Private equity companies weigh in on pellet business

By Lisa Gibson | September 09, 2011

Wrapping up the first day of an educational North American Biomass Pellet Export Conference in New Orleans, two representatives from private equity companies shared their point of view on the pellet business. They both agreed that it’s challenging.

If tasked to describe the wood pellet business in one word, Carl Williams, principal of River Stone Holdings, said he would use challenging. The industry is fraught with challenges, he said. It’s nascent and fragmented. Economies of scale and scope are crucial, and it’s difficult to realize “cash on cash” returns. “I will tell you that it is possible to do that in this business, but it is extremely difficult,” he said. If you can show a bank pages of cash on cash returns, however, they’ll finance the project, according to Williams.

But without that, the key criteria for “culling the herd” of pellet manufacturers are: health and safety, sustainability, product quality, and reliability of delivery. “When you say a shipment of pellets will show up, it sure as hell better show up,” Williams said.

Justin DeAngelis of Denham Capital added that a global strategy for a pellet business provides for the highest potential value. “We believe if you have a truly global footprint … it allows you to supply current demand, but also to switch when the market picks up elsewhere.” The conference had emphasized European markets, he cited, but Asian and South African demand is on the rise as well.

To be completely successful, the pellet industry needs to become a mini coal industry, DeAngelis said, due to the fact that power companies want to burn coal. In addition, pellets need to become a real commodity, instead of the nascent product it is today. “Basically, people want to deal with coal at the end of the day,” DeAngelis said. The survivors in the industry will be those that look like coal companies, he added, saying he wouldn’t be surprised if coal companies are making pellets 10 years from now.

Summarizing, he reiterated the importance of a global approach, saying global pellet businesses have three benefits: the ability to position or reposition quickly when the view changes of where the highest value exists; access and visibility into truly global business drivers; and opportunities to create a global enterprise that delivers the highest risk-adjusted returns.