Alt Fuels: Not Ready for Private Equity Primetime?

Interesting article out of U Penn's Wharton School of Business about the role of private equity and energy. The basic premise: while the energy sector is experiencing unprecedented interest from private equity investors, it's doubtful that alternative fuels will. At least at this point.

No surprise why private equity is moving into 'traditional' energy. The article lists the following data supplied by the U.S. Energy Information Administration:

• World oil prices will be 35% higher in 2025 than was projected in 2005.
• World economic growth is increasing at an average annual rate of 3.8% over the period through 2030.
• World energy consumption is expected to expand 71% by 2030. (From 421 quadrillion BTU in 2003 to 722 quadrillion BTU in 2030).

According to Jonathan Farber, cofounder of energy specializing private equity firm Lime Rock Partners energy: "In 1998, there were just five or six other private equity firms in the energy business with about $2 billion worth of capital invested. Now, there are 15 to 20 competing firms with $30 billion invested in the industry."

Makes the $32 billion spent by the consortium of private equity groups led by Kohlberg Kravis Roberts to acquire Texas based energy supplier TXU Corp seem pretty straightforward.

Alternative fuel companies shouldn't hold their breath for an onslaught of private equity $, however. Here's why, according to Bill Macaulay, chairman of First Reserve Corp., a 25-year-old private equity firm focused on energy:

"Alternative energy investments may be attractive for smaller firms or venture capitalists, but they are unlikely to attract classic buyout artists because there is often little, if any, cash flow to pay down debt. Alternative energy is [also] extremely price sensitive... you need high prices to justify almost any alternative."