The power brokers

This past August, First Reserve, a private equity firm with offices in New York, London and Greenwich, Connecticut, announced the closing of its eleventh fund with commitments of $7.8 billion, a record-setting amount that made the fund the largest energy-focused global fund ever. ?The investment rate has picked up as the opportunities have picked up, and we've been able to go after larger and larger deals,? First Reserve CEO Bill Macaulay told sister news service PrivateEquityOnline at the time.

Indeed, since 2004, First Reserve has backed successful IPOs via exits from energy assets such as Dresser-Rand Group, Alpha Natural Resources and Foundation Coal Holdings. With all the activity, the fundraising process for the new fund was uncharacteristically fast. ?This thing, start to finish, from pre-marketing through to closing, was about three months, a little bit over,? said Macaulay. ?So there's a lot of demand, no question. We could have raised a much larger fund.?

With the new fund at more than three times the size of the last one, First Reserve has concentrated on expanding its global presence. It opened its London office just two years ago, and opened associated offices in Shanghai and Tokyo earlier this year to leverage the relationships First Reserve has in Asia with some of the biggest steel producers in the world.

?First reserved?
Since Fund X, First Reserve has doubled the size of its staff in all of the offices. The roster has increased from 20 professionals to 40, as the firm hires additional hands to implement its global mandate to invest across the energy industry.

This past July, the firm announced a spate of new hires. Recent additions include Neil Hartley, a former director at the UK investment bank Simmons & Co International, as a director at First Reserve's London office; Joshua Weiner, a Warburg Pincus and Morgan Stanley alum, as an assistant vice president in its Greenwich operation; and Matthew Raben, formerly of law firm Simpson Thacher & Bartlett, as assistant general counsel in that same office. No doubt, First Reserve is very careful about whom it lets in. ?We like to say: we date for a long time before we marry, in terms of hiring people,? says Ellsworth. ?A lot of the additions have been people we have worked with in one capacity or another.?

First Reserve's most senior hire is Alan Schwartz, a former senior partner at Simpson Thacher for 17 years; there he worked with three buyout groups, and KKR and Blackstone-and, of course, First Reserve. The firm is very careful in its hiring, and having the sense of working with people prior to them coming in, or them being close to people that the firm works with, helps immeasurably.

The culture at First Reserve has remained the same, notes 16-year First Reserve veteran Ellsworth. Incoming professionals, many of whom have worked with First Reserve in the past, know the professional environment they're getting into. Says Ellsworth: ?People tease, and say we're ?First Reserved,? because we're a very reserved culture. We're very disciplined and focused in what we do. Everything is structured: there's a structure for everything from how we look at deals to our dress code.?

Launching from London
Still, despite the hiring and the growth, there are no plans to open other offices in countries it works with, such as Brazil, at this point. Nor are there plans to expand its associate offices in Asia, which now consist of two people in Tokyo and one person in Shanghai.

More action is happening in London, a popular meeting point for investors from all over the energy world. The firm is expanding its First Reserve International office in the UK capital. ?It's really a launching pad for many other areas,? says Ellsworth. ?It is a crossroads for people from the Middle East, Eastern Europe, Russia and so on.?

Even its infrastructure-building investment strategy has a key component in the already-developed world. ?There's not only the need to install infrastructure in the developing economies – China, Brazil, India and others – but also in western Europe and the United States, where we have not upgraded or expanded or replaced infrastructure in the developed economies,? says Ellsworth. Indeed, history has shown, in the cases of the California and New York blackouts, and after multiple hurricanes in the southern United States, that there's a great need to replace and expand energy infrastructure in even the strongest economies. That said, the fund will also invest in the initial installation, expansion and development of infrastructure in more emerging economies. It's a sort of a double whammy. ?We would expect at least 50 percent or more of the fund to be invested along that investment theme,? says Ellsworth.

Infrastructure, undoubtedly, is the firm's bread and butter. ?We like to say that if this is the equivalent to the California gold rush, we're investing in the picks and axes and shovels,? says Ellsworth. ?We invest in the equipment and services that are needed to support new infrastructure.?

New energy
There haven't been any investments yet from the new fund. However, within the next couple of months, the first investment will be made.

Energy prices, of course, are a major concern, and could make investments in, say, liquid natural gas more viable and more popular. First Reserve also takes a good, hard look at alternative energy investments. ?The higher gas prices make [alternative energy] investments much more viable,? says Kristin Custar, assistant vice president at First Reserve. ?With that said, we're not making investments in venture-type companies. We're not going out and making a bet on new technology that's never been proven in the alternative space. We look at wind, we look at solar?but we're not going to buy the business unless the technology's been proven and it's an established company.? That hesitancy is reflected in the fund strategy: only about 10 percent of the fund will likely go to alternative energy investments. First Reserve will also keep focused on infrastructure. ?Even in the alternative energy space we like to be the one that's providing the equipment and the services for those types of businesses – the turbines in the windmills, things like that – the same type of strategy that we do in infrastructure,? says Custar.

Traditional energy businesses are First Reserve's mainstay, however. In March, First Reserve announced its acquisition, with its tenth fund, of US-based Industrial Power Generating Corporation (INGENCO), a company that designs, builds and operates distributed power generation facilities, including traditional oil and gas-fired peaking facilities, industrial cogeneration facilities and, in a nod to alternative energy sources, methane-producing landfill gas-fired renewable energy facilities.

Investment opportunities abound in infrastructure, and First Reserve is not the only one on the playing field. New York-based LS Power Group and New Jersey-based Energy Capital Partners are each on track to raise energy-related private equity funds roughly in the $2 billion range.

But First Reserve intends to be at the forefront of investment in this new surge. ?There's a lot out there,? said Macaulay last July. ?We've underspent on infrastructure in the US and Europe since the last boom, which ended in 1982 – a lot of years that have to be made up for.? It's making it up in spades: just this past June, the firm announced the sale of Power Well Services, a platform company it created to consolidate various oil well testing and fluid analysis companies, to UK-based oilfield service company Expro International Group for close to $675 million.

With the new fund's $7.8 billion to work with, the firm will easily be able to capitalize on a wealth of new opportunities. And so far, First Reserve has shown little sign of not being able to manage its growing pains.

First Reserve Corporation
Founded: 1983

Office: Greenwich, Connecticut; New York; London; Tokyo; Shanghai

Most recent funds: First Reserve Fund XI LP ($7.8bn; 2006)

First Reserve Fund X LP ($2.3bn; 2004)

Total employees: 40 professionals worldwide

Key personnel:

William Macaulay, chairman and CEO

Ben Guill, president

Alan Schwartz, managing director

John Hill, vice chairman

Jennifer Zarrilli, chief financial officer

Anne Gold, general counsel

Legal counsel: Simpson Thacher & Bartlett LLP

Public relations: Cubitt Jacobs & Prosek Communications

Investment strategy:

First Reserve targets investments of $50 million to $500 million in middle-market energy companies with enterprise values of $100 million to $4 billion. First Reserve invests in a broad range of segments within the energy industry including: energy manufacturing and services, such as drilling service providers and wellhead equipment manufacturers; energy infrastructure and energy reserves. First Reserve's investor base is predominantly institutional and consists primarily of corporate and public retirement funds, endowments, and foundations.

First Reserve Fund XI closed with $7.8 billion in July 2006. Since raising its initial pure buyout fund in 1992, First Reserve has completed over 60 principal transactions, investing over $3.5 billion in equity. These transactions have had an aggregate total value of over $10 billion. In addition, First Reserve portfolio companies have completed another $5 billion of acquisitions through more than 225 add-on transactions.