Five Questions With Pentti Karkkainen, General Partner, Kern Partners

1 Pentti, you work for an energy-focused private equity firm based in Calgary, Alberta. How long has Kern been around and where is it headed?

Kern Partners has been around for 10 years. We closed our first fund in 2004, and we’re now into our third fund. We manage $1.1 billion over three funds. Our third fund, which closed in June 2010, has about $450 million, about half of which has been allocated to six companies. We also manage about $600 million in co-investments.

As far as our focus, we’re about 70 percent invested in Canada and 30 percent in the United States and internationally. We focus on three main areas: conventional oil and gas exploration, unconventional investments, as well as services and energy technology. While we still do infrastructure, the company now has to be something new or broken. As for our limited partners, they are the largest pension funds in Canada, and three of the top five U.S. endowments.

2 How does Kern see the energy space?

When you look at the investment cycle and energy projects, two things are true. First, it takes a long time and, second, it takes a lot of money. And the more successful you are in the energy business, the more capital you need.

Energy is a five commodity business but everyone just thinks it’s two: oil and gas. But the other three commodities are even more important. The third commodity is capital, which comes and goes just like any other. When capital is coming or going, it can create huge dislocation, usually negative. The fourth commodity is time. The less time you have to execute a business strategy, the riskier the decisions you’re going to make. But if we can manage our time profile, we can also manage our risk profile. And the fifth commodity is people. We have been able to draw on top-decile management teams, who are really good at what they do. These are people who know how to find oil and gas, exploit it and run a business around it.

3 Tell us about some of your favorite portfolio companies.

One company in our portfolio we’re proud of is MEG Energy Corp., an oil sands company that’s been around for 12 years. We got involved nearly 10 years ago, and now it’s listed on the TSX exchange and has an $11 billion enterprise value. Our stake is one or two percent. This is a company that wasn’t there 12 years ago.

Another business we’re pleased with is Cobalt International Energy, which is now a publicly listed, $6 billion deep-water exploration company. It’s run by a guy named Joe Bryant. We went to visit him and he put together a spectacular Gulf of Mexico and West African exploration company that has the best ‘explorationists’ and the best technology.

4 Besides returns, what is the biggest reason why an LP will invest with you?

My job is to make our LPs’ jobs easier and make them look good. I never want to be a headache. I never want to be a question mark. I do, however, want to be a good partner. So if someone is sitting in Boston or New York or Montreal, and they want exposure to energy, I want to be their strategic partner. And I want to deliver them the alpha returns that they want, but I also want to have a relationship that is really, really solid.

5 How would you differentiate yourself from a huge energy private equity firm like EnCap?

You already gave one answer: EnCap is a huge fund, we’re not. We’re small and we’re very targeted, but we can do larger deals if and when we see something that works for us. EnCap has a network that works for them, and they’ve obviously been very successful. We have a network that works for us. They will do bigger things that we may not do, but they won’t do smaller things. And that’s fine. There’s a market for both.

Edited for clarity