First Reserve: $3.4B Fund ‘No Small Feat’

In an exclusive Privcap interview, Alex Krueger, First Reserve’s president, says a recalibrated  investment mandate and refined investment focus convinced investors to back two new funds, including a just-closed $3.4B private equity vehicle.

Energy specialist First Reserve confirmed the final close of its latest private equity fund, rounding up a total of $3.4B for First Reserve Fund XIII.

The close brings the amount raised by the firm so far in 2014 to roughly $6B. In June, First Reserve announced the closing of a separate energy infrastructure fund of $2.5B (view an interview with the firm’s head of infrastructure investing, Mark Florian, here.)

First Reserve president Alex Krueger says the most recent fundraising is a “great outcome” and the total raised in 2014 is “no small feat” given the firm’s sharpened focus. He also acknowledges that the firm faced challenges due to investments it made in the run-up to the financial crisis.

First Reserve’s 13th private equity fund is down in size from its previous, $9B private equity fund raised in 2008. The prior vehicle, raised in 2006, has to date registered disappointing returns. A CalPERS disclosure document shows that fund, the firm’s eleventh, with a 2 percent new IRR. This stands in contrast to Fund X, closed in 2004, which shows a robust 31.2 percent IRR.

Krueger chalks up the weak performance of the 2006 fund to a deviation from the firm’s historically successful investment focus as well as an over-concentration of deals done just before the financial crisis.

“We stubbed our toe,” says Krueger, “and we’ve been hard on ourselves…There were missteps that the firm took during 2007 and 2008 and we’ve taken large and important strides towards incorporating those lessons learned into our institutional investment practice.”

Krueger adds that in late 2008, the firm decided to eliminate new buyout investments in the power and renewables spaces—energy sub-sectors that had only been added in recent years as First Reserve experienced significant growth. “The firm didn’t have a long track record of being an investor in these spaces,” he says.

First Reserve has refocused its investment processes in a number of ways, including how it analyzes and internally shares the data it gathers from its global portfolio of energy assets and companies. “Having completed over 475 transactions in our firm history, there is a vast amount of knowledge there, and depending on how you capture and filter it, it can be the holy grail of alpha creation,” says Krueger. “Our deal teams are immersed in what they’re doing, but at the same time they are connecting the data points between what’s happening with upstream producers and how that connects throughout the energy value chain to energy equipment and services as well as the midstream and downstream.”

Busy Dealmaking

First Reserve has not slowed down its dealmaking pace. In the past six years the firm has created “two dozen platform acquisitions” as well as more than 100 add-on acquisitions, says Krueger, “generating exciting returns to date.”

Krueger says First Reserve, which is building platforms across the upstream, midstream, downstream, and equipment and services sectors, is today less focused on drilling-related, installation investments and more interested in companies that will win business thanks to the incredible rise in oil production and need for servicing, equipment, and maintenance that increase entails.

As an example, Krueger notes the growth of the offshore drilling industry. “You have a market that’s grown eight-fold in the last 15 years,” he says. “What that does is put a lot of production facilities offshore, and there is a growing demand for services as that infrastructure ages.”

Krueger, a Texas native now based in the firm’s Greenwich, Conn., headquarters, joined First Reserve in 1999, having previously been an investment banker in the energy group at Donaldson, Lufkin & Jenrette. He was named president of the firm in 2012.

“The ability to unlock value creation opportunities in our portfolio is incredibly exciting,” says Krueger. “We have a great team and a great franchise, having operated in this space for 30 years, along with all the relationships that come with that history.”