With the acquisition of two TotalFinaElf divisions, STAR Capital Partners recently launched a private equity fund focused on capital outsourcing.
The fund, called STAR 1, has so far raised EURO272 million toward a target of EURO500 million with the Royal Bank of Scotland and Banco Santander Central Hispano as cornerstone investors.
According to U.K.-based STAR, the fund is the first anywhere to focus on the acquisition and development of capital intensive businesses. The fund is targeting Old Economy sectors in the U.K. and Western Europe, such as transportation, energy, oil, gas, industrial installations and telecommunications. A final close is expected before year-end.
The first investment to be made from the fund was the acquisition of TotalFinaElf Connect and TotalFinaElf Pipelines for approximately GBP100 million (Buyouts Aug. 27, p. 28). sold the businesses, which install and maintain their own pipelines that supply domestic gas. STAR Capital Partners and the management teams provided equity to finance the transaction and Royal Bank of Scotland supplied supporting debt and additional facilities for future capital expenditure.
The fund will be able to arrange financing for larger deals than this, possibly up to EURO1 billion. STAR’s investment partners, supported by large balance sheets, are willing to participate in the equity of future deals as well as on the debt side.
The TotalFinaElf companies have operated separately in the past but together will now be known as Inexus. The company hopes to capitalize on the opportunities created through the deregulation of other utilities.
Tony Mallin, chief executive of STAR and previously vice chairman of Hambros Bank, said the idea for the fund is something he has been developing for quite a while. The premise behind capital outsourcing is similar to the idea that drove the growth of service outsourcing. The industries targeted by the fund have expensive assets, such as TotalFinaElf’s pipeline, which they need to access but not own.
STAR intends to capitalize on the current necessity for companies to liberate capital and focus on core competencies. It will buy and develop assets, allowing companies to focus on value enhancement in their central business areas. The fund is also attractive to investors as investments will be in cash-flow positive companies and there is little correlation with the equity markets. Mallin said this model is not replicated elsewhere and offers an attractive level of risk below most private equity funds, but higher than debt-based funds, with a target IRR of 25%.
“Through responding to the increasing need for capital outsourcing’ of assets among European businesses, STAR will provide institutional investors with exposure to a major category of assets not otherwise available,” Mallin said. “These capital assets offer stable, enduring cash flows as well as the potential for significant returns. We believe this fund to be a truly innovative development in the alternative asset class.”
The other members of the management team, whose experience spans equity investments, project, structured and corporate finance, are Stephen Wright (previously corporate finance director at HSBC) and Will Liley (chairman of the Asian Infrastructure group of venture funds).