Top executives at Riverstone Holdings LLC, one of the world’s largest energy investment firms, face the prospect of returning more than $300 million of profits they made from investments before the oil bust erased those gains, according to securities filings and people familiar with the matter.Carlyle Group executives join Riverstone's founders in having skin in the game.
The money is related to an incentive formula employed at private-equity firms in which executives earn a cut of profits above a certain threshold for each fund.
In Riverstone’s case, profits in some of its funds shriveled after U.S. oil prices plunged to below $27 a barrel earlier this year from more than $100 in mid-2014. That decline reduced the value of some companies owned by Riverstone, eliminating paper gains and could require some executives to return profits in a so-called clawback if the investments don’t regain value before the funds that hold them are liquidated.
David Leuschen and Pierre Lapeyre Jr., who founded Riverstone and remain its majority owners, are the primary recipients of its portion of deal profits, known as carried interest. Through a spokesman, Messrs. Leuschen and Lapeyre declined to comment.
The firm initially teamed up with Carlyle Group LP, which helped the upstart raise money and handle back-office functions in exchange for a stake in Riverstone’s funds. That partnership lasted for several funds before Riverstone struck out on its own for a $7.7-billion fund it raised in 2013.So much for pay for performance. Carlyle's PEU professionals might ask Uncle Sam to carry them until times get better, like the U.S. Treasury did for Carlyle's Boston Private via TARP.
Carlyle said in a securities filing that as of June 30 it had set aside $76 million in gains it owes back to three funds it manages alongside Riverstone based on the investment pools’ present value.
Each of the three Riverstone funds that Carlyle says are subject to the clawback remained profitable for investors as of June 30 but have fallen below the minimum level of profitability that entitles the firms to a cut of the gains. They are the only of Carlyle’s 34 funds in clawback, company filings show.
When Carlyle reported second-quarter results last week, analysts asked executives why another of its funds, which had gained enough for the firm and its shareholders to start taking their cut, hadn’t started paying out. Carlyle’s executives said they wanted to ensure the profits were permanent lest they wind up having to return money.
“Investors aren’t happy with clawback,” said Carlyle co-CEO David Rubenstein, “but the professionals in our firm are even less happy when we have to claw back.”