GP Profile: First Reserve Plans To Capitalize On Emerging Markets

Firm: First Reserve Corp.

Founded: 1983

Investment Professionals: 70+

Key Executives: William Macaulay, Chairman and CEO; John Hill, Vice Chairman; Alex Krueger, Managing Director, leads natural resources and mining investments

Strategy: Invests $200 to $500 million of equity in companies across the energy spectrum, including ones involved in exploration and production, mining, renewables and alternative energy

Expect to see First Reserve Corp. spend more time in China, Brazil and other emerging markets in the years to come.

The Greenwich, Conn.-based energy specialist, which typically writes equity checks of $200 million to $500 million per deal, is increasingly looking for deals in the natural resources and mining sectors on the argument that those will benefit from ongoing urbanization and industrialization in emerging markets.

As more people in China, India and other emerging markets flock to cities for industrial jobs, the thinking goes, there will be greater demand for energy sources and for metals and other materials used in commercial and industrial construction.

By 2020, almost 50 percent of people in China, for example, will be living in cities, and by 2050 that percentage could grow to 75 percent, according to the 2009 report on city development by China’s Association of Mayors. China also consumes somewhere between 25 percent and 50 percent of the world’s production of copper, zinc, aluminum and other metals instrumental in infrastructure building, Krueger said.

Meanwhile, energy infrastructure worldwide will need upwards of $20 trillion of investment through 2030, with developing countries accounting for half, according to the International Energy Agency, a Paris-based organization that advises 28 member countries on energy.

“Those are macro trends that we think are very supportable over the long term, and we like the tightness of the supply and demand balance in a number of those commodities,” said Alex Krueger, a managing director who leads the firm’s natural resources and mining investments.

An expansion into Asia would be a natural step for First Reserve, which owns assets on six continents and has invested around $1.2 billion of equity in Asia in the last five years. “We have a substantial amount of experience there,” Krueger said.

Krueger joined the firm in 1999 from the energy group of the investment bank Donaldson Lufkin & Jenrette. Since then First Reserve has invested more than $1 billion in mining. All told, First Reserve, with more than 70 investment professionals, has invested more than $12.5 billion across the spectrum of the energy industry since its founding in 1983.

The firm’s portfolio of 26 companies includes exploration and production companies, mining companies, and service providers to energy companies, among others. First Reserve is currently investing from its 12th buyout fund, which closed in 2009 at $9 billion and is about 40 percent invested.

Natural resources and mining typically accounts for about 25 percent to one-third of First Reserve’s portfolio, and the firm typically deploys about $2 billion of equity a year. The firm typically holds its companies for four to seven years and levers its companies at around 3x debt-to-EBITDA, though some of its investments are all-equity while others might have as much as 5x debt-to-EBITDA.

Additional Offices

To meet anticipated demand in emerging markets, First Reserve, which first expanded internationally in 2004 when Krueger started an office in London, is looking at possibly opening an office in Asia to get closer to the deal market there. The plans are in their earliest stages and no office openings or personnel changes are imminent, but executives are looking at Hong Kong, Beijing and Singapore as possible locations. “We are actively talking about what the best location is,” Krueger said.

First Reserve is also reportedly in the market seeking $1.5 billion for its first infrastructure fund. Krueger declined to discuss the fund, but considering the firm is already an established player globally it’s certainly conceivable the fund will target steady, long-term infrastructure opportunities in booming emerging markets as well as in developed markets where aging infrastructure is in need of rehabilitation.

“They’re mindful of where the supply is and where the demand is,” said Andrea Kramer, managing director at funds-of-funds manager Hamilton Lane Advisors Inc., an investor in First Reserve’s last three funds. “That is what sets them apart. There are very good investors given the opportunities in different sectors, but energy is a space where you have to really understand the underlying sector.”

First Reserve already has a number of investments that are serving the demand for more energy and metals in rapidly urbanizing emerging markets.

In 2009, it helped establish KrisEnergy Holdings Ltd. as a platform for a portfolio of exploration and development assets in Asia. In 2006, First Reserve invested $100 million in China Coal, the second largest coal company in China and the fifth largest coal company in the world in terms of coal reserves, according to First Reserve.

The firm’s portfolio also includes a number of international mining assets that are feeding the demand for metals from China and other emerging markets.

These include Southern Cross, a company it formed in 2005 in partnership with the Greenwich, Conn.-based coal mining company American Metals & Coal International as a platform for investments in coal mining operations and resources in Australia; AMCI Capital, another joint venture with American Metals & Coal International that seeks investments in coal mines and coal-related infrastructure and raw material supply projects; and Rand Uranium, a South African gold and uranium mining company.

First Reserve is also seeking to tap into the services side of the business. In 2008, for example, it paid C$1.5 billion ($1.48 billion) to acquire CHC Helicopter Corp., a Canadian company that provides helicopter transportation services as well as emergency medical and search-and-rescue services to the oil and gas industry in Asia and Latin America, as well as in the United Kingdom, Europe, and Middle East.