Sample Engagements: Capital Sources (Buy Side)

COSCO was approached in 2007 by KGL Investment Company (“KGL”), a relatively new investing affiliate of a large industrial concern in Kuwait, about assisting it to set up a new oil and gas company, focused on the Middle East and North Africa.

After a visit to the investor’s office in Kuwait City, COSCO recommended that, instead of developing an E&P company from scratch, at least initially it make a “control” investment in an existing company with suitable focus. When one was identified, COSCO, through its own personnel and assisted by a Colleague in England with particularly apposite technical background, performed thorough due diligence and wrote an Investment Memorandum, recommending the investment. By end of May 2007, KGL had invested $30MM in convertible notes with warrants, giving it priority in case of liquidation (the company had real assets and cash flow), current yield, and potential through conversion and exercise of the warrants to take control of the company and use it as an investment platform for further pursuit of its energy related investment strategy. In the mean time, through representation on its board of directors, KGL assured itself of first hand exposure to investment strategies, growth issues, and operational demands of an emerging E&P company, as well as to the rigors of the public sector, at least in the UK, all important for KGL’s future investment activities.

COSCO was paid a retainer and is entitled to a “net profits” interest as a consequence of its services. 

JOG CAPITAL
(Calgary AB)

In mid 2004, COSCO was approached by the manager of JOG Capital, a small, first time Junior Oil and Gas equity fund, based in Calgary, to assist it to raise its second fund. COSCO introduced it to half a dozen prospective accredited investors in the United States, two of which decided to join, contributing in aggregate approximately $17MM toward a final close of C$38MM. COSCO was paid a retainer and received a “net profits” interest as a consequence of its services.

In December, 2003, COSCO approached CMP Funds (“CMP”) regarding its interest in investing in a Canadian client with a heavy oil project. CMP indicated it would have interest, but that it was already overweight in oils and wanted to divest a block of shares in a private heavy oil company before year-end, even though the subject company was intending to do an initial public offering early in the New Year. COSCO reviewed the market of likely purchasers and quickly arranged a sale to Farrallon in the United States. The company then went public in January, trading above its issue price.

Throughout the second half of 2002, COSCO was retained by Morgan Stanley’s Private Equity Group, which controls one of the largest private equity funds in New York, to assist it to review all those mezzanine energy portfolios which had been assembled over the previous several years, primarily by merchant utilities, and which in early 2002 held large portfolios of below investment grade and distressed notes. After analyzing all potential candidates, COSCO recommended and assisted the fund manager to acquire most of the loan portfolio of Aquila Energy Capital Corp. at a deep discount to par value, and to create a successor entity called Concert Capital Resources, L.P., to hold and manage the notes. The purchase price, which remains undisclosed, exceeded $200MM. The Fund has since monetized the entire portfolio.

COSCO was paid a retainer and received a carried interest in profits realized above the discounted purchase price.

In 2000, COSCO was retained by Emerging Markets Partnership, one of a family of internationally focused general equity funds (“EMP-A”), to assist it to perform due diligence on the principals, assets, and net asset values associated with Pan Ocean Energy, an oil and gas operator, active in West Africa, in which it was considering investing $40MM in new equity. COSCO not only performed these services, but also assisted in the structuring and negotiation of the investment, as well as presentation of the opportunity to EMP-A’s credit committee and multi-national investors. As a consequence, EMP-A concluded the investment, which within two years it monetized, almost doubling its investment.

COSCO has since assisted EMP-A to assess new energy investments, including, in 2007, helping it to analyze and eventually to invest $11MM in Artumas, an E&P company active in Egypt.

In mid-1999, COSCO was engaged by one of the largest U.S. Venture Capital Funds (“Warburg Pincus”), to assist it to divest a private, Canadian-based portfolio company whose prospects for growth no longer met Warburg Pincus’s expectations. By forming an association with Waterous & Associates, Canada’s largest property disposition firm, COSCO convinced Warburg Pincus that it could maximize returns in a difficult market by marketing the portfolio company as either or both an asset sale or a corporate merger candidate. In the end, both were accomplished, and Warburg Pincus was able to exit Canada without any vestigial liabilities or concerns. COSCO has since worked with Warburg Pincus to identify new candidates in Canada for its investment portfolio, as well as to develop proactive investment strategies for its international fund.

In mid-1998, COSCO was asked by Lime Rock Partners, a Tier 1 financial investor (“Lime Rock”), to coordinate, and to participate as a sole outside party in, an in-house forum analyzing those financial investors that Lime Rock considered to be its closest peer competitors or from which it could draw conclusions as to how best to conduct its own affairs. COSCO assisted Lime Rock’s in-house personnel to assemble appropriate profiles of each of such study candidates, based on COSCO’s own extensive files of published data, and assisted in the moderation of the seminar, providing comments as necessary on each case study regarding public perceptions and investor reactions.

On several occasions throughout 1998, COSCO was engaged by the in-house manager of a proprietary investment fund sponsored by SG Capital Partners LLC, an internationally headquartered commercial bank, for the purpose of conducting due diligence on prospective energy investments. The due diligence services included complete review of the assets of the investment candidates, analysis of the projected cash flows and ultimate financial potential, as well as thorough due diligence on the principals, their track records, and their peer and personal standings.

In early 1997, COSCO was engaged by the Stratum Group LP, a mezzanine capital investor based in the United States (“Stratum”), to assist it to expand into Canada. Based on Mr. Smith’s background and experience in Canada, Stratum engaged COSCO to introduce it to Canada, its legal, tax, and engineering practices, as well as its indigenous deal-making network. Working with resources marshaled by COSCO, Stratum developed an investment stratagem which satisfied its specific risk/reward objectives, while providing local operators a source of capital for which there was almost no competition in the market. Within six months of the engagement, Stratum had made two investments along these lines with companies to which COSCO had provided an introduction. All told, Stratum invested in excess of $50MM in Canada and touted it an area of major strategic focus.

In 1992, COSCO was initially engaged to review certain non-performing private company investments which Odyssey Partners, LP (“Odyssey”) had maintained in its portfolio for five to ten years. After a preliminary review and report of recommendations, COSCO was retained by Odyssey to rationalize its ownership of these assets. Over the ensuing two years, COSCO effected the sale of one of these entities to an affiliated operator, reorganized another through a carefully managed voluntary plan of liquidation, followed by sale to an unrelated operator of all but certain core assets, sale of yet a third company through a managed-bid process, and reorganization of the fourth from a limited partnership to a limited liability company. To expedite these activities, Mr. Smith was appointed an officer of certain of the surviving companies. While this program was in process, Odyssey broadened COSCO’s mandate to source investment opportunities in the exploration and production, service, and gas gathering, processing, and marketing sectors throughout the United States and Canada. During this period, Odyssey acquired Archer Resources and Canrise in Calgary and Hugoton Resources in Kansas. Mr. Smith participated actively in Odyssey’s analysis process, attending all relevant investment committee meetings. Eventually, after the principals of Odyssey retired and the Partnership was wound up, Mr. Smith arranged for COSCO to buy the remainder of its private energy portfolio, permitting it to withdraw entirely from the sector.