Support NeoGAF

[cameron]

WSJ: From $2 Billion to Zero: A Private-Equity Fund Goes Bust in the Oil Patch

A $2 billion private-equity fund that borrowed heavily to buy oil and gas wells before energy prices plunged is now worth essentially nothing, an unusual debacle that is wiping out investments by major pensions, endowments and charitable foundations.

EnerVest Ltd., a Houston private-equity firm that focuses on energy investments, manages the fund. The firm raised and started investing money in 2013, when oil was trading at more than double the current price of about $45 a barrel. But the fund added $1.3 billion of borrowed money to boost its buying power. That later caused it trouble when oil prices tumbled.

Now the fund’s lenders, led by Wells Fargo WFC -1.10% & Co., are negotiating to take control of the fund’s assets to satisfy its debt, according to people familiar with the matter.

“We are not proud of the result,” John Walker, EnerVest’s co-founder and chief executive, wrote in an email to The Wall Street Journal.

The outcome will leave investors in the 2013 fund with, at most, pennies for every dollar they invested, the people said. At least one investor, the Orange County Employees Retirement System, already has marked its investment down to zero, according to a pension document.

Though private-equity investments regularly flop, industry consultants and fund investors say this situation could mark the first time that a fund larger than $1 billion has lost essentially all of its value.

EnerVest’s collapse shows how debt taken on during the drilling boom continues to haunt energy investors three years after a glut of fuel sent prices spiraling down.

At its onset, the oil bust was expected to cause widespread losses for private-equity investors. While most funds have been able to navigate the downturn and are hanging on for higher prices, there have been pockets of acute pain. EnerVest’s struggles have been among the most severe.

Only seven private-equity funds larger than $1 billion have ever lost money for investors, according to investment firm Cambridge Associates LLC.Among those of any size to end in the red, losses greater than 25% or so are almost unheard of, though there are several energy-focused funds in danger of doing so, according to public pension records.

EnerVest has attempted to restructure the fund, as well as another raised in 2010 that has struggled with losses, to meet repayment demands from lenders who were themselves writing down the value fund of assets used as collateral, according to public pension documents and people familiar with the efforts.

Mr. Walker in an interview last year said he and his partners put $85 million of their own money toward satisfying the banks, but it wasn’t enough.

A number of prominent institutional investors are at risk of having their investments wiped out, including Caisse de dépôt et placement du Québec, Canada’s second-largest pension, which invested more than $100 million. Florida’s largest pension fund manager and the Western Conference of Teamsters Pension Plan, a manager of retirement savings for union members in nearly 30 states, each invested $100 million, according to public records.

The fund was popular among charitable organizations as well. The J. Paul Getty Trust, John D. and Catherine T. MacArthur and Fletcher Jones foundations each invested millions in the fund, according to their tax filings.

Michigan State University and a foundation that supports Arizona State University also have disclosed investments in the fund.

None of these investors commented. It is possible some of them earlier sold their stakes in the fund, paring losses.

EnerVest’s funds historically returned more than 30% or so, which enabled it to raise progressively larger pools of cash.

Article is behind a paywall. Also reported by Reuters: Former $2 billion private equity fund now nearly worthless: WSJ

 

[Syriel]

The risk of investing in the stock market.

Doesn't matter if you are a private investor or a union pension fund.

Investments are always a gamble.

 

[Vic]

an unusual debacle that is wiping out investments by major pensions, endowments and charitable foundations

smfh

 

[foodtaster]

worthless garbage. always invest in index funds. they literally cannot fail anymore than the (USA) economy in general.

 

[otake]

The risk of investing in the stock market.

Doesn't matter if you are a private investor or a union pension fund.

Investments are always a gamble.

I think this is private equity, not the stock market. Meaning they buy up private companies, to either hold or sell after a certain amount of time. These are not publicly traded companies as far as I know.

 

[ezrarh]

smfh

That could mean anything. Pension funds buy a lot of things - could have been just 0.1% of the pension's holdings so wouldn't have meant much.

 

[neurosisxeno]

Should have invested in renewables.

 

[Byakuya769]

Should have invested in renewables.

Lol. Nah. Those funds are still pretty trash too. Hopefully in a decade.

 

[Opto]

aaaand it's gone

 

[jono51]

Should have put it all in BTC,LTC and ETH instead.

 

[Sarek]

Seems incredibly dumb to invest in fossil fuels at almost their all time high prices when anyone can see that future is in renewables

 

[Lagspike_exe]

They have great sales people considering they persuades institutional investors to buy in what was essentially a leveraged energy investment vehicle.

 

[ElyrionX]

Seems incredibly dumb to invest in fossil fuels at almost their all time high prices when anyone can see that future is in renewables

Since renewables being the future is so obvious to you, why not dump all your cash into renewables stocks?

 

[Sarek]

Since renewables being the future is so obvious to you, why not dump all your cash into renewables stocks?

I have done partly just that, but the actual investing part is lot more complicated. Even though renewables are the future no-one can know exactly which companies will succeed and which won't. Plus that doesn't mean that other fields aren't also worth investing in.

 

[Slayven]

And the people at the top got paid I bet

 

[paradise_circus]

Since renewables being the future is so obvious to you, why not dump all your cash into renewables stocks?

well many do like for lithium. one major point is that the industry for resources needed for green energy are still extremely small compared to petrol.

 

[boingball]

I wonder how much the fund managers gambling the money away got paid.

 

[massoluk]

Since renewables being the future is so obvious to you, why not dump all your cash into renewables stocks?

A sixth of my fund is in solar and renewable related.

 

[Vicetrailia]

Renewables are the future, there's no doubt about that.

 

[Spoiled Milk]

 

[Bandini]

The managers fucked up huge by borrowing that much. Never use margin for long term investments! You have over 4b and that's not enough to work with? If they hadn't taken any loans they would have had big losses, but they wouldn't be underwater. And the people that are going to suffer are the pensioners.

The lenders are going to clean up on this deal.

 

[TheLostBigBoss]

Since renewables being the future is so obvious to you, why not dump all your cash into renewables stocks?

Because that's just silly considering how cut throat renewables are and how just a small percentage of companies will make it in the end.

You guys are all missing the point of what happened. This has nothing to really do with renewables, this has to do with the large surplus of oil being pumped over the last few years that has exceeded demand and crashed prices.

 

[Falchion]

Damn, that really sucks for people who had their retirements tied up in that.

 

[Bony Manifesto]

 

[YuriLowell]

Good. I hate private equity firms.

 

[otake]

Good. I hate private equity firms.

Why? They are funding more companies than you'd think. You would be surprised at how many companies are owned by private equity. It's a necessary evil due to market conditions and the stringent requirements to go public. If they did not exist, it's probable a lot of companies would disappear with them.

 

[Lagspike_exe]

Good. I hate private equity firms.

Why is that?

 

[jstripes]

Was this fund run by Stephen Harper?

 

[SyNapSe]

The fund was worth 2 billion and was using 1.3 billion in margin? Is it normal to have that much leverage as a private equity fund? As a normal every day pleb that seems like a lot

 

[Lagspike_exe]

The fund was worth 2 billion and was using 1.3 billion in margin? Is it normal to have that much leverage as a private equity fund? As a normal every day pleb that seems like a lot

Yes. Private Equity generally uses less leverage than hedge funds, but they can still be substantially leveraged. If they had $2b in equity and $1,3b in debt, that gives us D/E of 0,65 or 39% of financing coming from debt. There are corporations operating on higher leverage than this.

 

[Brashnir]

Damn, that really sucks for people who had their retirements tied up in that.

Diversify your bonds.

 

[Annubis]

including Caisse de dépôt et placement du Québec

Placement Québec fucking up its investments happens often.

 

[kiunchbb]

Good. I hate private equity firms.

Guess who are funding those video game?

 

[TyrantII]

What's even better news is $/kwh of renewables is coming in less than these bust levels, supply gut fossil fuels.

The big issues still left are and storage and transmission, but a lot of work is now going into that.

With oil bonds going out 20-30 years, it's going to be interesting to see how the market reallocates all the investment tied up into it. There's a reason coal and oil are pushing back hard and buying Congress critter, because they can't turn on a dime. Also why gov are still favoritable to them, trillions are tied up oil bonds.

 

[shira]

In a few years those people crying about jobs are going to be the oil jobs

 

[YuriLowell]

Why is that?

Worked for several companies that were bought by private equity firms, and then ended up destroying them both.
They just go in and cut out all of the good people, install their own cronies, and then charge the companies insanely large management fees and load them down with debt.

 

[NYCmetsfan]

Lol. Nah. Those funds are still pretty trash too. Hopefully in a decade.

This is going to happen to all fossil fuel stocks. besides short term for compounding interest, barring a sudden shift in their businesses' future investments within that decade you mention in Exxon Mobile, BP and the like are going to be stupid.

Since renewables being the future is so obvious to you, why not dump all your cash into renewables stocks?

most people aren't buying stocks but rather indexes.

What's even better news is $/kwh of renewables is coming in less than these bust levels, supply gut fossil fuels.

The big issues still left are and storage and transmission, but a lot of work is now going into that.

With oil bonds going out 20-30 years, it's going to be interesting to see how the market reallocates all the investment tied up into it. There's a reason coal and oil are pushing back hard and buying Congress critter, because they can't turn on a dime. Also why gov are still favoritable to them, trillions are tied up oil bonds.

Yeah, so much of their value is tied up in reserves that climate change literally says we can't access.

There's gonna be a huge crash in their value and a lot of people are gonna be out a lot of money. Disinvestment in these countries is smart over the next decade.

Guess who are funding those video game?

EA, Nintendo, Microsoft, Sony, Activision, Ubi are all public companies???

 

[Byakuya769]

This is going to happen to all fossil fuel stocks. besides short term for compounding interest, barring a sudden shift in their businesses' future investments within that decade you mention in Exxon Mobile, BP and the like are going to be stupid.

We're talking about private equity here.