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IPAA Private Capital Conference
January 18, 2007
Kayne Anderson Capital Advisors
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Who is Kayne Anderson?
Kayne Anderson is an LA-based investment firm with a 22 year track
record
Kayne Anderson manages $6.7 billion in assets
55 employees in Los Angeles and Houston
– 30+ investment professionals
Strong focus in the energy sector
– 80% of assets are in upstream and midstream companies
– $5.4 billion invested in public and private securities of energy
companies
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Strong Energy Focus
Energy private equity
– First fund raised in 1998
– Raised four funds totaling $1.9 billion
– Headquartered in Houston; 8 professionals
– Focus on equity investments in private and public upstream companies
Midstream energy investments
– Largest player in MLP space
– $3.2 billion held through 3 publicly traded closed end funds
– $500 million of midstream assets held in private funds
– Represents over 5% of total sector float
– Completed 23 PIPE transactions for over $1.1 billion
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Public Funds
Kayne Anderson MLP Investment Company (NYSE: KYN)– IPO in September 2004– Raised approximately $830 million in IPO– Raised over $475 million in subsequent debt and equity offerings – Currently manage $1.9 billion in assets– 100% MLP focus– High concentration of PIPE transactions
Kayne Anderson Total Return Fund (NYSE: KYE)– IPO in June 2005– Raised approximately $800 million in IPO– Currently manage $1.1 billion– Broader energy income focus
• MLPs• Canadian trusts• Marine transportation• Term B debt for E&P companies
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Public Funds (Cont’d)
Kayne Anderson Energy Development Company (NYSE: KED)
– IPO in September 2006
– Raised $250 million in IPO
– Structured as a business development company or BDC
– Focus on private midstream energy companies
– Target portfolio
• 60% private midstream companies
• 30% public midstream companies (“MLPs”)
• 10% term B loans
– Preferred structure for private companies is “private MLP”
– Will invest in other mezzanine structures as appropriate
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Private MLPs
Strategic rationale
– Relatively few options are available to finance private midstream
companies
• Return expectations of private equity are very high
• Typically require ceding control
• Liquidity requirements over some fixed period of time
Target companies
– Not yet of the size to go public
– Additional requirements of a public company are unattractive
– Experiencing rapid growth that public markets wouldn’t fully monetize
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Private MLPs
Benefits
– Valuation at or near public company valuations
• Yield is 150 to 200 bps above public company comps
• Depending on business, yield is 8.5% – 9.5%
– Disproportionate share of upside
• Deferred Partnership Units
• Incentive Distribution Rights or “High Splits”
– No public reporting requirements
• No Sarbanes-Oxley
– Non-controlling interest
• May have one board seat or observation rights
– Permanent vehicle with no liquidity requirements
• KED is a permanent capital fund
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Private MLP – Millennium Midstream Partners Millennium was formed in December of 2002 by John O’Shea and Kevin Coxon
– Gas gathering, treating and processing assets in Texas, Louisiana and Gulf of Mexico
– Not yet large enough to access public markets
Formed a private MLP with Kayne Anderson as lead investor– Kayne Anderson invested $47.5 million for a 39% limited partnership interest– Co-investors included Tortoise Capital and Wells Fargo
Capitalization was consistent with a public MLP– Approximately 60% of LP interests are common units owned by new investors– Approximately 40% of LP interests are subordinated units retained by
management and other existing equity– 2% general partner interest is retained by management– $35 million term loan and $25 million revolver ($10 million drawn)
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Private MLP – Millennium Midstream Partners (Cont’d)
New capital used to
– Repay existing debt
– Provide cash dividend to shareholders
Conservative leverage position provides capital for future growth
– Pro forma Debt / EBITDA ratio of 3.2x based on run rate
– Pro forma Debt / EBITDA ratio of 2.4x based on 2007E
Attractive valuation metrics
– Total Enterprise Value / Run Rate EBITDA = 12.0x
– Total Enterprise Value / Projected EBITDA = 9.0x
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Private MLP – Millennium Midstream Partners (Cont’d)
Significant upside retained by management
– Approximately 1.5 million Deferred Participation Units were issued to management
• Conversion into subordinated units upon liquidity event (IPO or sale)
• Value converted based on outside investors’ appreciation
– Substantial majority of IDRs (high splits) upon an IPO
• Provides GP the right to up to 50% of marginal cash flows
Upside potential can be substantial
– Assumptions
• EBITDA increases to $25 million in 2008
• IPO yield of 7.5%
• Valuation of management’s partnership interests and DPUs increases by over
$25 million, or 48%
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Other Targeted Investments
Joint Venture MLPs
– Target public and private E&P companies with midstream assets
– Form private MLP to hold midstream assets
– GP is wholly owned subsidiary of an E&P company, which operates and controls
the assets
– Disproportionate share of upside is retained by the sponsor company
• Traditional “high splits” retained by sponsor
• Gives 50% of cash flows to GP above certain levels
Benefits of a Joint Venture MLP
– Valuation substantially higher than valuation of E&P assets
– Avoids public company filing and disclosure requirements
– Transaction provides capital to grow core E&P business
– Joint Venture can be self financing to grow midstream assets
– Disproportionate upside
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Conclusion
Private MLP can offer an attractive vehicle for monetize and asset or creating a vehicle for growth
Can be used as a pre-IPO financing or in a permanent vehicle that is never designed to go public
Valuation near public company multiples
Disproportionate upside while retaining control of company
Structure more suited to relatively low risk of midstream assets
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Contact Information
Jim BakerManaging Director
(713) [email protected]
Jody MerazAssociate
(713) [email protected]
Kevin McCarthyPresident and CEO
(713) [email protected]
Ron LoganManaging Director
(713) [email protected]
Ryan ScottAssociate
(713) [email protected]
