September 13, 2018 / 5:04 PM / 12 days ago

Exclusive - First Reserve plans $3 billion buyout fund as energy rebounds: sources

NEW YORK (Reuters) - First Reserve Management LP is seeking to raise $3 billion (2.28 billion pounds) for a new buyout fund, making it the latest energy-focused private equity firm moving to capitalise on an oil price recovery that is fuelling new investor appetite for the sector, people familiar with the matter told Reuters on Thursday.

It will be the biggest test of First Reserve’s leadership since Bill Macaulay, who co-founded First Reserve in 1983, handed over the reins last year to co-chief executive Alex Krueger. Krueger started as an associate at the private equity firm two decades ago and rose through the ranks. Macaulay stayed on as executive chairman.

Like some of its peers, including Riverstone Holdings LLC, First Reserve’s financial performance took a hit when energy prices collapsed in 2014.

However, the gradual oil price recovery has offered relief. Its Fund XIII, that amassed $3.4 billion in 2014 after targeting $5 billion, is gradually bouncing back. It reported a net internal rate of return (IRR) of 14.1 percent as of the end of the second quarter, and has so far monetized $1 billion of its investments through five deals, according to an investor letter seen by Reuters and one of the sources.

The returns are a marked improvement on First Reserve’s predecessor XI and XII funds, two of the largest energy-focused private equity funds ever raised, which as of the second quarter reported negative net IRRs of 8.4 percent and 9.5 percent, respectively, according to the investor letter.

Stamford, Connecticut-based First Reserve plans to launch the fundraising for the new fund, Fund XIV, in the next few weeks, one of the people said. The sources requested anonymity because the matter is confidential. First Reserve declined to comment.

Energy-focused private equity firms raised $213 billion between 2015 and 2017, up 36 percent on the prior three years, according to financial data provider Preqin, as oil prices more than doubled in the last two years.

In addition to the energy downturn, First Reserve also suffered from investor dissatisfaction with some of its decisions. Fund XI and Fund XII, raised in 2006 and 2008 respectively, strayed away from First Reserve’s traditional focus on energy resources, equipment and services and midstream and downstream businesses. Instead, they branched out to power, renewables and energy finance.

The firm returned to its original focus with Fund XIII, as well as on smaller deals and transactions with less exposure to energy price swings. As a result, First Reserve transitioned from investing in companies such as solar power generator SunReserve and wind farm operator Renovalia Reserve to focus on businesses such as oil exploration and production company Deep Gulf Energy III and Utica Minerals Development, an owner of a natural gas acreage position in the Utica shale region.

The changes resulted in several staff departures, which at the time unnerved some investors in First Reserve’s funds, one of the sources said.

Fund XIV plans to follow Fund XIII’s strategy, according to the sources.

Riverstone is also laying the groundwork to raise a new flagship fund and has indicated to investors it may target $5 billion in capital, Reuters reported last month.

Reporting by Joshua Franklin in New York; Editing by Bill Rigby

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