Kayne Anderson Capital Advisors has revised its risk strategy for its newest energy-focused fund after previously incurring losses as an anticipated uptick in commodity prices failed to materialise.
In an investment due diligence research report written in March, obtained by sister title pfm, consultant NEPC said Kayne Anderson Energy Fund VII will consider deal pricing against a “base case” and a “downside case”, after realizing bigger-than-anticipated losses in some situations in its previous fund.
“This is a change from prior funds, specifically III and IV, when drilling decisions were informed by a [commodity price] forward curve that indicated that prices would rebound and this never happened,” the report said.
The document also outlined specific fund terms, stating there is a 20 percent carried interest and an 8 percent hurdle rate. The management fee will be 1.5 percent for the first two years of the investment period, 2 percent on capital commitments for the following three years and 1.5 percent on the cost or market value for the remaining investments thereafter, whichever of the two is lower, the report said.
Los Angeles-headquartered Kayne Anderson offered a 0.5 percent management fee reduction for the first two years for limited partners that made commitments before October 2015 or commitments larger than $50 million.
The GP made a $50 million commitment and is not using leverage at the fund level, though it may use a short-term credit facility and expects portfolio company-level leverage to be maximum 3x EBITDA.
KAEF VII is expected to make 15 to 20 investments of between $50 million and $200 million in equity, seeking a majority, control position. Upstream investment will account for between 70 and 80 percent of the portfolio, 10 percent to 20 percent will be in midstream, and another 10 percent to 20 percent in oilfield services, the document showed.
It is expected to make at least half of its investments in management teams from earlier funds. Three of its six investments made to-date – worth an aggregate $650 million – are repeat management teams. Also, up to a quarter of returned capital from previous investments may be reinvested in the first eight years after its first portfolio company investment.
According to the document, the sixth fund was generating a net internal rate of return of 12.4 percent, as of 30 September 2015. Funds III and IV were generating a net IRR of -1.4 percent and 3.3 percent, respectively, as of that same date, the document showed.
Mid-market Kayne Anderson Energy Fund VII beat its $1.6 billion target and reached its hard-cap of $2 billion at final close in October. This was slightly larger than its predecessor which closed in January 2013 on $1.84 billion.