Privcap/ Presents

Executive Summary of an Exclusive Networking Event

January 2015

Privcap/ Presents

A Conversation With

Robb Turner ArcLight Capital

With insights from: Debevoise & Plimpton LLP Gen II Fund Services Grant Thornton LLP And featured charity: Friends4Michael

Privcap Presents / Robb Turner

About Privcap/Presents

Events and Reports

Privcap Presents is a series of invitation-only networking events designed to bring together GPs, LPs and other guests. The events are organized by Privcap Media and hosted in partnership with leading professional service providers. Each Privcap Presents event begins with an intimate, onstage interview with a notable leader from the private equity industry. A transcript of that interview is used as a base for a digital report (like the one you now read) that is made available to Privcap’s global audience. Also included in Privcap Presents reports are perspectives from the event partners, including a non-profit selected by the featured interviewee.

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services to market participants.

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programs—mostly in-depth interviews and panel discussions

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Privcap is known for its authoritative online video programs and digital reports. Since its launch in September 2011, Privcap has produced dozens of focused reports, and about 800 video with private investment experts. Privcap’s audience has grown to about 8,000 unique visitors each month—a mix of institutional limited partners, general partners, high-net-worth investors and service providers. Each week, Privcap and its sister site PrivcapRE release and promote new content.

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Robb Turner / Conversation

The Transformation of U.S. Energy Investing At the debut Privcap Presents event on Nov. 24, 2014 Privcap CEO David Snow interviewed Robb Turner, senior partner and founder of ArcLight Capital Partners, on how the U.S. energy market has changed for private equity, and the country as a whole, since 2008

Privcap: Help us understand how profoundly the revolution in U.S. energy has changed things, both in our economy and around the world. Robb Turner, ArcLight: If you go back to 2005–2008 the U.S. had 10M barrels a day of oil production. Over 20 years, production declined about 5M, and the only thing stabilizing it at 5M was offshore Gulf [of Mexico production]. We thought we needed to import natural gas; people thought we had 15 years of supply left. Then another American entrepreneurial miracle happened called

© 2015 Privcap LLC

long horizontal drilling, or multi-stage fracking, and it unleashed base hydrocarbons across the U.S. This has fundamentally changed this country in the past five, six years, probably in ways a lot of Americans don’t know. Oil production today is 9M barrels, up from 5M. Natural gas is 65 BCF [billion cubic feet] a day, up from the high 50s, but on its way to 80 BCF a day. And it’s changed the geopolitical environment. If you go back to our average energy price in the U.S. in 2008 and you compared it to the average energy price around the globe, we had a little bit of a benefit, but not much. We had really high natural gas [prices], pretty high power prices, high oil prices. Today you have $100B in trade deficit savings, $300B a year of cash savings in this, because of our energy savings. It’s still really early days, and we’re still not fully appreciating the impact this is all going to have on the country. You made an interesting comparison, the remapping of the U.S. energy industry versus something of similar size getting reworked: the Japanese economy. Can you make that point? We were looking at some statistics on the Japanese economy, which is about $4.5T a year, and the energy business that is impacting the U.S. is $3.5T. So

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the way we framed it was to act as if you were going to take the entire Japanese economy, throw it up in the air, and reconfigure it because of a disruptive technology. What impact would that have? That’s what we’re experiencing right now in the U.S., and it’s dramatic and a lot of fun to be in the middle of. Can you walk us through the important differences between America’s new bounty of oil versus natural gas? How much of the infrastructure do we have to move our extra oil versus how much to get natural gas exported and transported to different parts of America? They’re very different commodities. I’ll start with oil, because over the last 25 years, as U.S. production went from 10M [barrels], then slid down to 5M [barrels], we reconfigured our oil infrastructure to accommodate a lot of imported oil. And so the oil infrastructure was built around ports, primarily in the area around Houston, but also in the Northeast and some in California. We got about 25 percent, 30 percent of our natural gas before this revolution out of the Gulf of Mexico and parts of Texas, primarily out west. So the natural gas infrastructure was based in that part of the world. Today the oil infrastructure is being completely reconfigured because . CONTINUES ON NEXT PAGE

Robb Turner / Conversation

Clockwise from left: Robb Turner shares his perspective; Turner with Privcap CEO David Snow; invited guests mingle and network

oil is coming from different parts of the country with big refining areas. And the biggest new gas finds in the U.S. are in the Northeast, so that entire infrastructure needs to be built. What parts of the landscape will change for this infrastructure to be built? Is it the Gulf of Mexico around Corpus Christi [Texas]? That’s a tough question, because the whole country’s changing. Just for the export of natural gas and natural gas liquids, there’s $120B of construction in that corridor from Corpus Christi around Louisiana. There are cranes all over the place. We’re also seeing about $50B of construction in Texas and Louisiana, and maybe in Pennsylvania, for the chemical industry. And that’s to export the natural gas and some of the petrochemicals, but also the natural gas liquids. Part of the reason we haven’t started exporting oil is because it’s illegal in the United States, and there’s a product right underneath oil in its heaviness, called condensate. We are starting to export a little bit of condensate, but by law you have to refine those products and then export. So right now, the way

© 2015 Privcap LLC

we export our oil finds is by refining our condensate. My gut feeling is that we’ll start exporting oil. When you started ArcLight in 2000, there was another disruptive technology that everyone was talking about: the Internet. What was it like to try to raise a PE fund focused on industrial objects when everyone was excited about something else? That was a time when everybody wanted to do media, telecom, Internet. So my partner, Dan [Revers], and I were in the middle of the energy business and it wasn’t the sexiest place to be. But there was a revolution going on back then, starting with the deregulation of the power business, and then it bled over into the E&P business, spinning out what we call our midstream assets. And our big break in life was that John Hancock, who Dan worked for, believed in the model, and they gave us $500M to start to invest in the first [energy] fund. And we had to go out and raise another $500M. That was a really tough thing to do. Most investors didn’t even have a bucket for energy assets. If they had a bucket, they said, “If you touch E&P we’ll shoot you,


because we hate E&P, because we’ve lost all our money, on E&P.” When we went to start raising the fund, Enron went bankrupt, so then the whole industry gets tarnished. But we believed if we could find 30 investors who understood what we were trying to get to, that we would make people good money—and fortunately we did. Let’s fast-forward to the present. There is a huge amount of interest in North American energy. That’s your specialty, so talk about the change in attitude among the LPs that you talk to, compared to your original dot-com era fundraise back in the day. Today LPs have buckets for what they call real assets, or energy. So that’s a big change. They have buckets for infrastructure. And a lot of the private equity components of LPs also have their own set-aside within private equity for energy because energy’s 30 percent, 35 percent of the economy. Today energy’s actually an area people are trying to find a way to make allocations to, versus the old days when they were trying to find a way to not make an allocation to it. ■

Sponsor Perspective

Expert

With Kevin Schmidt, Co-head of the Private Equity Group, Debevoise & Plimpton LLP

Describe the activities of Debevoise & Plimpton’s private equity practice. The Private Equity Group is one of the firm’s cornerstones and has been active since the initial deals of the late 1980s. We work with diverse clients, including buyout firms; the big, diversified asset managers like The Carlyle Group, The Blackstone Group, and Oaktree Capital Group; some of the new PE players; and pension plans, like the Canada Pension Plan Investment Board, that are increasingly doing direct deals. What is changing in the way private equity deals are done? It’s not just buyouts. The number of “go private” deals is declining. And private equity firms are looking for industry expertise. When we get a call from our clients

Contact:

© 2015 Privcap LLC

looking to do a PE deal, we can’t just look on our bookshelf and pull out the last deal that we did for them and do it again. A lot of transactional experience is not enough. You need industry knowledge, and we have that in areas like healthcare and insurance, so we can look at each deal and really find out what is unique about it. It’s also about being able to see the private equity space through the eyes of different types of clients, like solo buyout firms versus pension plans. For example, clients might ask us how to structure management incentives in a deal. We can draw upon our menu and say, “Here are some options, based on prior deals.” Debevoise is very interdisciplinary, and we are able to draw upon the knowledge we have across different disciplines and offices. ■

Kevin Schmidt, [email protected] | www.debevoise.com


Sponsor Perspective

Expert

With Steven Millner, Managing Principal, Gen II Fund Services

How does Gen II partner with private equity firms for success? Gen II is a third-party private equity fund administrator, and we’ve been doing it longer than anyone. We work closely with private equity funds to support their back office. We’re the team that oversees reporting to investors, whether that is for financial statements, capital calls, or distributions.

Contact:

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We keep the official accounting books and records for the firm. We maintain the investor database. We manage investor allocations and prepare waterfall calculations. We support the CFO or the person within the organization who has CFO functional responsibility. We bring an expert platform to our clients, a platform of people, process, and technology. ■

Steven Millner, [email protected] | www.gen2fund.com


GEN II FUND SERVICES, LLC

Sponsor Perspective

Expert

With Kevin Shroeder , Energy Industry Managing Partner, Grant Thornton LLP

How does Grant Thornton approach its private equity practice?

What is the firm’s involvement in the PE energy sector?

We are proud to have dedicated professionals for private equity that support our firm’s audit, tax, and advisory services. We’re well positioned and scalable to provide things like fund audit services, portfolio company audits, and transaction services to private equity. We see the benefits of aligning our services by industry specialization. We have industry leaders who are well connected to our private equity practice; it’s important to have industry–knowledgeable professionals dedicated to PE firms to provide audit, tax, and advisory services.

At Grant, energy is one of the fastest-growing areas in auditing, tax, and advisory in the past several years. We have about 400 professionals across the U.S. focused on the energy industry. E&P, midstream, and oil field services are our main industry sectors across all of our service lines. We have very scalable services—anywhere from large companies to startups, in private equity we’re well positioned to audit a small portfolio company, or a growing company that turns into a larger capitalized company. ■

Contact:

© 2015 Privcap LLC

Kevin Schroeder, [email protected] | www.grantthornton.com


Privcap Presents/ Featured Nonprofit

Can you talk about the Friends4Michael Foundation and why you support it?

© 2015 Privcap LLC

Robb Turner, ArcLight Capital Partners: The Friends4Michael Foundation was started by Mike and Brigitte Kwinn. They had a wonderful son [named Michael] who was a big-time athlete, a scholar, and a great kid. He was aff licted with a brain tumor and passed away. I’m on the board with the Kwinns, and they’ve tried to build this foundation around the spirit of Michael. Some of it’s through scholarship. We help the Make-A-Wish Foundation, because

that was an important part of the last year of Michael’s life. And what we thought was, if your child was afflicted by a brain tumor, you’re going to do anything to make that child’s last weeks the best they can possibly be. But if you’re really destitute, you’re probably going to go into debt to do that. We have the Family Assistance Program at Friends4Michael, and it gives grants out to underprivileged people who go through this. ■

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