Gateway fund listing

Gateway sets terms for $200 million Hong Kong offering

EIG-linked Gateway is seeking to double its NAV by raising fresh capital primarily from private banking clients and high-net-worth individuals and is set to become the first managed fund to list in Hong Kong.
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EIG invests across the entire energy value chain and has deployed more than $9.6 billion under management
<div style="text-align: left;"> EIG invests across the entire energy value chain and has deployed more than $9.6 billion under management </div>

Gateway Energy and Resource Holdings has set the terms for its initial offering at a level that will allow it to raise at least HK$1.52 billion to HK$1.56 billion ($196 million to $201 million), according to sources. It will be the first managed fund to list in Hong Kong and, unlike most IPOs in the city, it won’t have a retail portion.

Gateway, which has already been on the road for a week, is a feeder fund that is operated by the same people who run US-based EIG Global Energy Partners, one of the leading institutional investors in energy and resources globally. The fund is a closed-end vehicle that was set up in 2007 and which is listed on a private trading platform operated by Goldman Sachs (GSTrUE). Through the Hong Kong listing it will become available to a broader group of investors and will also double its net asset value.

It is open to professional and institutional investors, but is being marketed primarily to private banking clients and other high-net-worth individuals. The big family offices in Hong Kong and Europe have also been approached during a roadshow that included stops in London and Switzerland, in addition to Hong Kong. As noted, the deal is not open to Hong Kong retail investors, but the minimum order size of two board lots, which translates into an investment of about HK$1 million, is effectively shutting the door to most retail investors anyway.

Gateway is set up to invest in EIG-managed funds and to co-invest alongside EIG in other energy and resources projects, which means that it offers a rare opportunity for people who don’t qualify to invest in EIG directly. As one source put it: “Outside of being a billionaire or a state investment fund, Gateway is the only way to get exposure to EIG’s investments.”

This is not too far from the truth. According to its website, EIG’s clients comprise leading pension plans, insurance companies, endowments, foundations and sovereign wealth funds in the US, Asia and Europe.

EIG has a 30-year track record of privately negotiated investments in energy and resources projects across the value chain and on a global basis, and sources say that it is showing higher and more consistent returns than other high-profile funds. As of the end of 2011, it had $9.6 billion of assets under management.

Gateway had a net asset value of about $190 million at the end of 2011 and, according to a source, has generated an internal rate of return of approximately 17% since 2007. Or looked at in a different way, it has offered an annual yield of 8.1% based on NAV in the same period. It currently has exposure to 70 companies in more than 20 countries.

The fund is offering 13 million new shares, although the number may increase in case of strong demand. Based on the net asset value at the end of last year, the new shares will account for just over half of the enlarged NAV. The price is ranging from HK$117 to HK$120 per shares, which translates into a discount between 4% and 6.4% versus an NAV per share of about HK$125 at the end of last year.

According to a management presentation to investors, Gateway is targeting a dividend yield of 6% to 8% per year based on the average NAV in the past four quarters and total returns in the mid-teens (net of fees and expenses), which is in line with the historical net returns generated by EIG funds since 1982. This should prove quite attractive for investors — not only can they leverage up the annual yield a bit, but they also have the potential for long-term capital appreciation as the value of the underlying investments increases.

Or as stated in the investor presentation: “Gateway’s unique combination of fund and direct investments provides diversity, opportunity for rapid AUM growth and support for ongoing distributions to shareholders.”

And the market opportunity in energy and resources is viewed to be vast as economic growth, as well as growing populations and rising urbanisation levels, continues to boost the demand for electricity and fuels. The International Energy Agency (IEA) projects that 3.3% global economic growth per year until 2030 will result in a 50% increase in the demand for energy in the same period.

Meanwhile, the complexity and cost of developing unconventional resources is requiring ever more capital. According to an IEA forecast, which is quoted in Gateway’s presentation material, more than $37.9 trillion of cumulative investments into energy-related infrastructure will be needed between 2011 and 2035.

Aside from diversity, Gateway also offers inflation protection through its investments in upstream projects in oil and gas and other resources. As of the end of September last year, about 35% of its investments were in upstream projects, while 26% were in mid-stream and 27% in power.

Close to 80% of its investments were in fixed-income-type instruments, including 31% in mezzanine debt, 20% in high-yield debt and 13% in preferred equity. The remaining 20% is in common equity.

The majority of its investments (63%) were in the US, followed by 21% in Latin and Central America. At the time, it listed no investments in Asia.

The decision to list in Hong Kong doesn’t necessarily imply that it is intending to invest more in Asia, but rather it is turning to Hong Kong to tap into the rich pool of capital that is based in the region, one source noted. EIG’s latest fund, the $4.1 billion Energy Fund XV that closed in May last year, raised 45% of the capital from non-US investors.

EIG also already has good relationships with several Chinese investors, including a partnership with Sinopec. And in early February, China Investment Corp made a minority investment into EIG itself after previously investing in several of its funds. The size of the direct investment hasn’t been disclosed.

“CIC is one of the premier investors in the world and we are honoured to have them as long-term partners as we continue to grow our firm,” EIG’s CEO Blair Thomas said when announcing the CIC investment. “As a niche asset management firm that only invests in energy, resources and related infrastructure, we believe that this relationship will provide valuable insight into the demand side of the global energy equation that will benefit all of our investors.”

The final price for Gateway’s share offering will be set after the books close on March 23 and the trading debut is scheduled for March 30. Citi is the sole global coordinator and is also a joint bookrunner together with BOC International and Morgan Stanley.

¬ Haymarket Media Limited. All rights reserved.
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