Q&A: First Reserve Corp's Jamie Paton
Energy-focused private equity firm First Reserve Corporation set up its first office in Asia earlier this year. Jamie Paton, managing director of the company’s Asia operations, assesses the investment landscape
Q: What is the nature of First Reserve's exposure to Asia?
A: First Reserve invests across four main sub-segments: resources, such as iron ore and oil and gas; oilfield services that are required to get natural resources out of the ground; midstream and downstream assets and services such as logistics that get the materials from source to refinery; and power, financial and renewables. The firm started observing the growing demand in Asia for energy about 10 years ago and we first targeted Australia initially because it was well positioned given the demand coming out of China and India. Our first investment in Australia was Whitehaven Coal.
Q: How do you source deals?
A: About 90% of our deals are sourced proprietarily. We have people in our team who have been working in the energy sector for many years so there is a network of companies that bring investment opportunities to us. We invested in Whitehaven Coal through a company called AMCI Capital. Two people who had spun out of AMCI then introduced us to Calibre Global, which provides engineering, procurement, construction and management services to mining companies in Western Australia. Through the AMCI network we have also entered Mongolia.
Q: What do you look for in target companies?
A: We generally like to invest alongside talented and experienced management teams and help them grow the businesses for other people to buy. Our investment in KrisEnergy, an oil and gas company, came about because we knew a very competent management team that built up a successful energy business called Pearl in Singapore. Pearl was acquired by another company and we suggested to the team that they do the same thing again, and invested alongside them.
Q: Beyond capital and industry experience, what do you have to offer?
A: We also do a lot of work with corporates. We are very comfortable working with them and often they will approach us because of our history and knowledge. We are interested in partnering with Asian corporates that are going global in their search for assets and technologies. It's possible that we work in the countries they are looking at or have even invested in the companies they are looking at.
Q: Are there any disadvantages to focusing solely on the energy sector?
A: We believe there is a huge range of opportunities in the energy sector. If we think the pricing is inappropriate in one area we would step back and look elsewhere. This means for a period of time we may not invest in a particular type of company or a particular geography. Six years ago we started looking at some interesting developments in deep water drilling and identified people we wanted to work with in Brazil and West Africa. As a result we weren't spending a lot of time in the North Sea. This wasn't because the North Sea is unattractive, it just that we were focusing on other areas.
Q: How do you deal with energy-specific market movements, such as a drop in oil prices?
A: We obviously pay attention to price fluctuations, but we are patient investors so we don't get unduly perturbed. We ask whether the price fluctuations fit with our own models and look at the price bands. Ultimately, when we are making investments we have a long horizon in terms of how we see these price cycles working.
Q: How do these long-term investment horizons influence your view of fast-developing market segments such as cleantech?
A: Some investors in China have done incredibly well through early-stage cleantech deals but we aren't a VC business; we tend to invest once the companies and technologies are more proven. For instance, we invested in Kenersys, a wind turbine manufacturer in India, and we have invested in solar farms in other parts of the world - our skill is investing in more mature areas.
Q: So what is your average transaction size?
A: We don't have an average but we are seeking equity commitments in the $100-500 million range.
Q: How effectively can you compete for energy assets in Asia against regional or national private equity firms?
A: There are always going to be strong domestic funds with local connections - this is true of China, India, Europe and the US. If a certain kind of asset is in great demand or it comes from a specific network, I can see why the local funds might have an edge. What we are looking for are companies that want the international experience and network. This is a slightly different type of opportunity.
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