Riverstone uses Goldman minority investment to pay down clawback

Riverstone Holdings is using proceeds from a minority investment in the firm that Goldman Sachs made this year to pay down an expected clawback to its limited partners, two people with knowledge of the situation told Buyouts.

Goldman Sachs’s Petershill Group made a minority investment of up to $500 million in Riverstone’s management company, the Wall Street Journal reported in May. Petershill acquired a roughly 12 percent stake in the firm in the deal, which valued Riverstone at more than $4 billion, according to WSJ.

Through the passive interest, Goldman is entitled to management fees, carried interest and other compensation earned by the firm, according to Riverstone’s Form ADV.

Riverstone, one of the world’s largest energy investors, expects to owe its LPs about $300 million in what’s known as a clawback at the end of the life of one or more of its funds, the two sources said.

This means executives collected early profits on deals, but those gains were wiped away after oil prices collapsed. The firm is on the hook for ensuring its LPs collect their agreed-upon profit shares.

Technically speaking, Riverstone could wait to pay the clawback at fund liquidation, but it is paying it off early as a friendly gesture to LPs, one source said. “By proactively offering the payment, they are trying to respond to LPs’ concerns and have a better story to tell in the future,” the source said.

Clawback obligations can be reduced naturally through markups in the portfolio, with losses locked in when a firm exits investments. Riverstone’s clawback obligation could increase or decrease depending on how its portfolios perform, though the firm’s investments are tied at least in part to oil prices, which have remained depressed.

Riverstone spokesman Jeffrey Taufield and a spokesman for Goldman Sachs both declined to comment.

It’s unclear which funds are owed the clawback obligation. Riverstone’s most recent funds are Riverstone/Carlyle Global Energy & Power IV and Riverstone Global Energy & Power Funds V and VI.

Along with paying down the clawback obligation, the firm also is using proceeds to reinvest back into the firm, including to help expand its credit business, the sources said.

Several sources offered mixed reviews of using proceeds from a third-party investor to pay down a clawback obligation. One LP said it likes GPs to live with the “discomfort” of a clawback and resolve it through strong performance.

Riverstone, led by David Leuschen and Pierre Lapeyre Jr, closed its fifth fund — its first outside a partnership with Carlyle Group — on $7.7 billion in 2013. Fund V generated a 1.7 percent net internal rate of return and a 1x multiple as of Sept. 30, 2016, according to California Public Employees’ Retirement System, an investor in Fund V.

Riverstone/Carlyle Global Energy & Power Fund IV, a 2007 vintage pool that closed on $6 billion, was producing a 3.6 percent net IRR and a 1.1x multiple as of the same date, according to CalPERS.

The firm’s latest fund, Riverstone Global Energy & Power Fund VI, was launched in 2015, targeting $8 billion. Fund VI reached more than halfway to target in 2015, according to an SEC filing, but it’s unclear how much more the fund has raised or whether it has closed.

Riverstone managed about $27.2 billion as of Dec. 31, 2016.

Action Item: Check out Riverstone’s Form ADV here: http://bit.ly/2dQslVZ

Australian artist Ken Unsworth lies on the floor to check the alignment of his art-piece titled “Suspended Stone Circle,” which consists of 309 wires that hold up 103 riverstones, in Sydney’s New South Wales Art Gallery on Oct. 1, 1998.  Digital image courtesy Reuters.