1) Avista targets the energy, health care and media industries. What do you see as the most promising segments within those industries?
Pharma and medical devices represent some very interesting opportunities. Large pharma companies are restructuring because they’re not producing new blockbuster drugs, and many of their current blockbusters are running out of patent protection. So we’re seeing lots of industry consolidation leading to the divestiture of non-core businesses. Over the past two years, Avista has participated in four or five such divestitures. That’s a very interesting area for us, and we see that continuing over the next 12 months. On the energy side, we see low natural gas prices as a temporary condition caused by an oversupply from large unconventional resource plays and a slowdown in demand. But long term, the fundamentals are quite healthy because, with these new discoveries, the wells run dry quite quickly. This and a lack of new drilling will lead to an undersupply in the next 12 to 36 months, which will lead to a rebound in natural gas prices.
2) What was the biggest challenge in the past year?
The biggest challenges have been the financing and fundraising environments. Many investors suffered severe liquidity issues and recognized that their heavy concentration in mega-funds needed to be re-evaluated. That caused a dramatic slowdown in fundraising. The other challenge has been financing, which remains problematic, although we have had some success recently in arranging financing for health care opportunities because the debt markets are starting to open up for quality companies with stable cash flows.
3) What are the key criteria for companies that Avista finds attractive in the current market environment?
We’re looking for companies that have existing growth potential on a top-line basis, but whose bottom line has been undermanaged. We are very heavily involved operationally with our portfolio companies. We believe that if we can buy good businesses at attractive prices, put low leverage on them, and have an operating plan to improve profitability, it will lead to outsized returns.
4) Tell me about your most recent completed deal.
We recently invested in a joint venture with Carrizo Oil & Gas. We set up a company called ACP II Marcellus LLC to jointly develop with Carrizo the acreage they have in the Marcellus Shale, which is in Pennsylvania and Virginia. We have committed $150 million to the venture, as has Carrizo. We’re excited about it because it’s a very prolific basin for natural gas. We’re in it at very attractive pricing.
5) What kind of investment opportunities are you looking at now?
We’re looking at a number of large pharma opportunities involving the divestiture of non-core divisions that can be purchased at very attractive historic low multiples of cash flow, usually levered at around 50 percent. We believe the companies we’re looking at have substantial opportunities for value improvement.
Edited for length and clarity