In April, CIRI shareholders will receive their 2013 CIRI Annual Report, which will detail the results of CIRI’s business operations and investments. From real estate to tourism to marine services, shareholders will learn how each sector performed.
While high-profile projects like Fire Island Wind and the new Fireweed Business Center may generate the most public interest, one sector that does not receive as much attention, but contributed significantly to CIRI’s 2013 results, is private equities.
Starting in 1996, CIRI began investing in private equity funds – a broad spectrum of non-public investment partnerships financed by private money and that commonly invest in opportunities that are not publicly traded. The goal of most of the funds in which CIRI invests is to seek out companies or other investment opportunities that have potential to increase in value, but that, for whatever reason, are not realizing that potential. The funds typically acquire controlling (or at least significant) stakes in the target company or investment opportunity, add value implementing measures that might include management or financial restructuring, accessing new markets or strategic re-focusing. The fund would then exit the investment for a profit – often by selling the investment into the public markets.
“Private equity is a riskier class of investment than many of the things CIRI does,” said Stig Colberg, CIRI chief financial officer. “But for a company of CIRI’s size, with a large portfolio of operating and financial assets, there’s always a place for some portion to be invested in opportunities that offer a greater return but bring with them a greater amount of risk.”
[youtube_left]ABKUEuYThSI[youtubeend]CIRI has a long-term relationship with its private equity fund partners and they are among the best in business – the Carlyle family of funds, the Riverstone group of energy funds, the KKR family of funds and the Hellman & Friedman funds.
“Our primary goal is to generate meaningful dividends for our shareholders,” he explained. “The private equity funds that CIRI invests in have performed extremely well for our shareholders over the years.”
In a typical private equity partnership, CIRI commits to provide a certain amount of money to the fund over a number of years. When the investment team of the private equity fund finds an opportunity in which to invest, they call on CIRI to provide the capital. Once CIRI provides the capital, the fund and its managers make the investment and manage it until they believe that the maximum value for the investment can be achieved.
“It’s not like ‘flipping’ a house. This is a longer process,” explained Colberg. “It’s usually a period of two to eight years that a private equity fund owns and controls the company. After that holding period, if the fund has brought the value of that company to where they’d hoped, the fund would typically sell the company to the public market or, potentially, to another group of large investors. It’s not uncommon to see a fund sell a company to another fund or group of funds.”
When that happens, the fund distributes the proceeds from that sale back to its investors, which include companies like CIRI, pension funds, foundations, wealthy families and other well capitalized investors.
While private equity investments can be riskier, CIRI has consistently generated an internal rate of return on its private equity portfolio of more than 20 percent.
In fact, 2013 was one of the best years for CIRI’s private equity investments. The recession of 2008 saw fewer opportunities for private equity funds to sell the companies they’d grown and other investments that they’d made. However, the depressed values of companies and other assets provided opportunities for funds to invest in those opportunities at attractive prices. As the market grew stronger through 2012 and 2013, private equities exited those deals and generated gains that have been distributed to backers like CIRI—a return on a smart investment that ultimately benefits CIRI shareholders.