Avista Rides Energy And Health Care To Success

Firm: Avista Capital Management

Fund: Avista Capital Partners II LP (Vintage 2008)

Committed Capital to Fund II: $1.8 Billion

Fund II Net IRR: 21.4% Net IRR (as of March 2012, for Oregon Investment Council)

Fund II Return Multiple: 1.3x

Executives: Thompson Dean and Steven Webster, co-managing partners

Focus: Growth capital with a primary focus on health care, energy

Offices: New York, Houston, London

Employees: 46

Steven Webster, one of two co-managing partners, along with Thompson Dean, said the firm owes much of its success to its expertise in health care and energy. Both sectors, he says, are filled with growing companies that have large capital needs. They also are defensive.

“Our success is based on our industry background,” said Webster, citing the firm’s operating-executive model. “For a firm our size to have 12 very accomplished former CEOs involved with our portfolio companies—that’s a lot of horsepower. And I feel that’s been our key ingredient.”

The firm has also been able to turn on a dime when it has to. Although Avista Capital started out with a third specialty—media—the firm steered away from traditional media companies after they became less profitable and after Fund I made a couple of poor-performing investments in the newspaper and publishing space.

About two-thirds of Avista Capital’s investments have been made in energy and health care companies, and while the firm still invests in media opportunistically, the remaining third of the pie originally set aside for media is now shared with two other specialties, consumer discretionary and industrial investments. 

The firm’s original focus on health care, energy and media matched the partners’ industry experience. “DLJ had quite a background in doing deals in health care and media, and we felt that was where we had real competitive strength,” said Webster.

The firm has raised two funds, both of which have performed strongly. Its latest, the 2008 vintage Avista Capital Partners II LP, has returned a net IRR of 21.4 percent and a 1.3x return multiple, according to March 2012 data from the Oregon Investment Council, landing it squarely in the top quartile of funds from that vintage year. Avista Capital has so far spent $1.6 billion of Fund II’s $1.8 billion in commitments on 16 portfolio investments, and the fund has exited, at least partially, from five of them. Altogether, Fund II’s realized and unrealized investments add up to $2.3 billion, an increase of about $700 million, or more than 40 percent, above the original cost.

Avista Capital’s debut fund, which raised $2 billion in commitments, has so far generated a net IRR of 8 percent and a 1.3x return multiple, according to data from Oregon. All information for this article on Avista Capital’s investments and returns were posted on the Oregon Treasury’s Web site.

The firm is out raising a third fund, Avista Capital Partners III LP, a $2 billion effort that has already drawn several commitments from investors in its first two funds. The firm’s growth can also be seen in the number of employees. Since 2005, the firm has grown from 19 employees to 46, including nine investment partners and 12 operating executives.

Energy And Health Care

Webster heads up Avista Capital’s energy investing from the firm’s Houston office. The energy investments are mostly focused on upstream oil and gas development—that is, the business of finding and developing new energy deposits. “There will continue to be a big appetite from the bigger oil companies to acquire the smaller fish,” said Webster. “In other words, the big oil companies are effectively building a development pipeline from the companies that we back.”

For Fund II, the biggest energy-sector win was its investment in Hi-Crush Partners, a company that develops sands used in hydraulic fracturing in oil and gas wells. The firm went public in August 2012. Avista Capital’s remaining stake in the firm, plus the proceeds distributed back to investors, amount to at least $276 million, more than four times its initial $61 million investment.  

The firm also notched a win with its partial sale of natural gas drilling rights on more than 52,000 acres of land in Pennsylvania’s Marcellus Shale. That sale, to a unit of Reliance Industries, plus the remaining value of holdings, are worth $365 million, more than 2.4x Avista Capital’s original $153 million investment.

In health care, there remains a great deal of uncertainty surrounding the changes that could come from the introduction of President Barack Obama’s new health care law. But Webster said ObamaCare isn’t a big concern for Avista Capital’s partners, who invest in areas that are less subject to government regulation or reimbursement risk, such as pharmaceuticals, medical devices and medical testing. “To us, health care is not going to go away. It will continue to be a growth business,” said Webster.

In Fund II, one of the biggest investments that Avista Capital made was in Nycomed, a mid-sized European pharmaceutical maker. Nycomed was sold in 2011 to Takeda Pharmaceuticals, a Japanese firm, for $13.7 billion. While Avista Capital was one of four main sponsors (the others being Nordic Capital, DLJ Merchant Banking and Coller International Partners), the deal represented a 1.4x return for the firm.

As with the Nycomed deal, Avista Capital says it is not averse to partnering with other private equity firms. “We might partner with another firm to get us into a larger-size deal that we like. But we would not do that unless we had shared control, and the other firm was a group that we knew extremely well,” said Webster. In health care, Avista Capital has frequently partnered with Nordic Capital, and in energy deals, the firm has often joined forces with EnCap Investments.

While the firm’s investments in cable and Internet broadband have performed strongly, including a solid 3.6x return (in Fund I) for Wide-Open-West, a provider of high-speed Internet, cable TV and phone service, its investments in traditional media have not fared so well.

Newspaper Red All Over

One of Avista Capital’s worst decisions was its deal (from Fund I) to invest $105 million for a controlling stake in the Minneapolis Star-Tribune, the biggest newspaper in the Twin Cities. Soon after the $530 million deal closed, the newspaper business tanked even more, particularly ad sales, and the Star-Tribune went bankrupt two years later, wiping out the firm’s capital. “When we bought the paper, we thought we had taken the weakening ad climate into account, but it was much more dramatic than we thought,” said Webster. The deal was Avista Capital’s last investment in traditional media.

On balance, however, investors have been rewarded by Avista Capital’s efforts. The firm has returned approximately half investors’ overall contributed capital in Funds I and II. And with the partners making substantial commitments of $470 million to the firm’s first three funds, Avista Capital can boast that its partners’ interests are closely aligned with those of its investors.

So far, Fund III has attracted a $100 million commitment from the Oregon Investment Council, following a similar-sized commitment to Fund II in 2008. Other investors in previous funds include the New York City Comptroller’s Bureau of Asset Management. As part of its fundraising effort, the firm says it wants to attract more investors from overseas, including sovereign wealth funds.

Avista Capital’s new fund is set to make 15 to 20 equity investments of between $50 million and $300 million each. Investments will be earmarked for companies with enterprise values between $100 million and $2 billion. The firm plans to charge a 20 percent carry and a 1.75 percent management fee. It is offering an LP-friendly 100 percent transaction fee offset.

For now, don’t expect any shifts away from its two favorite industries. “The areas we’re focused on—energy and health care—are good, sustainable growth sectors, and they also have good defensive characteristics,” said Webster. These industries “are going to grow, or at least survive, even in poor economic times.”