First Reserve’s second infrastructure fund to be activated later this year

Firm: First Reserve Corp

Fund: First Reserve Energy Infrastructure Fund II LP

Target: $2 billion

Amount Raised: $2.5 billion

First Reserve Energy Infrastructure Fund II LP closed at its $2.5 billion hard cap, the firm said, well ahead of its initial target of $2 billion.

Mark Florian, a managing director at First Reserve and its head of infrastructure, told Buyouts that the firm probably would activate the new fund later this year after it completes the last couple of deals for its inaugural infrastructure fund, a 2011 vintage pool that closed at $1.2 billion.

The infrastructure strategy provides investors with a lower risk approach to the energy market, Florian said. While the firm’s core investments in businesses such as oil and gas exploration and production may generate higher returns, its infrastructure investments, in assets such as pipelines and power plants, generate more current income, albeit with a lower targeted IRR, which he put in the mid-teens.

The infrastructure fund also has a longer term than the typical buyout fund, with an expected 15-year life cycle as opposed to 10 years for buyout investments. The firm expects to invest the new fund over three to four years, with anticipated 10- to 12-year holds for the deals, which frequently will be contracted and regulated assets such as utilities, and which often will be structured as joint ventures.

The holdings will have contracts for virtually 100 percent of their revenues, Florian said. In Fund I, the average contract was for 17 years. With its long-term dividend yields, the fund will rely on the holdings’ free cash flow rather than growth to generate returns for investors, he said. “That’s why it’s important for us to generate current yield.”

The firm remains in the market for its latest flagship fund, First Reserve Fund XIII LP. A source told sister website peHUB last June that the firm is looking to raise $6 billion for the vehicle. The 2008-vintage Fund XII is returning 1.1x with a 4.98 percent IRR as of Dec. 31, 2013, according to investor Washington State Investment Board.

Known LP investors in the firm’s funds include the Alaska Permanent Fund Corp, the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the Canada Pension Plan Investment Board, the Oregon Public Employees Retirement System, and the Teacher Retirement System of Texas, according to the Thomson One private equity database.