Energy Capital pre-markets Fund III

The firm has been talking to LPs about its third fund, which will target $3.5bn, with a possible hard-cap of $5bn.

Energy Capital Partners is pre-marketing its next fund, which will target at least $3.5 billion and officially launch in the next few weeks, according to three people familiar with the firm. 

Energy Capital Partners III’s hard-cap could be set at $5 billion, sources said. Fund II closed on $4.3 billion in 2010, beating its $3.5 billion target. The firm also closed its debut mezzanine fund earlier this year on its $800 million hard-cap. 

Both funds were raised by Park Hill Group, but sources told Private Equity International that UBS would act as the placement agent on Fund III. It’s not clear why the firm has changed placement agents; Energy Capital Partners declined to comment. 

The firm enjoyed a fairly outstanding debut, closing its first fund on its hard-cap of $2.25 billion, one of the largest amounts ever raised for a first-time fund. Energy Capital Partners was formed by a team of Goldman Sachs executives, including Doug Kimmelman, Scott Helm and Thomas Lane. 

The firm’s latest fundraise may face greater LP scrutiny because of Fund I’s performance. That vehicle started out strong, but performance has lagged in recent years, according to an LP with knowledge of the firm.  

Doug Kimmelman

Fund I was generating an 0.80 percent internal rate of return since inception, as of 30 September, 2012, according to performance numbers from the California State Teachers’ Retirement System. CalSTRS committed $220 million to Fund I, a sizable commitment for a first time fund. 

Fund I was affected in part by macro factors like the volatility of natural gas prices. The firm has $100 million invested in electricity giant Energy Future Holdings (the former TXU), which has been on the brink of bankruptcy for several months, with about $60 billion in debt from the largest-ever leverage buyout in 2007. 

“It’s been disappointing, [though] there is still value there. That’s not to say they can’t turn that fund around,” the LP said about the debut fund. “It’ll be interesting to see how they do in this fundraising environment”.

Fund II, however, has been a strong performer. That fund was generating a 13.93 percent IRR since inception as of 30 September, 2012, according to CalSTRS information. The largest investment in Fund II is called Summit Midstream, which held an initial public offering last year at $20 per share.

Summit Midstream, which focuses on developing, owning and operating energy infrastructure, was trading at $32.70 in late trading Tuesday. Energy Capital has almost $1 billion of equity tied up in the company, and still owns a majority stake in the firm, according to a market source.

In May, PEI exclusively revealed that Jordan Robinson, head of investor relations at JC Flowers & Company, was leaving the firm to join Energy Capital Partners as head of IR. Robinson joined Paul Parshley, managing director, investor relations, who has been with the firm since 2006.

Energy fundraising has remained steady over the past few years. Earlier this month, Riverstone Holdings closed its first fund after separating from The Carlyle Group on $7.7 billion. There are 78 energy focused private equity funds in the market seeking an aggregate $49.4 billion, according to PEI’s Research & Analytics division.