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EnerVest in talks to salvage 2 funds

EnerVest is in the final stages of discussions with a private equity firm that would recapitalize its troubled 12th fund and is in discussions to sell assets held by its troubled 13th fund, said Ron Whitmire, senior vice president and chief administrative officer for the energy investment manager.

Even so, investors are expected to lose money on both funds — the $1.5 billion EnerVest Energy Institutional Fund XII, which closed in 2010, and the $2 billion EnerVest Energy Institutional Fund XIII, which closed in 2013, Mr. Whitmire acknowledged.

Florida State Board of Administration, Tallahassee, earned internal rates of return of -9.4% for Fund XII and -79.1% for Fund XIII, as of Sept. 30, according to information on its website. The board oversees a total of $189.4 billion in assets, including the $151 billion Florida Retirement System.

EnerVest has senior credit facilities with Wells Fargo on each of its funds.

After the valuation of Fund XII dropped, Wells Fargo in the fall of 2015 accelerated EnerVest's debt repayment to $125 million from $20 million, according to documents on the website of the $14.4 billion Orange County Employees Retirement System, Santa Ana, Calif., an investor in funds XII, XIII and XIV.

EnerVest executives told its limited partners in 2016 they had negotiated a deal for a recapitalization of the Fund XII by a private equity firm. Under that proposal, EnerVest and the unnamed firm would form a new company for some of the fund's assets. That deal was never finalized, Mr. Whitmire said.

EnerVest also said earlier in 2016 that it expected Wells Fargo to require an even larger repayment of Fund XIII in May 2016, according to the minutes of OCERS' May 3, 2016, investment manager monitoring subcommittee meeting. At the time, EnerVest executives were attempting to sell assets or issue subordinate debt.

Mr. Whitmire said he did not know whether Wells Fargo had accelerated that payment.

Both funds suffered from the collapse in oil prices and financial regulations of banks reducing the amount of energy loans they can carry on their books, according to documents from various limited partners.

The transaction with the private equity firm regarding Fund XII "fell apart," Mr. Whitmire said. However, EnerVest executives are "in the final stages" of a similar deal with another private equity firm, he added. He declined to provide further details.

EnerVest does not anticipate issues with its debt on the $2.4 billion EnerVest Energy Institutional Fund XIV, which closed in 2015 while the firm was dealing with debt issues of the earlier funds.

At least two investors in funds XII and XIII also invested in Fund XIV: Florida SBA and OCERS. Officials at both funds could not be reached for comment. The $12 billion New Mexico Educational Retirement Board, Santa Fe, which invested with EnerVest for the first time in Fund XIV earned a net IRR of 12.81% as of Dec. 31, according to the latest performance report on its website.

Documents on OCERS' website show that former Chief Investment Officer Girard Miller noted in May 2016 that rather than sell limited partnership interests in funds XII and XIII at a loss on the secondary market, "we have to eat what we cook." He added that later energy funds such as Fund XIV can capitalize on the problems faced by EnerVest and other energy funds raised around the same time.

Mr. Whitmire said the leverage is lower in Fund XIV than in prior funds, which all had fund-level leverage limits of 40%, with typical leverage of 35% of net asset value. Mr. Whitmire could not say what the leverage limit is on Fund XIV. However, EnerVest's website post concerning the final closing of Fund XIV states that fund, the largest in the firm's history, had $3.8 billion in purchasing power. This gives EnerVest executives room to add leverage of $1.4 billion or 37% of total fund capital.

A combination of leverage and the collapse of oil prices cut into the performance of funds XII and XIII.

"We added what we considered pretty modest debt and commodity prices plunged," Mr. Whitmire said.

The result was that the funds — Fund XII and Fund XIII — became overleveraged, he added.