First Reserve Corporation, the buyout industry’s energy-focused veteran, continues
to prove that investors are keen on energy. Less than a year after its initial close, the firm scooped up $9 billion for its 12th energy fund, topping its own record for the largest energy fund raised to date. But while there’s appetite, it’s not unlimited.
First Reserve missed its target of $12 billion by a third, but still managed to better its previous fund by $1 billion (this closed on $7.8 billion in 2006). And it again managed to raise the largest energy-focused private equity fund to date, hardly a sign that investors have fled the market.
Other energy specialists had similar success last year. Houston’s Quintana Capital
Group scooped up more than $250 million for its second fund in just four months. And Quantum Energy Partners, also in Houston, gathered $2 billion for its 5th energy fund in the turbulent second half of the year, after targeting $2.75 billion.
So investor interest remains, and for good reason. Returns have been good. The Pennsylvania Public School Retirement System’s(PSERS) reports an overall gross internal rate of return of 35 percent for First Reserve’s funds VI through XI. Also, the energy sector is generally not overleveraged, making it easier for companies to stay in business and operate out of cashflows – a distinct contrast to sectors
such as retail, media and consumer goods.
And, of course, the long-term fundamentals of rising demand and stagnant capacity are as attractive as ever to investors. “Energy remains a large, dynamic and complex industry where change creates new, attractive investment opportunities,” William Macaulay, First Reserve chief executive, said in a statement announcing the fund close. Even in this market, if the basics are right investors can be found.