June 10, 2014
Interviewed by: David Snow
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Wanted: Solid Energy Operators

There is a shortage of people and operating teams well-versed in both private equity and energy, say panelists from ArcLight Capital Partners, Trilantic North America, and Pine Brook Partners. Each of the firms have strategies for finding talent, whether it’s in-house or not.

There is a shortage of people and operating teams well-versed in both private equity and energy, say panelists from ArcLight Capital Partners, Trilantic North America, and Pine Brook Partners. Each of the firms have strategies for finding talent, whether it’s in-house or not.

Wanted: Knowledgeable Energy Operating Teams

Opportunities and Risks for Private Equity in the Energy Sector

David Snow, Privcap:

Today we’re joined by Glenn Jacobson of Trilantic Capital Partners, Andre Burba of Pine Brook, and Dan Revers of ArcLight Capital Partners. Gentlemen, welcome to Privcap. Thanks for being here.

All of you are energy investment experts. You’ve been investing in especially the North American energy opportunity for years. I’m fascinated to hear your points of view about what has changed. Let’s talk about human capital, a very important topic within investing generally. You need to invest in smart people in order to have a good outcome. But particularly in the oil and gas opportunity, you need to back teams that will actually execute a plan in a competent manner and get energy out of the ground and sell it. I’m fascinated to hear what’s going on with regard to the population of talented teams. Let’s start with a question for Glenn. What do you look for in a management team? What characteristics do they need to have in order for you to make a capital commitment?

Glenn Jacobson, Trilantic:

It’s a really good question. The reality is that no two teams are exactly alike. But playing in the energy space, and particularly in the upstream space, there’s a wide variety of skillsets you need. You need to understand where the oil is, where the gas is, how to get it out of the ground, how to get it to market, and how to finance your business.

We try to get as good an understanding as we can, but we need someone who’s the chief risk manager and shot-caller at the company really understanding the risks well. Having a multi-disciplined team led by someone with a science or technical background at the top has worked for us.

Snow: Do you agree, Andre? Is that what you look for as well? What is different about the skillset needed for executing an oil-and-gas strategy that is different from a regular way corporation?

Andre Burba, Pine Brook:

We have some very successful teams being led by businessmen, LAN man, and lawyers. We look to make sure the competencies inside the management team are married well to the business plan. We parse the E&P sector into roughly six different business plans, from prospect generation (which is just exploration-focused strategy) all the way to what we call development, which means the assets are there and you’re simply manufacturing, converting the resource in the ground into production.

Snow: Dan, how do things work at ArcLight by way of talent?

Dan Revers, ArcLight:

We’re typically picking up our E&P deals at the development stage—not so much “E,” more on the “P” side. To us, the most important thing is very granular, basin-specific knowledge, which is obviously technical knowledge because that’s important. The rock is different and the production capacity and profile are very different from basin to basin. What’s also key is knowledge of the operators in the area and of the regulatory regime, because being able to pull that team together at that point is paramount in terms of getting returns.

Snow: An important question is that there’s a ton of capital coming into the energy space via private equity funds. Is there sufficient human capital to match the capital coming in from the financial side? Does it make it more difficult for you to source talented teams?

Revers: I’ll let these guys speak to upstream but the scarcest resource on the planet now is a good midstream operating team. It’s great to get these hydrocarbons out of the ground, but if you can’t get them to market they’re not doing anybody any good. Finding people who understand today’s midstream business, which is night and day from where it was a decade ago, is very hard. A lot of them come out of producers and that’s definitely a different skillset and a different risk profile, so they’re not necessarily a good fit. The concept of risk management when you move away from the wellhead is sort of foreign to a lot of the midstream companies. So, we try to find people at very senior levels of management and, really importantly, the middle levels of management—people working in a given basin have responsibility for what might turn out to be a $1-billion system.

Snow: Do both of our firms experience the same thing, which is not an overabundance of talent to match your capital with?

Burba: Yes. Certainly, management teams are the scarce resource in this business. All three firms have been in the business for a long time and, luckily for us, the types of management teams we would be excited to back tend to gravitate toward private equity firms that are in the business permanently, rather than transitioning in and out of the sector.

Snow: The techniques that are now so important to unlocking the value of energy assets—are they spreading? How does that knowledge spread? Is it that younger people tend to be working in the kind of teams you back and then it’s like private equity—they spin out and start their own teams?  Is that happening at a sufficient enough space to match the capital coming into the industry?

Revers: It’s just starting to spawn because this industry is still fairly new in terms of this whole shale revolution. The people and resources required to manage it and build it out are at that next stage, but we’re seeing some sharing of it. It takes a bit of time, but in terms of the teams we’re looking for, we focus on people that really know how to pull all the value-creation levels. It’s not just finance, it’s not just operational. It’s commercial. It’s capital expenditures and construction-related activities. Still, you find a few of those people and they tend to find us. It’s a good match, but what is interesting about energy is companies start out very small and, all of a sudden, they’re multibillion-dollar companies in a matter of years.

Snow: The skills necessary to execute on these opportunities are in the U.S. How long will it take for places like Australia or Europe to have the same population of people who know how to execute these techniques? Is that a slow process?

Burba: It’ll take some time. Even in the U.S., the pool of people who really understand these techniques at a level that’s required to make challenging plays work is still relatively small. The technological transfer happening now, where these technologies are being transplanted into other places in the world, has been relatively slow. In our portfolio, the only opportunities outside the U.S. in this unconventional arena are in South America and Canada. Beyond jurisdictions like Colombia and Canada, which have been fairly quick to catch up, the progress has been much slower.

Jacobson: Yes. The technical shift is difficult and there’s also a resource ownership and a mineral-ownership difference. The U.S. and Canada. I’m not as familiar with Brazil, but there are certainly other jurisdictions that are very friendly toward developing resource and, in the U.S. in particular, most minerals are privately owned. There are certainly state and federal minerals, but having privately owned mineral more closely aligns the stakeholder.

Snow: What kinds of people are in your respective firms that communicate with and support the operating teams? Has that changed at all over the years? Let’s start with Dan.

Revers: When we started 15 years ago, we were very much a passive financial investor. We had a team of very smart energy investors but didn’t have a lot of industry experts on staff. In 2005, we saw that changing, so we built up an in-house operations and maintenance team. It’s about 400 people now. It has 30 engineers in it; we’ve got geologists in it. It’s a 50/50 partnership with us and a group called Sutton Ventures and it’s set up to support our business as well as other third-party businesses. We save a bit of money that way, but that’s not really the idea. The idea is when you have operators on the ground doing that work, the knowledge they get from talking to customers, working with service providers, and talking to regulators accrues back to our firm.

So, we’ve got an in-house operations maintenance team, an in-house commodity management team, and an in-house construction management team. Having more granular resources focused on an increasingly complex industry is really critical. It’s why the specialist firms, over the long haul—and this is very self-servicing—will do better in energy than people who pop in for a deal and then go off and do a retail or food-service deal.

Snow: How do things work at Trilantic, Glenn, by way of in-house talent?

Jacobson: We have very specific energy investment professionals who understand risk analysis and deal structuring in the sectors. Obviously in upstream services and up-midstream and other. The reality is we’ve chosen not to bring on staff, reservoir engineers, and geologists. Given the size of our firm, the rationale is that likely would be one or two individuals as opposed to the breadth that ArcLight can have.

Snow: How do things work at Pine Brook?

Burba: A similar approach to Trilantic in that we don’t have in-house technical resources. We think of ourselves as partners to our management teams and our management teams are the ones who make technical decisions. That said, we have a powerful network that allows us to reference both people and ideas. So, our approach has been to externalize those processes. We don’t have technical resources in-house.

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