Losses expected in two EnerVest Ltd. energy funds underscore the issues faced by some investors that put more than $200 billion into the sector between 2009 and 2014.
EnerVest executives are trying to extricate the energy manager and its investors from a collection of issues: the oil price collapse in the second half of 2014; investing money when asset prices were high; new regulations that reduced the amount of energy loans banks can carry on their books; and fund-level debt tied to market values that dropped with the price of oil.
EnerVest's use of leverage put its two pre-2014 funds — the $1.5 billion Energy Institutional Fund XII and $2 billion Energy Institutional Fund XIII — in a bind. When oil prices fell precipitously, the portfolio value dropped with it, causing EnerVest's lender to accelerate its debt repayment.
"Leverage works well when everything goes as expected, but can be calamitous when markets turn volatile," said David Fann, New York-based president and CEO of private equity consulting firm TorreyCove Capital Partners LLC.
(TorreyCove client Illinois Teachers' Retirement System, Springfield, is an investor in EnerVest's Fund XII, which closed in 2010. Mr. Fann declined to discuss the investment. Illinois Teachers' spokesman Dave Urbanek, in an email declined comment.)
But EnerVest is not the only energy firm to face problems with its pre-2014 funds, investor reports referencing EIG Global Energy Partners and EnCap Investments LP funds show. EIG reported lower fee estimates for two of its funds — in one case, retroactively — as a result of the decline in oil prices and lower returns, according to a June 1 fee report to the board of the $14.4 billion Orange County Employees Retirement System, Santa Ana, Calif.
EnerVest reported lower fees for funds XII and XIII as a "result of the 2015 washout in energy production," according to the report.
Molly A. Murphy, OCERS' chief investment officer, could not be reached for comment.
EIG spokesman Brandon Messina and Julie Oakes, EnCap spokeswoman, both declined comment.