Anastasia Pozdniakova |
Manfred Ernst and Anastasia Pozdniakova, managing directors at boutique investment bank Fieldstone Private Capital Group in New York, caught up with Senior Reporter Holly Fletcher about how access to information has commoditized the generation sales process and if peakers will get a run for their money from a new combined cycle technology.
Fieldstone--foundedby former Bankers Trust Co. bankers almost two dozen years ago—sees power is one of its core sectors, with a weighting toward generation side. They talked with PI about what has changed the M&A advisory landscape over the last five years.
PI: How would you describe what the sellers are looking for in an advisor right now?
ME: I think that actually it’s a very good question and to approach the question, sellers, like everyone else in the world have access to information today that may not have been available to a typical seller even five years ago. Information has become a commodity. The other thing that has sort of become a commodity is how to run a sale process. The typical two-stage sales processes, where people prepare information memoranda, hold first round bids, etc., etc. that’s really virtually become a commodity and cannot differentiate any advisor on that basis.
What is a seller looking for? If you look at the overwhelming amount of data available, they want us to mine the data and process the data. They may look to us for information about potential buyers that is not readily available that is tailor made to the particular asset that they are selling. They are looking to us to see what type of relationships we may have with a certain group of buyers that may somehow enhance the sales process.
AP: Right. Any information that is not widely known or not easily accessible to the seller. To that extent I think what sellers look for from advisors is senior level attention because unique information lies with senior professionals, not a junior level execution team, which is more of a commodity.
To answer your question with a third point, sellers are conscious of their transaction costs and there has definitely risen a desire to limit those costs if possible.
PI: I’m curious about the statement about how running a sales process has become a commodity. Is that because the client or the would-be sellers have developed the skill set or sophistication in-house or have you seen people who have left advisory firms leave, taking the skills with them?
AP: I think it’s both, but it’s definitely that people learn from participating in the processes. Even sometimes a private equity firm that has seen how the auction has been run decides they are capable of doing it next time in-house.
ME: The challenges that we have is that when we talk to a seller about a potential assignment is that sometimes we hear that they really have two options:dDo it myself in-house or hire you. That sort of speaks to the question that you just raised. There are, in fact, a lot of capabilities that are available within sellers that, you know, they learn over the years, selling an asset, going through that process, how to prepare the information that is attractive to potential buyers. It’s no longer a mystery. Everybody has the same recipe.
AP: We can pride ourselves that we think we do it better than others but that’s not really an objective measurement.
PI: It sounds like the sellers have changed especially in the last five years to wanting specific, in-depth information from you. What are they looking for—a compilation of sell prices or the pool of buyers out there?
AP: I think it’s primarily on the pool of buyers.
ME: The sale statistics, again, most sophisticated buyers have access to that information. They have a database and there are databases available so the comparable data crunching have become much more of a commodity.
PI: I can learn so much about one power plant by just spending 20 minutes on Google so if I do that, so do deal participants. How has the sell-side mandate changed over the years as information became more readily available?
AP: Our pitches are much more focused. It’s no longer just a point of information to the other side. In a way in terms of processes the materials that we provide to buyers are a lot more focused in highlighting the true value of what we’re selling as opposed to giving a lot of background information.
In general people have much less tolerance for volumes of information. So for us it’s important that when we reach out to people, whether it’s in a conversation or written material, we get to the critical point very quickly.
ME: Right.
PI: What about buyers, are you seeing hesitation from them to work with an advisor?
AP: I think with the buyers, what they are looking for is a negotiated transaction. There is an inherent contradiction when we talk to the same groups of people. When they are sellers they are looking for an auction. When they are buyers they are looking for a negotiated transaction. Our value added for buyers is really bringing them deals more so than execution.
ME: Every so often we get retained by buyers to do the analytical work because either they are resource constrained or they like to have a third party independent view of the process, which is very helpful. But as Anastasia said, more often than not, they are looking for transactions that they don’t have to compete for and they are looking for us to bring them those deals.
PI: What separates Fieldstone from the rest of the pack?
ME: First we have to clarify who we compare ourselves against. We compare ourselves against other boutique investment banks. We are not comparing ourselves to Goldman Sachs, for instance.
Where are we different? In this first instance, Fieldstone has an international footprint with an international brand name, which for boutique investment banks is not the typical set up. You have a lot of boutiques that are active in one market whereas Fieldstone has offices international offices in London, Berlin, Johannesburg, Kuala Lumpur, Hyderabad. That is a particularly unique feature of Fieldstone as we have grown over the years.
AP: As you may know we have a sales and trading group here in New York. For our business that provides a wider reach to other pools of money and hedge funds. It provides us a wider reach for transaction marketing.
ME: Maybe one other thing, I think it’s fair to say that at least compared to some bulge brackets in the particular space, Fieldstone very often tends to get involved much earlier in a transaction, shaping the contractual arrangements rather than just getting involved when the actual capital raising is being called for. So we will get involved at a much earlier stage than a lot of our competitors.
PI: Looking forward to 2014, what sort of transactions do you expect on the power side?
ME: That’s a bigger picture kind of question. There are always going to be discreet transactions. As we all know as the industry is looking at the shale gas revolution. As a result of that you will see a lot more transactions involving gas in general, whether it’s gas-fired generation, whether it is transportation of gas, everything related to gas.
More importantly I think that we’re seeing a few transactions right now where there is a new gas-fired technology being offered by virtually all equipment vendors. That new technology is called a rapid response combined cycle technology, which responds to one of the shortcomings of the existing capacity allocation. This means you need to be available when the renewable capacity is not available and you need to be available in a) a very short period of time and b) you should be available with environmentally friendly emissions.
Historically we’ve seen what we call “firming up” the renewable resources being balanced by peaking resources. But peakers themselves are inefficient and are not environmentally friendly. So what you have is a new type of technology that in a combined cycle mode can actually act like a peaker so it will be able to respond, if we continue at least having renewable energy, it can balance that energy very nicely.
AP: A statistic we’ve seen recently is that 40% of the baseload generation comes from coal-fired plants and the projection is that in the future the 40% will come from gas-fired generation.
ME: by 2020 the profile of the generation capacity will totally have turned around. Whether it’s 2014 or 2015 but we certainly have seen many more transactions come across our desk for gas-fired generation than we’ve seen in previous years
AP: One more point on what’s happening in 2014, in terms of renewables we see that activity moving to Latin America and Central America. It has already been there this year but it’s going to continue to grow compared to the United States.
PI: The rapid response technology seems like it could be impactful to peaker portfolios that are out there. If it is cleaner and quick and a combined cycle, do you think that calls into question the long-term viability of peakers that are online right now?
ME: I don’t know whether you’d say the long-term viability. It’s probably more fact and circumstances. I don’t think that one can say yet that they become obsolete but certainly if you have a choice right now between a peaker and if the economics make sense you’d probably reach for this new technology.
PI: I wanted to talk about how buyers and sellers are seeing gas-fired deals at the moment. We’ve seen some processes in Texas right now where buyers, including Exelon, have seen valuations come in higher than what they are willing to pay. I’m curious as to what is driving the price negotiations.
ME: That’s a very good question. Generally speaking our observation is, and it’s been true now for a couple of years, that a lot of deals are announced but few deals actually get closed. Part of the reason—and I think the market perceives this as well—is that the expectations between sellers and buyers are still just too far apart. It’s partially the fact that when today’s seller purchased the facility, they purchased the facility in an environment where they had different expectations of terminal values, different expectations of the power markets. Therefore, when they come to market, their reservation price is just well above what today’s buyer is prepared to pay for these assets. In a way, there is a little bit of a stalemate and very often, as you know from your own research, auctions are terminated because the offers that they get in the auction process are not exciting enough for a seller to bite.
PI: Several of the teasers I have seen recently from different firms have really focused on forward looking projections for what they are trying to sale, such as highlighting how regional economic improvement could impact the value of the plant. Has that always been a component of the teaser or is that something that is trying to be a value-add right now?
ME: I think that it’s entire a function of the markets. As we all know you cannot really get PPAs and typically when you have a power purchase agreement you can just describe your revenue stream over 20 years and that’s pretty much the first line of analysis. You may supplement that with market information, but the real emphases will be on the value of the contract.
Since many transactions that have come to market have a mixture of some capacity payments, some energy; in some cases all energy and no capacity payments. Depending on where the facility is being constructed since you no longer have that security of the power purchase agreement you have to pay a lot more attention to what you expect the market can and cannot deliver with respect to your revenues, with respect to your expenses. It’s really a function of the changing market as opposed to somebody deciding I’d like to emphasize the markets more than I used to.
PI: Last question: what is surprising to you right now?
ME: What is surprising to me right now? My answer is that the Giants are doing so poorly in the NFL. That is really a big surprise. (Laughter)
PI: I have to say I thought they’d do better too given the recent seasons.
(Laughter)
ME: So did I. That was an open ended question so that’s my answer about what surprises me.
