First Reserve Corp. specializes in energy, and your expertise is mining and natural resources. What looks interesting to you now?
Our mantra has been to find secular trends within cyclical businesses. We look for investment theses that will play out over the long term instead of being opportunistic. We look for places where increased natural resource production drives returns versus the commodity prices themselves.
An increase in the infrastructure needed to support production growth is the kind of investable trend we like. And early on we focus very intently on different exit scenarios, both via public markets and strategics. We really like the focus in emerging economies on urbanization and infrastructure growth and the implication for natural resources.
We also like the increasing focus on growing oil and gas reserves and production in deep water areas. For example, several of our portfolio companies have very large growth opportunities to service exploration and development in Brazil.
Why have limited partners been so gung-ho on energy funds?
Specialization is one reason. Energy funds have longer hold periods and have more experience with cyclical assets. Also, LPs have gotten quite comfortable with the real asset nature of the energy space and the macro trends supporting continued energy intensity, especially driven by emerging economies. They view it as a hedge to other parts of their portfolio as they think about the inflation characteristics of energy.
What’s happening with renewable energy?
Investing in renewables has been somewhat disappointing. There’s a lot of uncertainty concerning the government subsidies required to drive investment results. It’s largely driven by perception and political appetite, but those are changing with austerity plans and more fiscal scrutiny of spending. The idea of green electricity production has given way to economic realities. But we continue to focus on the need for maintenance and repair of renewable infrastructure, and we just acquired the largest European solar plant, but you must be very careful about how you place your bets.
What’s the most difficult deal you’ve done?
It was the creation of Alpha Natural Resources. We spent most of 2002 consolidating three coal businesses, negotiating for about a year to acquire them. It was challenging because a lot of financial and operational liability management was needed. The resulting entity had over 60 mines. We were able to IPO and exit the business in 2005.
What’s your most successful deal?
It was the acquisition of Foundation Coal in 2004. We negotiated the deal in a few months. What made it a great success was after closing the $925 million deal in July 2004, we filed a registration statement 20 days later and took the company public within five months. At the time of the IPO, we were able to return a meaningful amount of capital while retaining a big stake in the business.
Edited for clarity.