Pensions helped EIG loan cash to Chesapeake, McClendon

BOSTON Fri Apr 20, 2012 7:09pm EDT

BOSTON (Reuters) - An investment management firm that has loaned hundreds of millions of dollars to Chesapeake Energy Corp.(CHK.N) Chief Executive Aubrey McClendon raised money for its most recent investment fund from 19 institutional investors, including some of the largest U.S. public pension funds, according to a private equity research firm.

The list of state pensions that put money into the $4.1 billion EIG Global Energy Partners fund include ones from Alaska, Connecticut, Louisiana, Maryland, Minnesota, Missouri and Texas, according to research firm Preqin. Other large investors in the EIG Energy Fund XV were insurance giant MetLife and a Teamsters pension plan.

EIG's fund raising prowess is drawing attention after Reuters reported about the loans that the private equity firm has made over the past three years to McClendon, one of the energy sector's most high-profile chief executives.

On April 20, after a Reuters report, Chesapeake amended its preliminary 2012 proxy to disclose in more specific terms for the first time that McClendon had borrowed money to fund the cost of well interests.

Chesapeake Energy, responding to an outcry over a Reuters report earlier this week, formally disclosed that its chief executive has borrowed money against his personal stakes in wells controlled by the company.

The company did not detail the amounts and terms of the loans, nor the specific lenders. But it said some of those lenders, which includes EIG, also have lending, investment or advisory relationships with the Company. The loans, Chesapeake said, are used "in whole or in part to fund Mr. McClendon's well costs."

The newest fund, EIG Energy Fund XV, raised more dollars last year than any other energy-focused mezzanine fund, according to Thomson Reuters' Deals Intelligence group. Originally the fund was only expected to raise $2.5 billion.

The EIG Energy Fund XV, according to Preqin, invested some of its money in a Chesapeake subsidiary. Minutes from a meeting that EIG officials had with New Mexico investment officials last year reveal the fund also invested in McClendon's personal stake in some of Chesapeake's wells.

Reuters reported that Energy Fund XV loaned $500 million to McClendon and an earlier fund, EIG Energy Fund XIV, loaned $375 million to McClendon.

Some Chesapeake shareholders and corporate governance experts are saying the loans from the EIG funds could pose a potential conflict of interest because the private equity firm also has been a financier of the natural gas company. Others have questioned whether Chesapeake properly disclosed the loans, which McClendon obtained after pledging his financial interest in wells the company had given to him as a corporate perk.

The EIG Energy Fund XV, the firm's newest one which closed to investors last year, was pitched to pensions as a chance to capture some of the profits generated by those wells.

An earlier fund, the EIG Energy Fund XIV, raised $2.6 billion and closed to investors in 2008. The minutes from the meeting with New Mexico officials show that this earlier fund also invested in McClendon's personal well stakes.

So far, the newest EIG fund has made just four investments, including the one involving the Chesapeake subsidiary, according to Preqin. The other three investments do not appear to be related to the natural gas producer.

Preqin did not have information on the investment in McClendon's personal well stakes.

For the moment, most pension funds either are not commenting on the controversy involving McClendon, or taking a wait and see attitude since it's too soon to assess the performance of the private equity firm's newest fund.

A number of the state pensions that are invested in EIG's newest energy fund also are investors in the earlier fund, which industry analysts said is generating solid returns.

The two funds invest in energy and energy infrastructure projects.

Howard Bicker, executive director of the Minnesota State Board of Investment, which has invested in the newest EIG fund, said: "As far as we are concerned, it is just a loan deal."

In New Mexico, where the State Investment Council also committed $50 million to the new fund, a spokesman said it was too soon to comment.

In a presentation last year to New Mexico investment officials, representatives for EIG said the new fund's investment with Chesapeake would be similar to one made in the earlier fund. The EIG official said the firm's funds have a "fairly conservative investment approach."

In early 2011, EIG split with TCW, the large investment management firm best-known for its bond mutual funds. Prior to the split, TCW had a long history of raising money for the oil and gas sector.

Other institutional investors that went into EIG's newest fund include the Orange County Employees Retirement System, the Town of Greenwich and the Leona M. And Harry B. Helmsley Charitable Trust.

During the meeting with New Mexico officials, EIG's chief operating officer Randy Wade said the firm's top executives, almost all of whom had previously been with TCW, had a 25-year history with Chesapeake. He said the firm had provided financing to the gas company in the late 1980s before it went public.

The newest EIG fund, according to the investor presentation, says that McClendon has the personal right to take a 2.5 percent interest in all wells Chesapeake drills in a given year.

Investors in the EIG fund have been told expect to get a return of at least 13 percent.

(Reporting By Svea Herbst-Bayliss and Aaron Pressman; editing by Matthew Goldstein and Leslie Gevirtz)

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Comments (2)
breezinthru wrote:
It seems to me that giving the CEO a 2.5% interest in all the wells drilled in a year is unreasonable compensation when the company is publicly held. If those wells produce for even a decade, that is a hell of a lot of compensation.

When one considers that this is just a perk, not the CEO’s entire compensation, that is quite simply over the top.

Chesapeake would return much more to investors if compensation packages were more reasonable. It seems that Chesapeake’s board believes that it has a fiduciary duty to itself and its officers rather than to its stockholders.

Apr 23, 2012 3:15pm EDT  --  Report as abuse
AlkalineState wrote:
Guy already gets a hundred million dollar salary and bonus package each year. If he wants a stake in some oil wells, he should be spending some of his own money on it, and not be taking out the bizarre equivalent of a home equity loan from his own company.

What does he do, spend his whole salary on the stuffed animal crane game in the mall? Hey McClendon, drop another 50 million on it this month and you should be able to get the angry bird AND the spongebob. If not sucessful, just keep trying.

Good old Wall Street talent. Never over-estimate it.

Apr 23, 2012 4:43pm EDT  --  Report as abuse
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