First Reserve eyes extension after fund revamp collapses

First Reserve will request a one-year term extension for its 11th fund after a restructuring proposal for the vehicle fell apart.

Such an extension has drawn support from California Public Employees’ Retirement System, the largest U.S. pension system and a member of the limited partner advisory committee for the fund.

First Reserve will ask the LPAC to approve the extension for the $7.8 billion Fund XI, according to a person with knowledge of the process. Fund XI’s LPA allows two, one-year term extensions. Fund XI, a 2006 fund, is in the final year of its natural term.

“They’re going back to the original plan as outlined in the LPA,” the person said about the extension.

Restructuring proposal

First Reserve had been working on a proposed restructuring for Fund XI for months. The proposal would have allowed existing LPs to either sell their interests in the fund or roll their stakes into a new vehicle created to house four remaining portfolio companies.

The firm, which worked with Lazard on the restructuring, lined up Pantheon and Intermediate Capital Group as investors on the revamp. The two groups were set to buy existing LP interests as well as pay management fees and carried interest in the restructure fund.

Fund XI LPs approved the proposal. However, the two firms decided to back off the deal after the restructuring proposal generated only about $88 million of current-limited-partner sales. The two firms had a minimum target of selling LPs of $175 million, with a maximum of $400 million. Spokeswomen for Pantheon and ICG confirmed the groups terminated the deal.

Investors in restructurings expect a certain amount of current-LP sales to make the deals worth the effort. When those sales come well under target, the investors can choose to walk away or proceed with a much smaller transaction.

The proposal allowed LPs to sell their stakes at 96 percent of net asset value as of March 31, 2016, if they took full payment up front. But they also had the option to take 60 percent of the payment up front and the rest in 18 months. Those LPs would have made almost 102 percent of NAV as of the same date.

Some LPs, including CalPERS, disagreed with that reference date to value assets. LPs “didn’t want to sell at a price that was struck at the market low,” said one LP with knowledge of the deal.

First Reserve in April told Fund XI LPs it wanted to create the restructure fund with a five-year investment term. It sought more time to get through the lows of the energy market. The restructure term was reduced to four years after discussions with LPs.

CalPERS supported extension

The firm specifically hoped to avoid a one-year term extension, which “would limit our and management’s ability to implement needed longer-term strategies,” First Reserve said in the LP letter.

CalPERS, which opposed the restructuring proposal, said in a June letter to First Reserve that it would support a term extension.

“CalPERS would propose a simple extension of the fund, and would also be amenable to granting limited recycling for the remaining assets,” Real Desrochers, head of private equity at CalPERS, wrote in the letter.

First Reserve also is running a separate process for the $9 billion Fund XII, which closed in 2009. The firm wants to raise an annex fund to support portfolio companies. Existing LPs in Fund XII could invest in the annex on a no-fee, no-carry basis, the firm said in the April letter.

The firm also planned to ask the Fund XII LPAC for a one-year extension of the follow-on investment period, which ends Aug. 27, 2016.

Action Item: Cathleen Ellsworth, head of IR: cellsworth@firstreserve.com

William Macaulay, chairman and CEO of First Reserve, at his office in Greenwich, Connecticut. Photo courtesy of the firm.