First Reserve nears settlement with SEC over fees and expenses

  • First Reserve close to settlement with SEC
  • Issues include expenses at portfolio company
  • Senior-adviser fees should have been offset against management fee

First Reserve agreed to reimburse its investors $12.7 million and pay a $5 million fine to settle a Securities and Exchange Commission investigation  into various fee and expense practices, according to an LP with knowledge of the situation.

First Reserve recently sent a letter to LPs, disclosing that the firm is close to finalizing the settlement with the SEC, two separate sources said.

The firm, founded in 1983, disclosed terms of the settlement in December, one of the sources said. It’s unclear why the settlement has not yet been finalized and whether the terms could change.

The settlement as outlined in December includes $7.4 million paid back to Fund XII limited partners for issues involving certain organization and operating expenses in First Reserve Momentum. That’s a joint venture the firm formed in 2014 with executives from Petrofac, an oilfield-services company. Momentum invests in smaller equipment and services opportunities worldwide, according to First Reserve’s website.

Another $4.4 million would go back to LPs of Funds XI and XII for fees portfolio companies paid to senior advisers that the SEC said should have been offset against the management fees, the person said.

The balance of the LP reimbursements would be for allocation of directors’ and officers’ insurance premiums that should have been borne by the GP; and small fee discounts that went to the GP for legal work over five years that should have been allocated to the funds, the person said.

In its amended Form ADV in March, First Reserve disclosed that it was under further investigation by the SEC on issues of fees and expenses. The further inquiry followed a routine SEC exam that ran from August 2014 to June 2015, according to the Form ADV.

First Reserve closed Fund XI on $7.8 billion in 2006 and Fund XII on $9 billion in 2009.

Fund XI was generating a negative 8.4 percent internal rate of return and a 0.70x multiple as of Sept. 30, 2015, according to performance information from Oregon Public Employees Retirement Fund.

Fund XII was producing a negative 4.5 percent IRR and a 0.84x multiple as of Sept. 30, 2015, according to Oregon’s performance information.

First Reserve is considering options for funds XI and XII to give them more capital and more time to invest. The firm reached out to LPs of those funds in April about potential options, explaining that the time was right to restructure the older funds because of an extended recovery in the energy sector.

“Our macro view has consistently been ‘lower for longer.’ We remain convinced that it will take some time before we see a sustained recovery in the energy macro environment,” the firm said in the April letter to LPs, Buyouts exclusively reported.

“Thus, Fund XI faces a timing mismatch (in the final year of its initial term) and there are potential incremental capital needs for select Fund XII portfolio companies.”

The SEC did not respond to a request for comment on Monday.

Action Item: First Reserve’s Form ADV:

Photo: The U.S. Securities and Exchange Commission logo on an office door at headquarters in Washington on June 24, 2011. Reuters/Jonathan Ernst