REAPING WHAT OTHERS DIDN'T SOW

As far as private equity investment in the energy sector is concerned, the credit crunch hasn't been much of a spoiler. Numbers published by data provider Dealogic show that energy-focused funds investing in oil and gas assets globally accounted for 25 percent of total private equity activity in the first four months of 2008, making it by far the busiest industry sector for buyouts so far this year. During the period, deals worth more than $10 billion (E6.4 billion) were inked – nearly as much as for the whole of 2007, which saw just $11.7 billion of transactions.

Equally significantly, sponsors specialising in energy investments are confident that they will be able to continue to deploy capital at pace. Delegates at The Private Equity International Energy Forum: Europe 2008 in London last month were left with a strong sense that in terms of new investment opportunities, buyout groups and venture capital firms like what they see in the market today.

Opportunities abound not just in oil and gas, but across the entire spectrum of the energy business – including biofuels, wind power, solar power, waste-to-energy, fuel cells and, possibly increasingly given the way the political winds are blowing, nuclear energy. On top of that, there is the array of industries affiliated with energy: manufacturing and services, finance and insurance.

Bill Macaulay, chairman and CEO of First Reserve, the world's largest private equity firm with an exclusive focus on energy, told the PEI Forum that exploding commodity prices were in no small part the consequence of more than 20 years of chronic underinvestment in relevant infrastructure and people across the world. Making up for this period of neglect would take a long time and keep skillful providers of capital busy for many years to come, he said.

Make no mistake: this is a truly vast playing field. Energy is the largest industry sector of them all, with an estimated annual output worth $6 trillion – about one-tenth of world GDP. According to Macaulay, more than $20 trillion will be needed through to 2030 to get the world's energy infrastructure into shape, with developing countries poised to soak up about half that expenditure.

“Of course we're not buying a lot of oil at $130 a barrel,” Macaulay says. However, investing in makers of the proverbial picks and shovels so desperately needed to provide all the energy that the world so desperately needs right now is obviously a compelling proposition – in part because commodity prices are so high.

Add in the enormous pressures on this – as well as pretty much every other – industry on account of climate change and environmental concerns, and it is easy to see why energy investors today are quite a cheerful bunch. (It is hardly surprising that some of the finest minds in global business and finance, including Silicon Valley venture capital veterans John Doerr and Vinod Khosla, as well as Britain's uber-entrepreneur Sir Richard Branson, are now focused on finding ways to scale up and monetise some of the cutting edge renewable energy technology available today.

For private equity as an asset class, however, the energy story has only just begun. Like real estate, it is a sector with considerable barriers to entry for investors lacking specialist knowledge, regardless of how sophisticated they might otherwise be.

However, with such a dizzying array of opportunities up for grabs, energy is unlikely to remain on the fringes of private equity for very long. Expect, first of all, more limited partner capital looking for a way in. Expect also the generalist private equity funds out there to take a long, hard look at the energy-focused investment models that have already proven their ability to deliver the goods. Among the most interesting role models, apart from First Reserve, are The Carlyle Group's joint venture partner Riverstone Holdings, 3i with its long-established oil and gas sector team, and, way up north in sunny Stavanger, Norwegian buyout firm, HitecVision Private Equity.

For the generalists, replicating the requisite know-how at their own firms will not be easy. But that's hardly a reason for them not to give it a serious try. For those who get it right, the rewards could be enormous.

Then ext Private Equity International Energy Forum will take place on 7-8 October in New York. For details, visit www.peimedia.com.