Private equity (PE) interest in oilfield services companies is on the increase.
There are a wide range of PE houses – both large and small, with and without oilfield services experience – looking to invest in businesses with strong management teams, good market position and real growth potential.
When selecting a partner, three things really count: making sure there is a strong cultural fit; striking the right balance with an investor on the terms of their involvement; and – of course – making sure the financials stack up.
The first aspect is perhaps the most difficult to evaluate. The personal style of investment executives matters – but does it reflect the house style? Considerations include who will handle the investment after the deal is complete and what will the PE house be like as a partner?
There is no substitute for spending time with a PE house in advance of any deal to assess cultural fit, but sourcing references from management teams from a PE house’s previous investments – both successful and troubled – can help to create a picture of what they will be like to deal with.
A cultural fit must exist at an organisational level, too. For example, many oil and gas companies have a strong values-based culture and extremely active corporate social responsibility (CSR) programmes, making crucial contributions to the domestic and international communities in which they operate. Careful assessment of a potential investor’s corporate ethos is important to avoid future incompatibility at that level.
Progressing to the next point, business leaders’ views will vary in terms of the level of support they desire from their financial backers.
For some, the perfect scenario sees the backer take a hands-off approach, leaving management to run the businesses. Investors may request a seat on the board and the right to approve a chairman or chairwoman, while remaining relatively passive on their involvement in the business so long as it delivers the desired outcomes.
Others are more active, and will request detailed involvement on areas including strategy, international expansion, operational improvement and acquisitions. This can be viewed by management positively if it adds value and open doors, but negatively if all it is seen to do is add bureaucracy.
Last, but by no means least, there is the financial side of the agreement. Terms may be relatively easy to agree, but management must consider the financial stability of any potential PE partner.
Is it capable of, and have the stomach for, backing future bolt-on acquisitions and does it have a track record of doing so? How stable is the investment fund, and is there a risk that a strongly-performing investment becomes starved if the fund experiences wider difficulties?
Barry Fraser is an oil and gas executive director specialising in mergers and acquisitions with Ernst & Young.
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