First Reserve mulls options for aging funds XI and XII

  • First Reserve hires Lazard to run secondaries processes for two older funds
  • Firm considers restructuring Fund XI
  • Proposes raising annex fund to support Fund XII portfolio companies

First Reserve is considering options to give existing limited partners in one of its older funds the chance to cash out as well as provide fresh capital for another of its aging funds.

The firm reached out to LPs about potential options for funds XI and XII, 2006 and 2008 vintages, respectively. In a letter sent to LPs this week, the firm explained that the time was right to restructure the older funds because of what it believes will be an extended recovery in the energy sector.

“Our macro view has consistently been ‘lower for longer.’ We remain convinced that it will take some time before we see a sustained recovery in the energy macro environment,” the letter, which was reviewed by Buyouts, said.

“Thus, Fund XI faces a timing mismatch (in the final year of its initial term), and there are potential incremental capital needs for select Fund XII portfolio companies.”

The firm is in the early stages of planning for the future of funds XI and XII and nothing is set in stone, the letter said. LPs are not expected to make any decisions yet, the letter said. “This is purely a ‘head’s up’ communication – no decisions have been reached as to the optimal path forward,” the letter said.

First Reserve, which was established in 1983, in recent years has struggled with weak performance in some older funds. The firm closed its most recent pool, Fund XIII, on $3.4 billion in 2014, well below its original $6 billion target and a far cry from the $9 billion the firm raised for Fund XII in 2009.

Performance on both funds XI and XII has declined since 2014 amid a collapse in oil prices.

Need more time …

First Reserve is contemplating two separate processes for funds XI and XII.

The firm said it needs more time to exit investments out of Fund XI, which closed on $7.8 billion in 2006. Fund XI was generating a negative 8.4 percent internal rate of return and a 0.70x multiple as of Sept. 30, 2015, according to performance information from Oregon Public Employees Retirement Fund.

The goal, according to the letter, is to return the principal on Fund XI. “We feel confident the remaining portfolio has the ability to deliver that result,” the letter said.

To do that, First Reserve is considering a plan that would establish an extended Fund XI with a five-year term. Existing LPs could either cash out or roll their interests into an extended Fund XI on similar terms.

“We anticipate the fund needs up to five additional years to allow the remaining portfolio to benefit from an ultimate energy market recovery,” the letter said. It’s not clear how much value remains in Fund XI or how many investments the portfolio holds.

A one-year extension of the fund life, which is built into the limited partner agreement for Fund XI “would limit our and management’s ability to implement needed longer-term strategies,” the letter said.

… and more money

Fund XII closed on $9 billion in 2009. Fund XII was generating a negative 4.5 percent IRR and a 0.84x multiple as of Sept. 30, 2015, according to Oregon’s performance data.

First Reserve wants to raise fresh capital to help support several companies in the fund, “to better position these holdings to survive through the downturn and ultimately take advantage of a market recovery,” the letter said.

The firm’s idea is to raise an annex fund to invest in a “subset” of the portfolio. Existing LPs in Fund XII would be able to invest in the annex fund on a “no fee, no carry” basis, the letter said. Specific details about where First Reserve would look to raise capital – outside of existing LPs – was not disclosed in the letter and Lauren De Paola, First Reserve’s director of communications, declined to comment.

The capital raising process would include “independent/disinterested parties to provide clear pricing validation,” the letter said.

First Reserve also plans to ask the Fund XII LP advisory board for a one-year extension of the follow-on investment period, which ends Aug. 27, 2016, the letter said. Fund XII has about $400 million left to invest in follow-on investments, the letter said.


First Reserve recently picked Lazard to run the processes, according to a secondary market source. Lazard was expected to send out non-disclosure agreements this week, the source said.

Park Hill Group had contacted potential investors in the secondary market last month about a process involving First Reserve, four secondary market sources told Buyouts.

First Reserve had not officially hired Park Hill to run the processes and had discussions with several advisors about various options, a person close to the firm said. It’s not unusual for secondary advisory firms to solicit potential investors in a process they are trying to win, even without a formal mandate, according to one of the four secondary market sources.

Park Hill declined to comment. Lazard could not be reached for comment.

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