Paladin Puts Sugar In The Gas Tank

Ethanol has been a disaster for private equity. VeraSun is bankrupt, Aventine Renewables is trading at less than $2 per share and Hawkeye Holdings wasn’t even able to price its IPO. And there continue to be those pesky – and disputed – reports that a gallon of ethanol takes more power to produce than it actually creates (particularly when shipped from the Midwest to the coasts).
So you might blink a few times when you read this: Paladin Capital Group today will announce that it is leading the formation of a new ethanol production and infrastructure platform, called Vital Renewable Energy Co. The firm isn’t disclosing dollar amounts, but a regulatory filing says that the effort has already called down $257 million of a $400 million total capitalization. Other participants include Leaf Clean Energy Company, Petercam Asset Management and PCG Clean Energy & Technology Fund.
The catch here is that VREC is avoiding two major characteristics shared by VeraSun, Aventine and Hawkeye: The United States and corn. Instead, the company will focus exclusively on the Brazilian market, which is almost entirely based on sugarcane.
The Brazilian ethanol market is booming, due to both the cost-effectiveness of sugarcane and a national adoption of ethanol as the power source of choice. Ninety percent of new cars sold in Brazil are flex-fuel, and new plants keep popping up to satisfy demand. VREC will focus on building new production plants, which will include co-generation facilities that can sell gas byproduct into the Brazilian power grid.
Its initial plant is about 90 minutes outside of San Paulo, and is being built in partnership with sugarcane and ethanol company Grupo Farias. VREC is not required to team with Grupo Farias on future projects, but it does have right of first refusal on any other opportunities that Grupo Farias is interested in pursuing.  
“We’ve run all our models based on selling all of the ethanol internally into Brazil, but we’re not going to limit ourselves,” says Ken Pentimonti, a principal with Paladin. “We think there will be other opportunities down the road – particularly on the Western border – and we’re going to sell at the highest price.”
What Pentimonti could not explain, however, was why so few other U.S. private equity firms have ventured into the Brazilian ethanol space. The only other large deal I could find was Carlyle/Riverstone’s acquisition of CNAA, which came in at $240 million. And then there’s Khosla-backed Brenco. (if you know of others, please email me).
So I asked a few U.S. alt energy investors, who all told me the same thing: (1) Brazilian ethanol is a great macro growth story; (2) Finding project finance is very difficult; (3) Few U.S. firms have Portuguese-speakers on staff; and (4) The U.S. ethanol experience, while characteristically distinct from Brazil, has scared off a bunch of would-be investors.
In other words, a large and open opportunity with lots of execution risk. In other words, a place that private equity should be playing.