compelling investment rationale over the long term means that energy is fast becoming the hot private equity sector of the day.