Kimmeridge passes $500m target for energy activist fund, eyes $1bn cap

If Kimmeridge Energy Engagement Partners II hits the $1bn cap, it will be one of the largest traditional energy pools raised in recent years.

Kimmeridge, an energy private equity firm with an activist bent, exceeded the $500 million target for its second public engagement offering, sources told Buyouts.

Kimmeridge Energy Engagement Partners II, launched last November, will continue fundraising with an eye toward the vehicle’s hard-cap of $1 billion, sources said.

Oil and gas PE fundraising has been mostly in decline since 2014, as multiple challenges, among them industry supply gluts and price wars, eroded performance. Many LPs also eschewed the strategy due to limited payback on substantial amounts of committed capital as well as ESG concerns.

If Kimmeridge’s latest offering hits the $1 billion cap, it will be one of the largest traditional energy pools raised in recent years.

The New York firm is perhaps having success on the fundraising trail in part because of the improved environment for oil and gas. After bottoming out during the covid-19 pandemic, energy prices rose with increasing consumer demand and Russia’s invasion of Ukraine, which contributed to much tighter supply.

Another factor appears to be the track record of Kimmeridge’s debut public engagement fund, which helped demonstrate an ESG-friendly strategy of changing the way oil and gas companies are run.

In a 2020 interview with Buyouts, managing partner Ben Dell said the fund would focus on listed exploration and production businesses that were “decoupling true financial performance from reality.”

“The US E&P industry is in a time of crisis,” he then said. “Despite being one of the worst performing sectors in the market over the past decade, it maintains a high reinvestment ratio and a mindset of growth for growth’s sake, volume for volume’s sake.”

E&P executives were responding to deeply rooted challenges by blaming prices, Dell said. They “mismanaged” their companies and were unwilling to shift gears because of compensation systems that rewarded a growth orientation instead of returns. As a result, he said, shareholders were “exhausted with the sector” and “voting with their feet.”

Campaigning for change

To provide a remedy, Kimmeridge devised an activist approach that borrowed from its energy PE investing. It was bolstered by the 2020 hire of managing partner Mark Viviano, a former E&P analyst and portfolio manager with Wellington Management.

Fund I targeted several listed E&P companies where it could become a top shareholder by acquiring stakes of 2 percent to 5 percent. In each case, it mobilized disgruntled investors in campaigns to revamp business models and enhance share values through key initiatives, such as cutting costs, reinvesting less, repairing balance sheets and selling assets.

Raising $165 million, the vehicle acquired interests in four companies, including Ovintiv, which was charged with failures of capital allocation, governance and environmental stewardship.

Last year, Kimmeridge settled a proxy fight with Ovintiv, gaining a seat on its board. The US shale producer also sold its Duvernay assets in Alberta, set new debt reduction objectives, aligned executive compensation with performance and established climate change targets.

Fund I, now fully invested, is generating strong returns, sources said. As of June, it was earning a 2.5x net multiple and a 144 percent net IRR.

Fund II is already active, making three investments, sources said. Disclosed examples include Chesapeake Energy, a one-time PE-backed pioneer of the US shale revolution that last year emerged from bankruptcy. In May, Chesapeake said it was in talks with Kimmeridge, agreeing its shares are undervalued.

Along with its activist strategy, Kimmeridge invests in privately held, low-cost unconventional oil and gas assets in the US E&P sector. Unlike most of its energy PE peers, which tend to back independent E&P teams, the firm acquires and operates assets in-house.

Kimmeridge also has a carbon solutions strategy to invest in ways to lessen the oil and gas industry’s environmental footprint, PE Hub reported. This year, it seeded with $200 million the start-up of Chestnut Carbon, a nature-based carbon offset platform.

Kimmeridge declined to provide a comment on this story.