From the ground up

Energy Investors Funds launched in 1987 as the first private equity fund manager dedicated exclusively to the independent power and electric utility sectors. In December 2003, the group's management team bought itself out entirely from then-owner Dresdner Kleinwort Capital, making it the first time in its history that itwas not a captive firm. With offices in Boston, New York and San Francisco, Energy Investors Funds power investments are located worldwide, but have a clear US focus. This intersection of the expansive energy and private equity sectors, then, provides a daunting task for anyone charged with running the firm. But Mitchell Coddington, partner and chief financial officer at Energy Investors Funds, is up to the challenge. Having joined the firm in 1993 from commercial real estate investor Property Capital Associates, Coddington today heads up all treasury, financial reporting, account, tax and IT matters. As a member of the firm's Investment Committee, he is involved at some level in every investment Energy Investors Funds makes, while as part of the Executive Committee, he helps to manage all of the day-to-day operations of the organization including human resource issues, and to set short and long term goals for the organization.

How did you make the switch from commercial real estate to energy-based private equity?
private equity? I joined Energy Investors Funds in the fall of 1993, after working ata commercial real estate private equity firm for seven years, where we managed both institutional investors'capital in private equity funds and also multiple pools of capital via a publicly-traded REIT. The transition was fairly smooth because the core business, managing institutional investors'capital in an alternative asset class in a private equity environment, was very similar. In fact, investing in and managing real estate assets and power plant assets have similarities, both being hard assets with typically long-term holding periods and non-recourse projectfinance structures. On the other hand, I didn't know the first thing about the independent power industry and that piece of the business I had to learn from the ground up.

How has the structure and operations of Energy Investors Funds changed since you joined?
Interestingly, the structure and internal operations of Energy Investors Funds has not changed significantly since its inception. Although we have more than doubled the number of employees since I began in 1993, it has been gradual and spread among the investment acquisition, finance/accounting, legal, asset management and marketing/ investor relations functions. However, one noticeable change over the last five to 10 years has been the increasing level of acceptance among the institutional investors of the power and energy segment as an attractive asset class. Many of the larger, sophisticated institutional investors are now actively investing in the power segment and with that has come a need for us to provide new and innovative tax structures, investor advisory boards and other investor-driven requirements. These new structures are much more complicated and timeconsuming, as evidenced by the fact that our vintage 1988 fund had a 38-page partnership agreement and our most recent fund's partnership agreement is almost 100 pages.

Energy InvestorsFunds recently became an independent firm. How has that changed the way operations function within the firm?
In December 2003, seven of us acquired 100 percent of the management company in a management buyout that took about nine months to complete. Energy Investors Funds had been a captive management company since our inception. Notonly did the MBO give us the flexibility to manage the business internally, itwas also strongly encouraged and supported by our investors. In fact, certain of our current investors would not have committed to our more recent funds if we were not 100 percent management owned. Operationally, the MBO itself has not significantly changed how we do business, although we now are somewhatless bureaucratic. Our focus continues to be maximizing returns for our investors, in an environment where our employees are challenged and motivated to work as a group toward that goal and hopefully, to have some fun along the way.

As an investor in power and electric generation facilities, are there many issues that you have to deal with that your counterparts at generalist private equity firms don't?
With regard to the inherent regulatory environment that exists in the power business, we have experienced professionals ? legal, investment and engineering ? both within the firm and outside the firm who understand the regulatory environment in which we invest. Having been in this market niche for 16 years, we have had a great deal of experience with the Federal Energy Regulatory Commission, the Public Utility Holding Company Act of 1935 and the Public Utility Regulatory Policies Act of 1978. Of course there are also regulatory issues unrelated to the power sector that many private equity firms encounter such as the Employee Retirement Income Security Act of 1974 or bank holding company issues.

The longer I am in this business the more I appreciate the fact that from a 20,000 foot perspective, the private equity business is fairly simple, but when you dig in a bit, you realize that this is a complex business which requires you to focus on the details in order to be successful.