Tag Archives: private equity

Meet The Only Private Equity Fund In History To Raise $2 Billion From Investors And Return $0

(ZeroHedge) Sir Richard Branson once said that the quickest way to become a millionaire was to take a billion dollars and buy an airline. But, as EnerVest Ltd, a Houston-based private equity firm that focuses on energy investments, recently found out, there’s more than one way to go broke investing in extremely volatile sectors. 

As the Wall Street Journal points out today, EnerVest is a $2 billion private-equity fund that borrowed heavily at the height of the oil boom to scoop up oil and gas wells.  Unfortunately, shortly after those purchases were made, energy prices plunged leaving the fund’s equity, supplied primarily by pensions, endowments and charitable foundations, worth essentially nothing. 

The outcome will leave investors in the 2013 fund with, at most, pennies for every dollar they invested, the people said. At least one investor, the Orange County Employees Retirement System, already has marked its investment down to zero, according to a pension document.

Though private-equity investments regularly flop, industry consultants and fund investors say this situation could mark the first time that a fund larger than $1 billion has lost essentially all of its value.

EnerVest’s collapse shows how debt taken on during the drilling boom continues to haunt energy investors three years after a glut of fuel sent prices spiraling down.

But, at least John Walker, EnerVest’s co-founder and chief executive, expressed some remorse for investors by confirming to the WSJ that they “are not proud of the result.”

All of which leaves EnerVest with the rather unflattering honor of being perhaps the only private equity fund in history to ever raise over $1 billion in capital from investors and subsequently lose pretty much 100% of it. 

Only seven private-equity funds larger than $1 billion have ever lost money for investors, according to investment firm Cambridge Associates LLC. Among those of any size to end in the red, losses greater than 25% or so are almost unheard of, though there are several energy-focused funds in danger of doing so, according to public pension records.

EnerVest has attempted to restructure the fund, as well as another raised in 2010 that has struggled with losses, to meet repayment demands from lenders who were themselves writing down the value of assets used as collateral, according to public pension documents and people familiar with the efforts.

So, who’s getting wiped out?  Oh, the usual list of pension funds, charities and university endowments.

A number of prominent institutional investors are at risk of having their investments wiped out, including Caisse de dépôt et placement du Québec, Canada’s second-largest pension, which invested more than $100 million. Florida’s largest pension fund manager and the Western Conference of Teamsters Pension Plan, a manager of retirement savings for union members in nearly 30 states, each invested $100 million, according to public records.

The fund was popular among charitable organizations as well. The J. Paul Getty Trust, John D. and Catherine T. MacArthur and Fletcher Jones foundations each invested millions in the fund, according to their tax filings.

Michigan State University and a foundation that supports Arizona State University also have disclosed investments in the fund.

Luckily, we’re somewhat confident that at least the losses accrued by U.S.-based pension funds will be ultimately be backstopped by taxpayers…so no harm no foul.

Private Equity Pours Money into Self-Storage Deals

by Robert Carr

Investors are crowding into self-storage as the sector continues to post the highest long-term returns of any commercial property type, according to a recent quarterly industry survey.

Marc Boorstein, a principal with Chicago-based MJ Partners Self Storage Group, said in his full year and fourth quarter overview that the average 2014 investment return for self-storage REITs was 31.4 percent. The REITs are the major owners in a largely fragmented sector, as about 80 percent of self-storage properties are owned by small mom-and-pop-type firms. But according to Boorstein, private equity is starting to enter the sector.

Long-term returns for self-storage beat out all other commercial real estate sectors, Boorstein says. The five-year average return for self-storage is at 24.4 percent, the 10-year average is at 17.8 percent and the 15-year average is at 20.3 percent, beating out the closest sector, multifamily, by about 400 basis points for each category. These numbers, as well as a lack of new supply and unusually high demand, have led to increased competition for assets.

“There’s just a lot of transaction activity going on, for every $50 million portfolio there [are] 20 offers,” Boorstein says. “Average occupancy has increased to more than 91 percent, and new supply was at less than 100 new properties last year. That compares to about 3,665 new properties that opened in the peak year of 2005. Even if we have 300 to 500 new properties in 2015, as Extra Space Storage CEO Spencer Kirk predicts, that’s still not enough to even match the population growth.”

The recession created more renters, and the urban movement further increased self-storage customer base, Boorstein notes. Investors have flocked to the industry because of how quickly rents can be increased. A customer who pays $125 per month will tend not to move if the rent is increased incrementally, to $140 per month.

“That doesn’t sound like much each month, but multiply that by owning a thousand units and that’s a huge impact on revenue,” Boorstein says. New income generators such as self-storage insurance and improved digital advertising and management platforms have also boosted bottom lines, he adds.

The returns have attracted private equity firms new to the sector, such as the Carlyle Group partnering with self-storage operator William Warren Group last year, as well as increased activity from investors such as Prudential, Fortress, Morgan Stanley and Harrison Street. The four major REITs—Public Storage, Extra Space Storage, CubeSmart and Sovran Self Storage—are able to take down the large deals of more than $75 million, but there are aggressive bidding wars by private equity for the smaller portfolios, Boorstein says.

“If it’s a mid-sized deal, say between $20 million and $70 million, there’s four times as many private equity groups looking to purchase than there were two years ago,” he says. “There [are] groups bidding that have barely been in the market that long. Cap rates have plunged because of all this competition and partnering that’s going on.”

For example, Roseville, California-based Life Storage secured more than $120 million from TPG Real Estate and Jasper Ridge Partners late last year. “Not only is there strong continued support for self-storage, the industry remains very fragmented, which should provide opportunities for consolidation and attractive follow-on acquisitions,” said Avi Banyasz, partner and co-head of TPG, in a statement regarding the investment.

Michael Mele, senior director with Marcus & Millichap’s national self-storage group, says he agrees that private investment in the sector is “bigger than it has ever been.” He says while these investors can’t compete with the REITs in the large deals, there’s much more competition for the second-tier properties.


“Mom-and-pop ownership of self-storage is declining because of the demand by private investment,” Mele says. “There’s also a continued consolidation of the industry, with a lot more private firms going after large portfolios with the help of the REITs, or using the REITs as third-party managers. You’re going to start seeing, in major and secondary markets, the same people owning many of the properties.”

Scott Humphreys, self-storage acquisitions director at Austin, Texas-based Virtus Real Estate Capital, says a new trend in the industry being employed by many of the REITs and larger regional players is purchasing sites in construction or shortly after they open. This eliminates some of the risk/liability associated with the development timeframe, and has also allowed the REITs to move forward with new site development without the added overhead and expense of keeping a full coterie of development resources in house. For example, Extra Space recently bought a portfolio of three self-storage properties in Austin from Endeavor Real Estate Group. All three properties were new, with two of the three having been opened less than a year at the time of sale.

“The difficult element to this type of purchase is the valuation gap, and determining how much to pay for yet-to-be leased space,” Humphreys says. “In core and growth markets, the risk is obviously not as great, and this allows you to rely on ‘merchant-build’ type development resources who know the local municipalities, and their nuances, well.”