Pantheon, ICG step up as investors in First Reserve fund revamp

  • Pantheon, ICG would buy out existing Fund XI LP stakes
  • Restructured Fund XI will reset carry for GP
  • Lazard is adviser on the process

Pantheon and Intermediate Capital Group are lead investors in the restructuring of First Reserve’s Fund XI, according to three people with knowledge of the process.

The restructuring proposal would give the Greenwich, Connecticut, firm more time to sell off the assets held in Fund XI. The restructuring would also give First Reserve executives another chance to earn carried interest, the people said.

The proposal is being mulled by the fund’s limited-partner advisory committee, the people said. The goal is to return the principal on Fund XI, First Reserve said in a letter to LPs in April.

“We feel confident the remaining portfolio has the ability to deliver that result,” the firm said in the letter.

Lazard is working as adviser on the restructuring process.

Amanda McCrystal, a spokeswoman for Pantheon, and Helen Gustard, spokeswoman for ICG, declined to comment. Julie Oakes, a spokeswoman for First Reserve, also declined to comment.

How it works

Fund XI closed on $7.8 billion in 2006. It was 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.

These figures are down from negative the 8.4 percent IRR and 0.7x multiple as of Sept. 30, 2015, according to Oregon’s numbers.

Under the revamping proposal, Pantheon, ICG and any other new investors would buy out Fund XI LPs who want to sell. It’s unclear what price the two firms have offered for the LP stakes. Nor is it clear whether Pantheon and ICG are the only two new investors in the deal.

The new investors would become LPs in a new special-purpose vehicle formed to hold remaining Fund XI assets. The new investors would pay management fees and carried interest in the new fund. This would give the general partner a new line of fees and the chance to earn carry on the remaining investments. (How many investments remain in Fund XI is unclear.)

Existing Fund XI LPs who don’t want to sell can roll their interests into the new vehicle on terms similar to those they had before. Existing investors would not pay a management fee or carry, according to one of the people with knowledge of the deal.

First Reserve initially considered setting a five-year term on the restructured Fund XI. It’s unclear whether that extension length has changed.

“We anticipate the fund needs up to five additional years to allow the remaining portfolio to benefit from an ultimate energy-market recovery,” the firm said in a letter to LPs in April.

Fund XI does have a built-in one year extension, but the firm believes that would not give it enough time to wait out a recovery in the energy markets. The one-year extension “would limit our and management’s ability to implement needed longer-term strategies,” the letter said.

Annex for Fund XII

First Reserve also wants to raise an annex fund to support portfolio companies in Fund XII, which closed on $9 billion in 2009. Fund XII was producing a negative 8.1 percent IRR and a 0.73x multiple as of Dec. 31, 2015, according to Oregon’s performance numbers.

Existing LPs in Fund XII would be able to invest in the annex fund on a no-fee, no- carry basis, First Reserve said in the April letter. The firm also planned to ask the Fund XII advisory board for a one-year extension of the investment period. It’s not clear whether that has happened.

It’s also not clear whether investors in the Fund XI restructuring will also take part in the Fund XII annex fund.

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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