Energy specialist First Reserve raised $7.8 billion for fund XI to invest in energy equipment, manufacturing and service companies.
It is believed to be the largest private equity fund to focus exclusively on the worldwide energy industry, surpassing the $4.5 billion joint energy fund raised in the spring by The Carlyle Group and Riverstone Holdings.
Riding a surge of energy prices, First Reserve has over the last few years been among the elite performers in the private equity marketplace. The firm has generated IRRs of 99.3% and 47.9% for Funds X and IX, respectively, according to The California Public Employees’ Retirement System, an investor in First Reserve’s two previous funds.
The current IRR of nearly 100% on Fund X will not last, said Ben Guill, president of First Reserve. Guill says much of fund X’s performance stems from the outsized returns on such exits as its IPO of Dresser Rand, an Olean, N.Y.-based provider of infrastructure equipment which went public last year in a $567 million IPO. First Reserve typically pitches its funds to LPs as aiming for a 25% IRR.
In other exits, the firm used add-on acquisitions to build Power Well Services from a carve out of Halliburton, which it then sold after a short hold for a 3.5X return to U.K.-based Expro International. Expro paid $675 million, netting First Reserve $415 million in proceeds. “That’s the kind of deal we are proud of,” Guill said.
The demand for energy investments is strong among private equity firms as First Reserve and others have turned significant gains from their exits. In October, NRG Energy Inc. agreed to buy power-producer Texas Genco Holdings Inc. for more than $8 billion in cash, stock and debt from a consortium of buyouts firms (including The Blackstone Group, Texas Pacific Group and Kohlberg, Kravis, Roberts & Co. ), which bought the electric power provider in 2004 for $800 million.
First Reserve, which was not involved in the Texas Genco deal, previously raised First Reserve X in 2004 with $2.3 billion in commitments. It is close to fully invested, and after roughly 20 months, has already given one third of the capital back to its LPs.
About 75% of the new fund was raised from past LPs, such as the Government of Singapore and the Minnesota State Retirement System. New LPs include the Canadian Pension Plan, Florida Investment Board, British Columbia Investment Management Co., Partners Group, LGT Capital Partners and two Swedish pension funds.
First Reserve has doubled its size since the end of the investment period for Fund IX to 65 employees and 40 investment professionals. Nine are in Houston, four in London and the balance is in Greenwich, Conn.
With the current fund, First Reserve will consider buying in its traditional fields, not considerably widening its scope beyond oil, gas, liquid natural gas, coal and infrastructure. Guill downplayed green energy, which he said will continue to be a growing industry but will remain a small slice of the overall energy pie.
While characterizing himself as not as bullish as others in the marketplace, Guill, who joined First Reserve in 1998 from Simmons & Co. and heads the Houston office, said he does not believe oil and gas are on the downside of their cycle. “This is a good cycle, being driven by demand rather than under supply of the commodity,” he said, with the biggest growth of the energy market in India and China. —Mark Cecil and Alastair Goldfisher