Hunting for equity in energy

Financial powerhouses Guardian Holdiings Limited (GHL) and RBTT are looking at setting up a private equity fund that will allow local and and foreign investors to participate in the local energy sector. “We must find ways to bring ownership to the sector,” Kristine Gibbon,  vice president, Business Development at GHL told businessmen and energy gurus at the recent Trinidad and Tobago Petroleum Conference at the Hilton Trinidad. She spoke on the topic, Financing the TT energy sector : Opportunities and Challenges. “There is no reason why it should not happen.” For GHL, she said it was opportunity to put capital to work that the company may not have explored before. “What we are pursuing is a portfolio investment,” she said, stressing that GHL was staying in the financial services sector.  She also stressed that it was shareholder capital and not shareholder funds that was going to be invested in the projects. “Take a bit of methanol, service companies, upstream and bring all these projects together, like a mutual fund, and offer it to the public and other financial institutions.” Last week saw the successful culmination of the three-day conference. Billed as the premier energy event in the Caribbean, this year’s theme was “Trinidad and Tobago: Energy Sector in Transition.”

The event featured the delivery of speeches and professional trade papers from many top line speakers, all experts in their own fields, several government ministers, including Prime Minister Patrick Manning and Energy Minister Eric Williams. The conference also heard from Venezuela, Cuba, the United Kingdom and the United States, as well as leaders from energy sector companies operating in Trinidad. Revelations, assurances of greater investment in the energy sector and differences of opinions highlighted this year’s proceedings, the fiercest being when PM Manning disagreed with statements of Dr Jim Lee Young, president of the South Chamber of Industry and Commerce. Lee Young felt that there would be no energy boom, in spite of all the government’s grandiose statements, while the Prime Minister insisted that the country’s proven existing reserves are more than enough to sustain the government’s commitments in the sector. Explaining the conference theme, Lee Young said it was chosen “against the backdrop of the economy of Trinidad and Tobago moving from an oil-based economy to a natural gas based economy.

“The energy sector in particular is in transition with developments such as the moves to encourage greater local capital investment in the sector, efforts to increase local content in the delivery of goods and services and impending fiscal reform to boost production in the older, marginal fields onshore and in the Gulf of Paria,” added Lee Young. It is in this latter context that the presentation by Gibbon on the final afternoon is of such great importance outside the energy sector. She revealed that her company and the RBTT group have been evaluating options to invest in the regional energy sector, but primarily in Trinidad and Tobago, through an Energy Fund. Already GHL and RBTT representatives  have met with top energy finance practitioners in Houston, Texas; met with fund managers at development banks as well as entrepreneurs and government officials involved in the local energy sector.

Non-banking sector could fund energy sector

She took the view that non-bank financial institutions could be an important source of funds for the local energy sector and identified some (TT)$60 billion as coming from mutual funds, life insurance funds, pension funds, National Insurance Board (NIB) and credit unions. Of that TT$60 billion, Gibbon took the view that at least ten percent could go to the energy sector without putting those funds in jeopardy. More than that, Gibbon also said that her company has agreed to co-sponsor the feasibility study for the highly-touted Eastern Caribbean Gas Pipeline Project. She pointed out that her company would want to become involved in the energy sector because it was seen as one way of achieving profitable growth in revenue and earnings, while at the same time diversifying the company’s sources of income. It was also seen as a method of improving the company’s risk-adjusted yields on funds under management. Additionally this sector involvement would contribute to the “sustainable development of the local energy industry,” while “broadening our product offering in a world of increasing integration of financial services.” She dismissed the notion that the GHL/RBTT combination was going to be one like CL Financial. “We will not be a CL Financial in energy and not directly own or control majority in energy company.”

Why GHL/RBTT are getting involed

On the question of why would companies like Guardian Holdings and RBTT want to get involved in the local energy sector, Gibbon explained that there were expected to be unprecedented levels of growth in oil and gas production, which would create many business opportunities for portfolio investments. Such opportunities would be found in value added oil and gas-based activities; ports, trading and shipping on a larger scale; supply/logistics services for expanded offshore marine oil and gas operations and exports and support services like financial, environmental and Human Resource development.

Gibbon also pointed out that historically, domestic capital has been locked out from energy sector investment and “now may be the time to break in,” she added, since the government was pushing for local participation and also foreign investors need local partners. She saw this Energy Fund as coming not only from Guardian Holdings and RBTT, but also other local and even foreign companies. She saw Phase one as RBTT and GHL making investments in Trinidad and possibly in projects in the United States, with Phase One seeing local institutions and private investors participating in energy investments. Citing several critical factors in investing in energy,  Gibbon identified as important a “well-defined, focused target market,” which would take into consideration sector, geography, size as well as large, good quality deal flow. It is not unusual to have energy finance practitioners look at anything between 20 and 100 proposals for each investment made. Additionally, there must be rigorous adherence to all investment criteria and the investments made, must be managed by energy finance experts with input from technical, commercial and industry specific advisors.

Not enough projects

For GHL and RBTT to get into the energy fund, return on investment had to be in the region of 25-30 percent. Her rationale was that international investors required a risk premium to invest in TT and local investors had a higher cost of capital. “If we make it, then everybody else makes it,” she said. On whether TT’s market was big enough, she said there was concern that there was insufficient projects going on at the moment. The experts have told them that specialise in one sector, “but from a risk management point of view can’t afford to invest in one sector.” Capital, she said is not the problem, “the problem is finding the projects to put the capital in. “We are not seeing the projects out there to be funded.” She reiterated that the financing LNG Trains was more than GHL/RBTT can handle, stressing that they were prepared to stay in the $20M - $400M bracket.

Closing the gap between local and foreign investment

But if the gap between foreign and local investment is to be closed then there is work to be done. The financial sector must “improve its ability to accurately assess energy sector risks through increased awareness and formal education together with active involvement, where possible, in investments. It also has to develop products to meet the sector needs as well as being able to reduce its cost of capital. On the other hand, the energy sector must increase awareness of investment criteria and tailor proposals to suit. It also has to increase transparency and improve the breadth and depth of local management, mainly through formal management training. There is also the need, according to Gibbon, to forge partnerships with foreign experts as a means of getting up the learning curve fast, but ensuring that such partnerships are as binding as possible. Energy investments outside the region may be an important part of an investor’s portfolio since this could mean diversification, learning, global energy contacts and increased deal flow. She also pointed out that if movement of local institution capital into the energy sector is to take place, then there is great need for legislative reform.

This need was echoed by the South Chamber’s vice president — energy, Rampersad Motilal, who said, “Many of the potential opportunities in the sector may require some changes to the existing regulatory and legislative environment in Trinidad and Tobago. We are of the view that the local business community must take a lead role in working with the government to effect changes to the local business environment that will promote greater participation by nationals in all areas of the sector.” “We note that although Trinidad and Tobago has one of the most advanced gas-based sectors, there are still considerable portions of the population that know little about this critical driver of the local economy,” he added. Motilal also warned that since it seemed the country was on the brink of  another energy boom, it would be wise not to repeat the mistakes of the boom of the 70s and “every effort should be made to ensure that all sectors of the population are given a fair chance to participate meaningfully in this period of prosperity.”