Having borrowed $1.3 billion to buy oil and gas wells in 2013, a $2 billion EnerVest fund has now lost almost all of its value after energy prices plunged, reports The Wall Street Journal.
Managed by Houston private-equity firm EnerVest Ltd., the fund has received investments from endowments, charities, and major pensions, as well as Wells Fargo & Co., per WSJ
Oil is currently priced at roughly $45 per barrel, less than half of what it was back when the fund acquired its debt. The sharp decline will leave the fund’s investors with mere pennies on their invested dollars, and the fund’s largest lenders are already attempting to seize the fund’s assets to satisfy their debts.
The falling energy prices have caused issues for many private-equity funds, but none the size of this fund. Private-equity consultants and investors think this could be the first billion-dollar fund to lose the vast majority of its value.
Investment firm Cambridge Associates LLC says that only seven private equity firms managing over $1 billion have lost money for investors, and losses of 25% or more are virtually unheard of for funds of any size, per WSJ.
EnerVest co-founder and chief executive John Walker, in reference to the fund’s downfall, told WSJ, “We are not proud of the result.” In an interview last year, he also said he and his fund partners had put over $80 million of their personal wealth towards appeasing debt to banks.
It wasn’t enough.
Commenting on his investors’ anger at the situation, Walker said, “We’ve had some chew us out and hang up on us.”
Despite the fund’s good intentions and common practices, its list of victims is lengthy. Canada’s second largest pension Caisse de dépôt et placement du Québec, Florida’s largest pension fund manager and the Western Conference of Teamsters Pension Plan (WCTPP) all invested at least $100 million, according to WSJ.
WCTPP manages union retirement income in nearly 30 states.
Among charities to have invested are the J. Paul Getty Trust, John D. and Catherine T. MacArthur and Fletcher Jones foundations, each putting millions into the fund.
EnerVest’s strategy was solid if not unspectacular. It pooled cash from big investors to purchase existing oil and gas fields that had been neglected by big oil.
After the purchase, it revamped the wells to increase output. The low-risk strategy brought in lower profits, but at a steady rate. An issue that made falling oil prices hit EnerVest more than most is that it borrowed massive amounts of money as if it was an oil company itself, meaning that the fund’s assets were all saddled with the same debt.
This meant that even winning investments were hindered by the losing ones, but the strategy attracted investors anyway. It usually starts paying out steadily immediately after the first investment, unlike many private-equity investments that can take years to mature, Christian Busken, director of real assets for Fund Evaluation Group LLC,told the Journal.
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