Investors who’d plowed $2 billion four years ago into a private equity fund that had also borrowed $1.3 billion to lever up may receive “at most, pennies for every dollar they invested,” people familiar with the matter told the Wall Street Journal.
Fund raising and investing started in 2013. Houston-based EnerVest manages the fund. This could be the first time ever that a PE fund larger than $1 billion lost nearly all of its value.
The lenders to the fund are now negotiating to take control of the fund’s assets, these “people familiar with the matter” told the Journal. Wells Fargo is leading the negotiations.
Investors span the spectrum of institutions managing other people’s money. Some of them might have sold their stakes to cut their losses. Among these investors are: the Orange County Employees Retirement System; Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund; Florida’s largest pension fund manager; the Western Conference of Teamsters Pension Plan, covering union members in nearly 30 states; the J. Paul Getty Trust; the John D. and Catherine T. MacArthur Foundation; the Fletcher Jones Foundation; the Michigan State University; and a foundation supporting Arizona State University.
But it sounded good at the time…
EnerVest, which was started in 1992 and focuses on energy investments, kicked off the fund in 2013, raising $2 billion in equity from institutional investors and borrowing $1.3 billion. According to the Journal, it specializes in acquiring oil and gas fields with producing wells that are neglected by larger oil companies. It then makes improvements and drills additional wells to raise production.
The fund was started at the peak of the fracking boom, when West Texas Intermediate traded between $91 and $109 per barrel. Another fund EnerVest started in 2010 by raising $1.5 billion and borrowing $800 million is also in trouble. In the past, EnerVest’s funds had stellar returns and it had no trouble raising the funds.
These “resource funds” appeal to institutional investors due to the steady cash flow they normally generate starting with their first investments.
What the fund didn’t include in the calculus was that by early February 2016, WTI would be trading below $30 a barrel, and that it is currently trading at $46.62, less than half of where it was when the investments were being made.
And the fund added an unusual twist: it cross-collateralized the fund’s assets. Normally, PE funds debt-finance each investment separately so that if it fails, the debt will take down only the individual investment. The remaining investments in the fund would be untouched. But EnerVest’s funds encumbered all of the investments in the fund with fund-level debt, and so the fund’s good and bad assets alike are going to the lenders. Hence the total loss for investors.
EnerVest already tried to restructure the two funds – the one raised in 2010 and the one raised in 2013 – in order to meet repayment demands from the lenders. The lenders, in turn, have already written down the collateral value, according to public pension documents and people familiar with the efforts, cited by the Journal.
Until this collapse, it was “almost unheard of” for a PE fund with over $1 billion in assets to lose more than 25%, the Journal said, citing investment firm Cambridge Associates. But now, based on public pension records, several other energy-focused funds are “in danger of doing so.”
The renewed hype about shale oil – which is curiously similar to the prior hype about shale oil that ended in the oil bust – and the new drilling boom it has engendered, with tens of billions of dollars being once again thrown at it by institutional investors, has skillfully covered up the other reality: The damage from the oil bust is far from over, losses continue to percolate through portfolios and retirement savings, and in many cases – as with pensions funds – the ultimate losers, whose money this is, are blissfully unaware of it.
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