Facing Losses, Energy Funds Ask Investors for More Time, Money

Woes of private-equity investments are being felt by pensions and other institutional investors

Rocked by the fall in oil-and-gas prices, some energy-focused private-equity funds are pleading with their investors for more time and money.

EnerVest Ltd., a Houston-based investment firm that says it operates more U.S. oil-and-gas wells than any other company, is asking investors in two of its funds to put up hundreds of millions of dollars to bolster the troubled vehicles or risk losing the billions they have already invested.

“No question, this is a giant disappointment,” Chief Executive John Walker said in an interview.

First Reserve Corp., meanwhile, is negotiating with investors to extend the life of a $7.8 billion fund from 2006 to give it time for oil prices to rebound, according to pension records and people familiar with the matter. The fund has lost more than a third of its original value, and First Reserve has proposed waving management fees it charges investors in exchange for more time to sell the fund’s remaining holdings, according to people familiar with the matter.

Private-equity firms were among the most avid financiers in the shale-drilling boom of the last decade, which helped produce market-flooding supplies of oil and gas. Two years ago, oil prices collapsed, and they have languished at about $45 a barrel. The decline has vexed investors across Wall Street who financed the shale boom with $100-a-barrel oil in mind.

The woes of private-equity energy funds are rippling to pensions and other institutional investors that pumped more than $400 billion into these pools since shale drilling took off.

Funds raised a decade ago are proving particularly painful for investors. Fund typically have a limited lifespan, promising to sell their assets and return investors’ money after 10 years. Many are filled with assets worth less than they cost and face the prospect of liquidating at losses. The alternatives are for investment firms to negotiate deals with their investors to extend the fund or bring in outside investors with fresh cash.

“There are no good options when an energy fund reaches the end of its life at the bottom of the cycle,” said Jay Yoder, head of real assets at Pavilion Alternatives Group, a Sacramento, Calif., firm that advises private-equity investors. “The number of energy funds that need more time is at a level we’ve not seen before.”

The price slump has left old funds reluctant to unload assets. At year end, private-equity funds specializing in oil and gas that were raised between 2005 and 2007 held assets valued at $34.5 billion, or about half the $71.1 billion that those 131 funds started out with, according to data provider Preqin.

EnerVest built a network of 40,000 wells by pairing its investors’ cash with borrowed money. Now, EnerVest’s lenders, led by Wells Fargo WFC -0.07 % & Co., are forcing it to repay a big chunk of the money borrowed by two funds because the oil-and-gas reserves used as collateral lost much of their value when energy prices collapsed. That has put the funds at risk of default.

Mr. Walker said he and other EnerVest executives put $90 million of their own toward repaying lenders, and some of the firm’s investors have committed $250 million. But about $150 million is still needed.

Enervest, which said it eliminated management fees on the older of the two funds and halved them for the other, is asking investors to contribute roughly 10%-12% of their original investments in the $1.5 billion and $2 billion funds.

“We have some limited partners that are mad as hell at us,” said Mr. Walker, referring to the funds’ investors. “We’ve had some chew us out and hang up on us.”

In 2013, EnerVest borrowed $1.4 billion for its 13th fund. Mr. Walker said EnerVest paid back much of that debt, but the fund was still leveraged when oil prices plummeted in late 2014.

We thought we were underleveraged,” said Mr. Walker, a former Wall Street analyst who founded the firm in 1992. EnerVest’s funds have typically returned more than 30%, and the firm raised $2.4 billion in November for its 14th and largest-ever fund.

But investors in its 2010 and 2013 funds, such as Orange County Employees Retirement System face potentially large losses. Ocers records show that at year end, $54 million of investments in those funds had been written down to $9.7 million.

“There is not a practical way for Ocers to exit its investments without taking a material pricing haircut,” the pension’s investment chief wrote to its board. “We will most likely ride out this horse.”

That is what First Reserve is asking investors to do after a plan to restructure its troubled fund by moving assets into a new fund fizzled when too few investors agreed to sell their stakes.

First Reserve invested more than half its $7.8 billion fund in the run-up to more than $140-a-barrel oil in 2008, according private-markets analytics firm Bison. Since then the fund has lost roughly 35% of investors’ cash, or about $2.7 billion, through June 30, according to public pension data.

Now, the Greenwich, Conn., firm is trying to extend the fund’s life.

Earlier this year, California Public Employees’ Retirement System pushed for a break on fees charged by First Reserve to manage the remaining investments, much of which are shares in an offshore oil explorer and pipeline company that have both lost more than 90% over the last two years.

In June, Réal Desrochers, Calpers’s head of private-equity investing, wrote First Reserve Chairman and co-CEO Bill Macaulay and suggested the firm distribute the shares to investors, according to correspondence reviewed by The Wall Street Journal. That would eliminate management fees charged for holding the stock. First Reserve has reaped more than $500 million in fees since the fund was launched, Mr. Desrochers wrote.

Mr. Macaulay responded that First Reserve has offered ways for investors to sell out of the fund “or remain invested in a fund that will have a sufficient duration to benefit from the recovery in the energy markets.” Since then, First Reserve has told some investors that it would waive management fees if the fund’s life is extended, according to people familiar with the discussions.

Some funds are simply liquidating. Among them is a $3.8 billion fund in which Riverstone Holdings LLC and Carlyle Group CG 0.20 % LP began investing in 2005. While the fund is up 50% overall, it held about $475 million worth of assets as of June 30, which represented a markdown of about 30 cents on the dollar on those holdings, according to Carlyle’s security filings.

Write to Ryan Dezember at ryan.dezember@wsj.com and Dawn Lim at


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This article makes you wonder how Rice is going to pay for the Pig in a Poke (Vantage) buy they announced yesterday?

makes you wonder were all the money is really coming from ? billions and billions of dollars


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