We have commented in the past on what we believe to be a major problem for the energy business, which is the large pool of private equity funds seeking investment opportunities. That money may merely extend the current difficult environment for the business. Our view is that much of this money will wind up supporting weak companies that should be eliminated or consolidated in order to help reduce industry capacity and accelerate the recovery that is necessary in order for the industry to return to profitability. This does not mean that all energy-focused private equity funds are poor investments or that all their investments will fail, but normally when so many dollars are seeking investment opportunities, future returns shrink and losses often become the norm rather than outsized profits. A recent story in The Wall Street Journal discussing the travails of First Reserve’s two recent multi-billion dollar private equity energy funds highlight this conundrum.
First Reserve may be the oldest energy-dedicated private equity fund having been founded in 1983 by John Hill, an Energy Department undersecretary in the Ford administration, and William Macaulay, an investment banker with Oppenheimer & Company. (In full disclosure, we know Mr. Macaulay and our prior employers did business with First Reserve.) These two gentlemen were early in seeking energy industry investment opportunities, starting during the industry’s first significant bust – the mid-1980s, oil-price-induced collapse. For those who experienced that period, many energy companies were victims of overleveraged balance sheets that were unsupportable when asset values collapsed in response to the dramatic oil price decline orchestrated by Saudi Arabia and the subsequent drop in activity. Often there were solid businesses underlying the debt debris, but many times the good and bad were both destroyed. During the mid- to late-1980s, by working with the banks to restructure loans and through judicious use of the U.S. bankruptcy courts, balance sheets of companies in the energy business were restructured.
First Reserve Billion Dollar Funds Struggling
First Reserve may be the oldest energy-dedicated private equity fund having been founded in 1983 by John Hill, an Energy Department undersecretary in the Ford administration, and William Macaulay, an investment banker with Oppenheimer & Company. (In full disclosure, we know Mr. Macaulay and our prior employers did business with First Reserve.) These two gentlemen were early in seeking energy industry investment opportunities, starting during the industry’s first significant bust – the mid-1980s, oil-price-induced collapse. For those who experienced that period, many energy companies were victims of overleveraged balance sheets that were unsupportable when asset values collapsed in response to the dramatic oil price decline orchestrated by Saudi Arabia and the subsequent drop in activity. Often there were solid businesses underlying the debt debris, but many times the good and bad were both destroyed. During the mid- to late-1980s, by working with the banks to restructure loans and through judicious use of the U.S. bankruptcy courts, balance sheets of companies in the energy business were restructured.
First Reserve Billion Dollar Funds Struggling
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