ArcLight fundraise hits uncertainties

The Boston-based energy firm has been targeting $3bn for its fifth fund, which launched last year, but is switching placement agents.

ArcLight Capital Partners, a Boston-based firm that invests in the energy sector, has hit some roadblocks in its efforts to collect $3 billion for its fifth fund, several sources told PEO.

The firm, led by managing partner Daniel Revers and senior partner Robb Turner, is switching placement agents amid the fundraise, according to several sources.

Placement agent MVision had been working with ArcLight to raise the fund, but now is off the assignment, sources say. One source said the fund placement division of Lazard was close to signing on to finish the fundraising, but that could not be confirmed.

Lazard and MVision declined to comment. ArcLight did not return numerous requests for comment.

It is not clear how much ArcLight has collected so far for Fund V. Fundraising for the vehicle began in 2009. Fund V, which is listed in several “Funds in Market” lists for 2010, has not yet furnished registration exemption documents to the US Securities and Exchange Commission, as is required for unregistered securities.

One source said potential limited partners may need more time to see how the performance of substantial existing funds plays out before committing more money to ArcLight. The firm collected about $2.1 billion each for its third fund in 2006 and its fourth fund in 2007. The firm raised $1.6 billion for its second energy fund in 2004 and $950 million for its debut fund in 2003.

As of 31 May 2010, Fund IV was generating a 5.45 percent internal rate of return, with a .27x cash-on-cash return, according to performance data from the University of Texas Investment Management Company. Fund III was producing a 3.19 percent IRR with a .25x cash-on-cash return, while the second fund had a 14.60 percent IRR and a .93x cash-on-cash return. The debut fund was generating a 24.46 percent IRR and a 1.67x cash-on-cash return, according to UTIMCO numbers.

In total, UTIMCO has committed $168 million with ArcLight in the four Energy Partners funds, and has gotten back about $120 million, for a total cash-on-cash return of .71x, and a 13.35 percent IRR.

Three sources, including an LP in a past ArcLight fund, said the firm's strategy has “drifted”. The strategy started out as energy buyouts looking for private equity returns, but has moved into more “lower return, lower risk strategy with a bigger current income element”. The LP said they have skipped committing to ArcLight's newer funds “due to a blistering investment pace, fund size increases and strategy drift”.

Investors have had no shortage of energy-focused private equity funds to evaluate lately. Energy Capital Partners recently closed its second fund on $4.3 billion, and Energy Investors Funds (EIF) has collected $1 billion over the past few months for its $1.7 billion target fourth US power fund.