Private equity’s new energy kings

Jun 20, 2013

Dan Primack was a senior editor at Fortune from 2010 to 2016. He was also the author of Term Sheet, Fortune's daily newsletter about deals and dealmakers.

FORTUNE -- Four years ago, Riverstone Holdings was messier than an oil slick.

The energy-focused private equity firm's longtime partner, The Carlyle Group (cg), was pulling away in order to form its own energy investing platform. Firm co-founder David Leuschen had admitted to bankrolling a low-budget film produced by the brother of an influential public pension fund manager in New York. And there were additional pay-to-play allegations, due to Riverstone's use of a corrupt "placement agent" who would eventually find himself in state prison.

Riverstone and Leuschen ultimately paid out a combined $50 million in restitution to New York, without admitting guilt.

Yesterday, however, the firm announced that it had raised a whopping $7.7 billion for its fifth fund. That's larger than any prior Riverstone fund, and the first to not be co-branded with Carlyle. New York Common Retirement Fund didn't re-up, but Riverstone did manage to secure commitments from public pensions in states like California, Delaware, Illinois, New Mexico and Texas.

The reversal of fortune is pretty easy to explain: Riverstone has generated a ton of money for its investors.

Take a look at its general fund returns through the end of 2012, according to documents published by the California Public Employees' Retirement System (which is investing in the new fund):

  • Carlyle/Riverstone Global Energy & Power II (2003)
    54.1% internal rate of return
    2.69x cash-on-cash multiple
  • Carlyle/Riverstone Global Energy & Power III (2005)
    12.3% internal rate of return
    1.66x cash-on-cash multiple
  • Carlyle/Riverstone Global Energy & Power IV (2008)
    17% internal rate of return
    1.47x cash-on-cash multiple

For an investor like CalPERS, all of that comes out to more than $1.2 billion in value (realized and unrealized) on $738 million invested (inclusive of fees).

Now compare this to returns from rival First Reserve Corp., which raised $9 billion for its last fund but recently had to cut its new target from $6 billion to $5 billion:

  • First Reserve Fund X (2004)
    31.6% internal rate of return
    1.82x cash-on-cash multiple
  • First Reserve Fund XI (2006)
    3.1% internal rate of return
    1.11x cash-on-cash multiple
  • First Reserve Fund XII (2008)
    3.3% internal rate of return
    1.08x cash-on-cash multiple

Notice the difference?

For sure, there are plenty of other, large energy-focused private equity platforms within generalist private equity firms (including Carlyle). But for now Riverstone is tops. Couldn't have imagined it a few years back.

Sign up for Dan's daily email newsletter on deals and deal-makers: GetTermSheet.com

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: http://www.djindexes.com/mdsidx/html/tandc/indexestandcs.html. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions