First Reserve explores fund restructuring options

First Reserve, the largest energy-focused global private equity firm, has begun a process to offer liquidity to investors in its 2006-vintage fund and provide new capital for its 2008-vintage vehicle.

The Greenwich, Connecticut-based firm has hired Lazard to offer limited partners in its $7.8 billion First Reserve Fund XI the option of cashing out or rolling over into an extended fund, according to three sources familiar with the deal. The aim of the process is to give Fund XI more time to find exits for its assets amid an extended recovery in the energy sector, Secondaries Investor understands.

The process is in the early stages and Lazard is expected to send out non-disclosure agreements this week.

PE Hub first wrote about the restructuring.

LPs in Fund XI will have similar terms if they choose to roll over into the extended five-year vehicle, according to one of the sources. The fund had a negative 8.4 percent internal rate of return (IRR) and a 0.7 x return multiple as of 30 September, according to a performance document from the Oregon Public Employees Retirement Fund, which committed $300 million.

Other investors in Fund XI include AP Fonden 3, California Public Employees’ Retirement System and Canada Pension Plan Investment Board, according to PEI Research and Analytics.

First Reserve is also exploring options to add new capital to its $8.8 billion First Reserve Fund XII by raising an annex fund, Secondaries Investor understands. The fund closed below its $12 billion target in April 2009 after a year of fundraising, according to PEI data.

Fund XII had a negative 4.5 percent IRR and a 0.84x return multiple as of 30 September, according to the Oregon pension document.

In an interview with sister publication Private Equity International last year, a managing director at First Reserve said the firm’s shift in focus to investing larger amounts of equity, coupled with extending investments into new areas, did not turn out to be a successful strategy.

“What happened in parts of our industry was that as consolidations continued it took more dollars to do the same kind of deals that we had been doing,” Cathleen Ellsworth, who heads the firm’s investor relations activities, said. “Consolidating bigger companies required bigger cheques to do so.”

“What didn’t work out for us was adding that fourth energy sector in the 2006 to 2008 time frame. That took our focus away from our core areas of expertise,” she said.

The firm’s first 10 funds had been focused on buying smaller companies for consolidation within the energy value chain – upstream, equipment and services, midstream and downstream. The new approach had been to fund larger investments in power, renewable energy and financial energy-related investments.

First Reserve declined to comment. Lazard did not return a request for comment by press time.