First Reserve closes Fund XII on $9bn

The buyout industry’s energy-focused veteran continues to prove LPs are keen on energy, topping its own record for the largest energy fund raised to date. The final close comes less than a year after it went to market, though is less than its $12bn target and $16bn hard-cap.

First Reserve Corporation has bested its previous fund by $1 billion and has again raised the largest energy-focused private equity fund to date with the closing of Fund XII on $9 billion. Its prior fund closed in 2006 on $7.8 billion, more than three times its Fund X, which closed on $2.3 billion in 2004.

Fund XII was launched at the firm's annual meeting in May 2008. Its first close, just three months later, was on roughly $6 billion, while its second close in October was on approximately $8 billion.

Both returning and new investors made commitments during the “compressed timetable” for raising such a mega-fund, First Reserve said.

Certainly the post-Lehman world is one where liquidity is contrained.

Cathleen Ellsworth

Though the fund closed roughly 25 percent below its $12 billion target, First Reserve managing director and head of investor relations Cathleen Ellsworth noted the firm is one of the few – if not the only – firms raising mega-funds that did not extend its fundraising period amid a tougher fundraising climate.

This more difficult environment is characterised by limited partners battling the denominator effect and liquidity issues, often causing them to reduce re-ups or write smaller commitment tickets.

“Certainly the post-Lehman world is one where liquidity is contrained and that was a big factor,” said Ellsworth, who added that First Reserve's level of returning investors was nonetheless impressive. For example, the California Public Employees' Retirment System, which has been quite public about its denominator problems, committed $300 million to the fund in October, down from the $500 million it committed to the firm's Fund XI in 2006.

Energy remains a large, dynamic and complex industry.

William Macaulay

Other LPs in Fund XII include US public pensions The Virginia Retirement System, The Pennsylvania Public School Employees’ Retirement System, The Teachers’ Retirement System of Louisiana and the The Florida Retirement System.

Ellsworth said the $9 billion figure is “certainly ample capital” that will allow the firm to build a diversified portfolio with no change to its investment strategy.

That said, First Reserve will adjust its strategy slightly to benefit from drops in commodity prices. It will focus a bit less on the renewable sector and a bit more on oil producing assets, Ellsworth said.

William Macaulay, First Reserve chief executive, said in a statement that Fund XII's capital will be deployed in what is expected to be an excellent investment environment. “Energy remains a large, dynamic and complex industry where change creates new, attractive investment opportunities,” he said.

Macaulay added the 25-year-old firm's history of investing throughout varying economic cycles gives it an advantage in today's marketplace.

Fund XII has already begun investing. Last October it invested $350 million in Reliant Energy, a publicly traded Texas utility. According to a filing with the Securities and Exchange Commission, the deal for convertible stock was part of a $1 billion financing package that also included a $650 million term loan from GS Loan Partners.