Ethanol may be the wave of the future. The benefits are clear: It cuts back on America’s dependency on foreign oil, keeps the environment cleaner by burning renewable fuel and makes a byproduct that can feed livestock. Just ask Steve Farsht, a partner with Minneapolis-based Norwest Equity Partners. The firm is expected to make an announcement today that it has made a $30 million investment in two ethanol facilities alongside the Broin Companies and local farmers.
While Farsht feels good about NEP’s investment into the ethanol arena, he knows that the investment doesn’t come without risk. In fact, the firm, which usually makes majority investments in its targets, decided to take a lesser stake in the ethanol facilities and partner with The Broin Companies to mitigate those risk factors. The Broin Companies manages, produces and markets more than 600 million gallons of ethanol annually. As the second-largest producer in the industry, The Broin Companies has designed and constructed 20 operating ethanol plants, and currently has five more under construction.
“We had looked at dozens of opportunities in the ethanol industry, but were worried about the risks,” said Farsht, who proceeded to rattle off potential problems including government regulations, the commodity risks, technology advancements that can render farms obsolete and excessive interest in the sector. The risks are indeed real: Ethanol prices are down 30% this year due to oversupply.
“We spent a lot more time doing our diligence on this deal. We spent four months looking at this. We talked to anyone from gas blenders to researchers to government officials,” said Farsht.
The investment will be used to help fund the construction of two farmer-backed ethanol plants: Frontier Ethanol LLC, located near Gowrie, Iowa; and Horizon Ethanol LLC, located near Jewell, Iowa.
The other reason for partnering with The Broin Companies is the company’s use of farm credit banks. While there will be six or seven banks participating in the deal, Ag Country is taking the lead. “Farm banks really understand the commodity elements and the cyclicalness of it all. They are long-term players,” said Farsht.
Being that Norwest’s only limited partner is Wells Fargo & Co., Farsht said the firm feels compelled to hold this company longer than the five to seven years that is typical. “We think it will go through a cyclical downturn, so we will need to hold it a longer time. The industry does look extremely profitable in the next 24 months, but we might experience a downturn after that,” said Farsht.
NEP typically invests in companies with enterprise values of between $50 million and $250 million, and EBITDA of at least $10 million. Additionally, the firm usually makes an equity investment of between $20 million and $80 million. NEP is currently investing out of 2004Norwest Equity Partners VIII, an $800 million fund. The firm also raised 2004Norwest Mezzanine Partners II, a $400 million fund that is currently investing out of.