By Joshua Franklin and David French
(Reuters) - Riverstone Holdings LLC, an energy-focused buyout firm backed by Goldman Sachs Group Inc <GS.N>, is laying the groundwork to raise a new flagship fund, indicating to investors it may target $5 billion (3.84 billion pounds) in capital, people familiar with the matter said.
The preparations came as Riverstone, the world's largest private equity investor in energy companies and a prolific financier of the U.S. shale-drilling boom, has been seeking to recover from some poor investments in the oil patch.
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, inspiring new confidence in the sector among investors.
However, Riverstone faces headwinds because of lacklustre returns on recent funds, as big bets placed on oil exploration companies such as EP Energy Corp <EPE.N> and Fieldwood Energy LLC soured when energy prices collapsed in 2014, said the five sources, who spoke to Reuters this month.
After posting a 52.7 percent internal rate of return (IRR) for the $1.1 billion fund it raised in 2003, its performance has gradually declined, with its $7.7 billion fund that launched in 2012 reporting an IRR of 4.6 percent as of Dec. 31, according to the California Public Employees' Retirement System (CalPERS), a long-time Riverstone investor.
The performance of Riverstone's latest $5.1 billion fund, Fund VI, offers a silver living, with an IRR of 71.1 percent, though experts cautioned that a lifespan of two years is too short to judge the performance of a private equity fund with a maturity of 10 years.
"With the exception of Fund VI, whose performance is really tricky to assess absent any meaningful cash distributions, Riverstone's recent funds underperformed not only standard industry benchmarks by vintage year, but also the PERACS Relevant Peer Benchmark," said Oliver Gottschalg, founder and head of research at private equity analytics firm PERACS and a professor of strategy and business policy of HEC Paris.
GRAPHIC: Riverstone fund performance and the largest energy private equity investors https://tmsnrt.rs/2NgNJnK
Riverstone, which last year sold a minority stake to Goldman Sachs, has faced fundraising challenges in the past. It scaled back expectations two years ago when it was raising Fund VI, as oil prices hovered near record lows. It settled for $5.1 billion after targeting $7.5 billion, according to Preqin.
Riverstone plans to begin fundraising later this year or in early 2019 for what would be its seventh flagship energy fund, said the sources, who cautioned that no firm fundraising target has been set and requested anonymity because the deliberations are confidential.
A spokesman for Riverstone declined to comment.
Since Goldman Sachs veterans Pierre Lapeyre and David Leuschen founded Riverstone in 2000, the firm has raised $38 billion in capital.
With the 2014-2016 downturn in oil prices hitting the value of its assets, Riverstone returned hundreds of millions of dollars in performance fees to its fund investors through a mechanism known as claw-back, according to the sources. This weighed on staff morale, because individual Riverstone employees had to pay back some of the money they received, one of the sources added.
Veteran dealmaker Michael Hoffman, who led Riverstone's investments in renewable energy, was the latest investment officer to exit in June, according to one of the sources, who did not reveal the motive behind his departure. Hoffman is no longer listed on Riverstone's website and did not respond to a request for comment.
BLANK-CHECK COMPANIES
Riverstone has also been seeking to diversify its revenue stream by launching so-called special purpose acquisition companies (SPACs), blank-check vehicles that are managed by Riverstone and raise money from stock market investors in initial public offerings to acquire companies.
ADVERTISEMENTIts first SPAC, dubbed Silver Run Acquisition Corp, acquired oil and natural gas company Centennial Resource Development Inc <CDEV.O> in 2016 in a $1.7 billion deal with backing from Riverstone's private equity funds. Centennial is now worth more than $5 billion, prompting some fund investors to complain why Riverstone did not allow them to have a bigger slice of the profits by investing directly in Silver Run, according to the sources.
When Riverstone launched its second SPAC, Silver Run Acquisition II, it made Fund VI its sponsor, giving it more of the profits, according to a regulatory filing. That venture has so far been much less successful. It merged with Alta Mesa Holdings LP and Kingfisher Midstream LLC in 2017 to create Alta Mesa Resources Inc <AMR.O>, a company which at the time of the deal had a market capitalisation of $3.8 billion and is now worth less than a quarter of that.
(Reporting by Joshua Franklin and David French in New York; editing by Greg Roumeliotis and Leslie Adler)
