Jerome Halbout – Partner, 4D Global Energy – France
The co-founder of Paris-based investment management firm 4D Global Energy, talks about their specialization and expertise in the energy sector, and how they transform SMEs into credible potential targets for strategic or financial investors.
You take pride in explaining that you are the only growth capital investor in the oil and gas sector in continental Europe. How do you explain the limited amount of players in your domain, and what sparked your interest with Mr Noonan to create 4D in 2002?
I have been involved in the oil and gas industry since the 1980s. My partner and I had been working extensively on transactions together when we worked as head of project finance teams for various banks and financial advisory companies. I was personally working for Credit Lyonnais and Lazard. We arranged the first financing for LNG in Qatar for example. We felt comfortable in oil and gas and had established privileged relations in the industry from government officials to CEOs of SMEs. We had raised more than USD 30 billion in energy deals. But we often met companies that sought a mere USD 10 million investment, which we couldn’t provide as bankers in large institutions. This has encouraged us to build 4D where we can truly assist and not just advise all sorts of companies, including the smaller ones. Many younger investors were attracted by other industry segments in the 2000s when oil and gas looked dull in comparison. We instead prefered “real” rather than virtual assets. We knew nothing about Internet, but knew a lot about oil and gas. Much to our surprise, we are still the only oil and gas specialized growth capital investor in continental Europe!
What encouraged you to set up 4D in France?
There are many energy investment funds in the United States. We had no specific edge to bring to this market. London on the other hand is very focused on the stock market whereas we knew from day one that we would work with private companies. Paris is definitely at the crossroads of several oil and gas markets but with fewer specialised investors, if any. And that’s where we lived! We had initially established a joint venture with Societe Generale which was terminated a few years later.
Most small European companies have a hard time to develop a governance suitable for larger companies to become interested in buying them. We offer analytical skills and the simple basics on how to operate a company. The perception of banking in continental Europe can be negative, especially in the oil and gas industry where local banks don’t know how to handle SMEs working internationally. Here you will find local SMEs with an 80 percent global market share who are unable to find financing and that’s why they talk to us. Many entrepreneurs are also very attached to their companies and not willing to sell them, so you have to work on their transmission objectives to be invited to join as shareholder. When we get involved in a company, we always agree on an exit strategy with the other shareholders, which usually takes 3 to 7 years to execute.
What is the role of 4D in supporting the development of the companies you are interested in?
Our job is to transform SMEs into credible potential targets for strategic or financial investors. We are in the business of making an exit happen and, as I said, we must make sure that we agree on a common exit strategy with the owners of our portfolio companies. Sometimes we only control 20 percent of the equity and still dedicate as much effort as if we owned 80 percent. The energy we invest coupled with our expertise in the sector constitute our most valuable asset as we can assist shareholders and managers to think strategic globally and improve execution and governance at the same time.
You invest in SMEs that are robust and have demonstrated a competitive edge, which is often technological. What other variables do you take into consideration when investing in oil and gas companies?
We invest in technical companies but not necessarily in high-end technologies. We are interested in companies that are able to protect their businesses as they grow. In the downstream sector we invest in companies that operate in niche markets with high entry barriers. In refining for instance, geographic considerations are really important, and we have invested in small niche refineries in Italy which produce diesel rather than gasoline which is in less demand in Europe. In each case our industrial strategy attempts to create more added value within the plant or company than through financial engineering or leverage. In services and technology, our rationale consists in backing proven technologies and companies with a solid commercial position. The major challenge today in the industry is costs. Therefore service companies we back should enhance productivity and provide cost-effective solutions to very capital-intensive industrial chains. We focus on companies that deliver a critical service representing a minute fraction of the capital spent. Our good understanding of the value chain can help direct small services towards where they add the most value.
In the upstream sector, we have been affected by an investment in the North Sea offshore that went pear-shaped. We no longer want to be exposed to such very high cost environments and rather invest in low-cost local, imbedded companies working onshore – as oil is sold for the same price regardless of where it comes from! We also learnt to invest only where our funds have the wherewithal to cure a problem encountered by an asset, that is in companies the assets of which are of a size and value corresponding to the funds’ investment bite size.
As you mentioned, you invest in upstream, midstream and downstream. In light of the current market dynamics, have you re-examined your portfolio orientation?
We made mistakes in some investments, which was disappointing for our investors. But they appreciate that we are sticking to our expertise: helping SMEs create shareholder value from their industrial edge. Our motto is: “say what you will do and do what you said you would do”. Our investors cannot trust people who tell them they will invest in oil and gas and then turn out to have invested elsewhere, in power for example!
We will not change our strategy but rather stick to our core fundamentals even more diligently. There is essentially no private equity investor awareness of the oil and gas value chain in Europe. Throughout our careers we have developed relationships with other investors, banks, oil and gas companies of all sizes and government officials which we put to at the disposal of our portfolio companies. This has allowed us to do great things with small deals and companies now come to us to present investment opportunities. We are not seeking to revolutionize the industry. We have now earned the trust of very qualified investors and want to serve them the best we can.
We have the chance of being close to Africa, a continent that is full of fantastic opportunities. We have invested in an onshore upstream company in Senegal, which has since become a very hot place for oil and gas exploration. In countries like Nigeria and Mozambique, there are too many players of all sorts now however and we feel out of our depth.
You are currently teaching in the MBA of Institut des Sciences Politiques. What values do you try to install to younger generations?
Transmission of knowledge, experience and values becomes very important once you have reached a certain maturity in your domain. I have taught several types of courses and was eventually offered the Sciences Po experience through senior oil and gas contacts. I met fascinating students, from all nationalities, with incredible résumés and anxious to learn more. But with young fellows inundated (almost brain-washed!) with information and political stimuli I need to restore a balance between fossil and renewable energies in their minds so I start my course by explaining how the earth was formed and how various types of energy are interrelated, and I must say that I enjoy it very much!