Conduit Charged Up With Latin Power III

There’s no doubt that power and energy investing in the U.S. can yield outsized returns. One need look no further than First Reserve Corp.’s string of high-return exits, or the recent $8.3 billion sale of private equity-backed Texas Genco to NRG Energy Inc.

Conduit Capital Partners is familiar with this as well. The firm, founded in 1993, is focused exclusively on energy and power-related investments. But Conduit is unique in that it chooses not to deal in the U.S. Rather, the firm targets independent electric power assets in Latin America and The Caribbean.

To date, New York-based Conduit has made a total of 18 investments from its first two funds and, having closed its third fund late last month, is ready for another round of deal making.

The new vehicle, Latin Power III, came away with $393 million in limited partner commitments, just shy of its $400 million hard cap. Conduit will use the fund to close another 13 to 15 deals, writing equity checks of between $25 million and $35 million for each one. Total transaction sizes for the firm tend to range from $60 million to $300 million.

Conduit Chairman Scott Swensen said Conduit is the only private equity firm operating exclusively in Latin America and the Caribbean with a focus on the independent power industry—a factor that bodes well for the firm.

“The Latin American GDP is growing at close to 5% per annum, and demand for electricity is 1.5 times GDP, about 7%, which is a huge number and a huge opportunity,” Swensen told Buyouts.

Conduit has already made two investments through Latin Power III—a natural gas pipeline in Mexico and diesel barges in Jamaica—and has several more potential deals in the works.

Fund III represents a substantial increase in dry powder compared to Conduit’s $157 million Fund II (vintage 1998) and its $100 million inaugural fund (vintage 1993).

Two thirds of Latin Power III’s capital commitments came from U.S. investors, including Oklahoma State University, Baylor University and Mizuho Corporate Bank in New York. Abroad, commitments came from investors such as the Australia Post Superannuation Scheme, FMO (the Dutch development bank), and BNP Paribas, Swensen said.

Conduit tapped three separate placement agents to raise money in separate geographic regions. RGM Financial Marketing was used to solicit commitments from U.S. investors, Principal Advisory Services spoke to Australian LPs and Global Private Equity took care of the remainder.

The firm began marketing Latin Power III in February 2004, and Swensen holds that the protracted, two-and-a-half-year period it took to raise the vehicle reflects the difficult time that many investors have had in Latin America.

“There was a boom between 1996 and 1998 when about $7 billion of private equity capital was raised for Latin American investing,” Swensen said. “Out of that, there were a lot of busts due to currency risks and the inability of a lot of firms to access an exit market.”

Conduit counters the currency risk by only investing in power plants and facilities that obtain their revenue in U.S. dollars, Swensen said.

Meanwhile, the exit risk for Conduit is mitigated because the assets that Conduit invests in can be held for a long periods of time, allowing the firm to be opportunistic in its exit approach. “Our companies post high enough earnings that we don’t need the exit to make the return. For our investments, the exit adds to the return.”

Hedge funds currently dominate the exit market for Latin American and Caribbean power assets, while during the 1990s, that market was covered almost exclusively by strategic buyers, Swensen said. —A.N.