Andrew Homewood / Beyond Q&A
Q: Andrew, you work in London and have spent significant time in the United States working with a number of private equity firms, investors, and companies. What do you find appealing about your work in the U.S.?
A: Four things come to mind: The U.S. has the largest, most active, most dynamic PE market in the world. It has more investment diversity, more investment opportunities and hence greater choice for investors. This makes it a very interesting and exciting market to work in.
It’s also important to point out the States’ professional rigour, expertise, and high industry standards—elements that are essential for successful and enduring relationships with both companies and investors.
U.S. innovation also continues to lead the world. No doubt this is driven in part by the entrepreneurial spirit in small- and middle-sized companies rather than by government-directed or large institutional spending.
Lastly, the ease of doing business in the U.S. is critical, and reflects the States’ ever-present enthusiasm, openness, and the “lets make it happen” spirit.
Q: One of your principal concentrations is conventional and renewable energy. And, you’re a principal in an energy project in Texas. What are your thoughts on the state of the energy industry, and your near- and long-term prognosis?
A: Oil and Gas: I think the near- to medium-term global outlook for oil is bright. The price of oil has to keep rising. The major oil producing nations—OPEC and Russia—are experiencing substantial fiscal deficits as their oil revenues have sharply fallen due to the huge drop in oil prices (since 2014); mostly the result of global overproduction.
The price of oil has risen to circa $50/barrel, and I anticipate the price will climb further as the major oil producing nations agree to lower production levels amongst themselves—enough to restore fiscal balance to their commodity economies, and as the current oil glut runs off. All of this against a background of growing global demand for oil.
The U.S. oil industry is based on fracking shale deposits. The near- and mid-term outlook for the sector is bright where production is economically viable under $50/barrel—for example, the Permian Basin, West Texas. Conversely, the Bakken and the Eagleford shale will remain underwater until, as I anticipate, oil rises to circa $60/$70/barrel—the break even price for those regions—and, then, new investment will be attracted.
In the global gas market, prices have fallen dramatically in the last two years yet, despite this, huge quantities of new LNG export supplies are coming online from the U.S. and Australia. Prices, which are already low, will be under pressure against a background of over supply, weak global demand—particularly in Asia—and also the threat of a price war emerging in Europe between Gazprom and new supplies seeking a market in Europe. These conditions can be expected to continue from the near to medium term as the global gas market rebalances.
In the U.S. very low gas prices of natural gas produced from shale deposits has been a game changer for energy intensive manufacturing and, with the right economic policies, could eventually lead to an American manufacturing renaissance. Cheap and abundant shale gas has already transformed the U.S. chemical industry, which not only uses gas for heat and power, but also as a feedstock for chemical products.
Renewables: Hydrocarbon power generation is being slowly displaced by renewable power production—solar, wind, tidal, etc. In the near-term, this transition is mostly driven by government incentive regimes, which subsidize renewable investment at public cost. In the US the incentive regimes are operated at the state level.
Over the medium to long-term new and more efficient technology which dramatically reduces cost in $/kWh will drive this displacement. Solar power offers the best opportunity: the price of solar modules continues to significantly drop as improved photovoltaic technology achieves much higher rates of conversion of solar energy to electrical power. Solar power generation is now moving closer to being cost competitive with hydrocarbon power generation in $/kWh. Once it’s cost competitive and solar power can be distributed with significant scale by local generation, we may see large reductions in conventional power plant capacity and a large-scale transition to electric powered transportation.
Q: You also focus on commercial real estate and technology. What disruptive trends do you see affecting these categories in the near- to mid-term?
A: Commercial real estate is a conservative industry and has fallen behind other industries because buildings are owned for decades, and occupied by tenants from five to up to 20 years; there’s little incentive for change.
But the industry is now facing disruptive challenges from digital technology and innovation, drivers that will transform office spaces, retail and distribution spaces, and industrial buildings. This is coupled with the increasing demand for sustainable infrastructure in buildings.
eCommerce continues to transform retail shopping and transportation, for example the trend to buy goods online and pick them up at a nearby collection point changes the nature and location away from the traditional retail space, and presents completely new possibilities for marketing and the customer experience. The need to get goods to customers more quickly facilitated by technology means that logistic/distribution centers need to be nearer to where customers live.
Another example is robotics and advanced manufacturing technologies which will require highly intelligent building design to deal with very complex production and operational requirements, which the traditional factory design simply cannot meet.
Technology: We’ve seen how digital media has totally transformed the music industry, almost completely replacing physical artifacts, and transformed the publishing industry, where digital media is replacing print media and books. Interestingly, these changes were very rapid and often unforeseen by the incumbent industries.
With this in mind, a host of disrupting technologies are emerging that will similarly transform work, the economy, and our culture. I think some of the most challenging and disruptive ones will be the application of artificial intelligence in the workplace, which could replace knowledge work, the use of robots, and 3D printing, which is revolutionizing manufacturing.
Q: From your experience with PE firms, both in the U.S. and UK, what does private equity look like when it is at its best?
A: Private equity is at its best when both the owners and the private equity investors’ objectives, goals, and interests are aligned, when both sides develop a successful long-term working and investment relationship—one that concentrates on growth and long-term wealth creation, and where the outcome is that expected returns for both the owner and investors are achieved.
Empirical evidence often shows that investments held over the long-term for growth typically deliver higher returns to investors than investments which are held for short-term gains.
Q: What is your advice for companies that are considering private equity investors for capital to grow their business?
A: The most important thing is to find the right private equity partner who shares the same values and objectives, and who has:
- a proven and verifiable track record of investment in growth companies;
- a proven and verifiable track record of companies’ returns;
- a proven and verifiable track record of investing in the same industry;
- a demonstrable commitment to companies they invest in;
- a demonstrable commitment to the same objectives and goals for the company at the outset
- is trustworthy
- shares the same values and principles
And it goes without saying: the company should obtain recommendations and feedback from third parties who know or have acted on behalf of the private equity partner.
Andrew Homewood has more than 25 years of experience as an economist and advisor in private equity funds and corporate finance in the U.S., UK, Japan, and Hong Kong. His principal concentrations are in conventional and renewable energy, as well as in commercial real estate and technology. In addition, he’s served as a business and utility economist focused on industry restructuring, market and regulatory design, asset valuation and M&A transactions—predominately in power, telecoms, and water. He holds a B.A. and M.A. from Cambridge University, and is professionally qualified as a Chartered Accountant (ACA). For additional information, contact Andrew at email@example.com.