Small-Capitalization Investment Opportunities
Eschelon targets “small-cap” businesses with enterprise values of less than $250 million across the energy value chain in the U.S. and Canada. Public markets generally do not provide an efficient market for small-cap energy-related issuers. At the same time, while billions of dollars of capital has been raised and is available for energy private equity and debt investment, the majority of this capital has been raised by “mega” buyout funds with aggregate committed capital of $1 billion or more. Eschelon’s research and experience suggests that larger funds find it uneconomical to pursue small-cap opportunities, creating more limited competition for investments. Eschelon believes that experience and detailed knowledge of the energy market’s small-cap participants should allow it to generate returns in excess of those available to investors in larger sized energy enterprises.
Pricing Inefficiencies
In addition to the benefit of limited competition, small-cap companies provide the Fund a unique opportunity to exploit pricing inefficiencies already inherent in the energy industry. Industry data indicates that liquidity and valuation multiples tend to increase as companies exceed capitalizations of $250 million. In Eschelon’s view, this increase in valuation multiples available to growing small-cap enterprises is often absent in the market for mid- to large-cap businesses. Eschelon believes that this pricing efficiency offers the prospect that the Fund will be able to provide capital and leadership for these small-cap companies and then exit such investments at a higher multiple of their original cost than would be available with investment in mid-to large-cap companies.
Opportunities Across the Energy Value Chain
According to the U.S. Department of Energy, the U.S. energy sector generates annual revenues in excess of $1 trillion in multiple sub-sectors each of significant size(7). Eschelon’s experience in this area supports this research, and the team continues to see attractively valued investment opportunities throughout these energy industry sub-sectors. In addition, individual energy sub-sector volatilities generally are above S&P volatility, creating low cost entry and high value exit opportunities for the Fund. Furthermore, by reviewing opportunities across the energy value chain, Eschelon hopes to avoid the volatility risk inherent in an energy fund restricted to a single sub-sector and gain perspective only available to industry-wide participants.
Disciplined Investment Program
Eschelon has developed a disciplined strategy and process to assess and select appropriate investments for the Fund (see Investment Process). Eschelon’s approach involves an in-depth analysis of a portfolio company’s business plan and the ability of management to execute this plan in a competitive and evolving marketplace. Equally important will be the financial terms of a particular investment and the attributes of the portfolio company’s other investors. Eschelon believes utilizing this program to select investments will generate significant financial returns.
Active Management Oversight and Focused Exit Strategy
Eschelon expects that its Houston location, as well as the projected size of portfolio companies, will allow it to provide each portfolio company with a higher degree of hands-on attention than has historically been provided by other private equity funds in the energy sector. Eschelon further believes that this increased attention will result in improved portfolio company performance, as well as provide Eschelon with the insight to better exploit prospective exit opportunities. These advantages should allow Eschelon to generate superior returns for its investors.
————
7 Energy Information Administration (“EIA”) data, at http://www.eia.doe.gov.
————