First Reserve LPs consider deferred-payment option in fund revamp

The restructuring of First Reserve’s 2006, $7.8 billion Fund XI comes with an interesting detail: LPs who choose to cash out will be paid about 96 percent of net asset value as of March 31, 2016, if they take full payment up front.

LPs can choose, however, to take 60 percent of the payment up front and the balance 18 months later. Those LPs will make almost 102 percent of NAV as of that date, according to an LP who is considering the deal.

This is known as a deferred-payment arrangement, and it’s a tool secondary buyers use to finalize deals even if they don’t have the necessary proceeds. Buyers can use distributions from the acquired portfolio to pay the balance.

LP sales goal

In this case, it’s not entirely clear why the buyers — Pantheon and Intermediate Capital Group — are offering the deferred-payment option. Pantheon and ICG want to get at last $175 million in existing LP sales, with a maximum of $400 million in the restructuring, the LP said.

“If you only get $150 million of people wanting to cash out, it will be interesting to see whether the deal is consummated,” the LP said.

LPs in Fund XI must decide whether to approve the restructuring proposal, which would create a new vehicle to house Fund XI’s remaining assets. The new vehicle would have a four-year fund life.

If they approve the deal, existing LPs must also decide whether they want to cash out of their interest in the fund or roll their stakes into the new vehicle. Existing LPs that stick with First Reserve would not pay fees or carried interest.

The Fund XI limited-partner committee approved the proposed restructuring recently despite objections from California Public Employees’ Retirement System, a member of the limited-partner advisory committee.

The deadline for all Fund XI LPs to approve the overall proposal and choose whether to sell or roll with the GP is Aug. 2, according to a second LP considering the deal.

One issue LPs must consider is the value of selling now, or sticking with the GP in the hopes of the portfolio strengthening. Four assets are left in Fund XI: FR Midstream Holdings LLC, Cobalt International Energy, Deep Gulf Energy LP II and Energy Credit Partners. Certain other remaining investments in Fund XI are not being moved to the restructure vehicle. It’s not clear what will happen to those assets.

Fund XI has been a weak performer, generating a negative 9.8 percent internal rate of return and a negative 0.66x multiple as of Dec. 31, 2015, according to performance information from Oregon Public Employees Retirement Fund.

The restructuring aims to return LPs’ principal, First Reserve said in a letter to investors in April. Lazard is working as intermediary on the restructuring.

Reference date

LPs who choose to cash out in the restructuring will sell at a net asset value as of March 31, 2016, according to a separate LP considering the proposal.

Some LPs had issues with this reference date because they said oil prices bottomed out, with West Texas Intermediate crude closing on March 28 at $40.32 a barrel, then jumped to $50.35 by May 23. Prices have fallen again since then, closing July 25 at $42.63 a barrel.

LPs who decide to stick with the GP and roll their interests into the restructured vehicle are making a bet that oil prices will recover over time, the first LP said.

“It’s a gamble you’re taking on with these companies,” the LP said.

Action Item: Track the price of WTI crude here: http://cnb.cx/1glerWm

William Macaulay, chairman and CEO of First Reserve Corp, speaks at the Wharton Economic Summit in New York on Feb. 1, 2006. Photo courtesy Reuters/Chip East