June 10, 2014
Interviewed by: David Snow
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The Story of Riverstone

Riverstone Holdings’ co-founders Pierre Lapeyre and David Leuschen formed their firm—now one of the largest in private equity—while working together at Goldman Sachs. They talk about wanting to be known for energy rather than PE, and the unforeseen shale revolution.

Riverstone Holdings’ co-founders Pierre Lapeyre and David Leuschen formed their firm—now one of the largest in private equity—while working together at Goldman Sachs. They talk about wanting to be known for energy rather than PE, and the unforeseen shale revolution.

The Story of Riverstone

With Riverstone Holdings Co-founders Pierre Lapeyre and David Leuschen

David Snow, Privcap:

We’re joined today by Pierre Lapeyre and David Leuschen of Riverstone Holdings. Gentlemen, welcome to Privcap. Thanks for being here today.

We’re talking about the huge energy opportunity around the world and, certainly, in North America. Riverstone is one of the largest private equity firms in general and the largest in the growing subsector of private equity, which is facing the energy opportunity. I’d love to hear about the background of the firm and where you see it going in the future. Let’s start with a question for Pierre. You and David don’t like to refer to yourselves as private equity guys. You like to be thought of as energy guys. Why is that and how has that formed the kind of firm you’ve built?

Pierre Lapeyre, Riverstone Holdings:

I think it dates back to both our respective histories. David grew up out west ranching and in or around the energy business. I grew up in Louisiana around the energy business. So, we came to this industry or this business from the ground up with a true love for the business. We met at Goldman doing advisory work for the energy business, but the real reason we prefer to be thought of as industry versus private equity is that private equity has a relatively limiting connotation.

Our business was built out of a true belief that there’s lots of low hanging fruit, so to speak, in the industry that is very large for us but too small for industry. And that a focus on operations and on unique relationships—which was the bedrock of building an investment franchise that David led at Goldman—was key to finding attractive investment opportunities.

For us, we put our pants on in the morning much more thinking about what can we do to the energy assets we have or we’d like to own to make them better and which people we would want to capture into our orbit that are best in class at operating that which is a bit different from the average connotation given to the private equity business. We’re much more of an operator and exploiter of assets first and a provider of capital second, third, or fourth.

Snow: So, you met at Goldman. How did the conversation begin about possibly doing something on your own, creating a private equity way to approach this opportunity?

David Leuschen, Riverstone Holdings:

We met at Goldman in 1986. We’ve known each almost 30 years, longer than either of our wives. Pierre was in the utility part of the business; I was in the energy part. I was running the oil and gas or resource business at Goldman. Probably 90% of life is just showing up and there’s a lot of luck and serendipity in life. The partner that ran the utility business shortly after Pierre joined the firm decided to retire and he approached me and offered that we ought to merge those two businesses. Pierre and I had gotten to know each other on a couple of deals prior to that, but after that merger we were fairly inseparable for the next 12 or 14 years.

In the early ‘90s, the firm decided as they were building up their commodity-trading business—which is J. Aron—that any trader will tell you it’s great to own assets. To be low on assets is a way to get rid of commodity risk by converting oil into gasoline or whatever the case may be. They first convened a group of us whose job it was (kind of a moonlighting job because we were still investment bankers at that point) to build the energy infrastructure of Goldman and Pierre and I were two of about eight people focused on that. We got the bit in our mouth a bit and found that we really enjoyed that side of the business more than we did the banking side of the business.

But, around the mid-‘90s, it was becoming clear to the two of us that there would be a time when we would want to get more directly into the energy business and the investment business. It’s also fair to say that a lot of clients of ours—like a Rich Kinder at Kinder Morgan or some well-known in the E&P side, like a Jon Brumley—who would run four or five of the most successful energy companies were extremely close friends of ours socially, spending weekends together and things like that. They all had the bug and it’s hard to resist when your best friends are out doing what they’re doing to not try it yourself. So, that is what drove us.

Snow: Talk about the scope of activities your firm is in today. How did that develop? What are the advantages of having it under one roof?

Lapeyre: As we mentioned before, we have a four-sector approach. I would describe it as the upstream E&P, midstream infrastructure, oil-field service, and power. Those are really a function of our experience base, where we had spent our collective time, where we felt the best, risk-adjusted return opportunities were, and where we could source and find proven management teams. That’s why 80% of the business is in the upstream and midstream. Those are the most defined, most deep, and most liquid. They’re also the areas of the business where you can bring operational improvement and efficiencies more quickly to the table to increase value faster in our view.

What’s happened over time is our ability to source capital and to attract proven management teams has allowed us to dramatically broaden the scope of strategies within, say, upstream, as David’s talked about. There are six or seven different strategies there. There are four different strategies within midstream and, likewise, in oil-field service and power. So, the business has broadened but it has stayed within the confines of the two most important things to us, which are “Where can we source and get proven management teams?” and “What sectors do we feel comfortable that our experience base allows us to do the level of diligence and creativity we need to generate the returns we hope to generate?”

Leuschen: When we started Riverstone, we didn’t envision the shale revolution. We’re no wiser. We’ve got no better crystal ball than anyone else. In fact, back in our Goldman days, one relatively unsuccessful investment we had made was in an E&P business around Fort Worth, Texas, which was ultimately sold to George Mitchell and became part of what George Mitchell became famous in creating—the Barnett shale.

We thought when we started Riverstone that the biggest opportunity set for us was in the midstream area with this whole MLP business, which we’d been very active in at Goldman. We saw what Rich Kinder had done and we thought it would be possible to convert some of that midstream business into MLPs, build the business, take advantage of the multiple arbitrage between where MLPs traded and how you could buy assets in the private market, and make a good business. And that proved to be true but, as Pierre said earlier, that has swapped ends over the last few years. It’s much more difficult to.

Snow: You have grown and gotten into new strategies as you’ve grown. What do you see happening going forward, whether by way of new strategies you’re focusing on or new sources of capital to bring into your organization?

Leuschen: If you look at the business today, what the shale revolution has offered to us, what the dramatic increase and success in deep water is offering, and what Mexico is offering, it’s obvious what we ought to be doing today. That’s why we opened an office in Mexico.

We’re making a bet there. If we’re fortunate enough to be with you in a couple of years, we’ll find out whether it was a good bet or not.

One thing we haven’t talked about this very large amount of shadow oil-and-gas assets that are available from the major oil companies that everybody talks about. Depending who you read, it was $300 or $400 billion of assets that we expect to come out of the big oil companies. One thing we’re most active on today is finding those new management teams if we don’t already have them in our portfolio to go out and optimize production from those assets when and if we get them. So, it’s an awful lot more of the same but the future looks fairly bright.

Snow: You have a vehicle that’s publicly traded on the LSE, the London Stock Exchange. It’s capital for your investment activities. Why is that important and does that indicate something about an appetite to source new forms of capital?

Lapeyre: We’re always interested in getting new and flexible forms of capital because, as David mentioned, first and foremost, I think of us collectively (and I know David agrees with this), that we want to be the first call as a strategic partner to people in the industry. That is our calling card at the end of the day. Part of that is having not only access to a large enough amount of capital to solve the problem or the need they have but having capital that comes in multiple forms.

Historically, what we’ve had is one cost of capital, if you will, and one form of capital—a private equity fund. There are some things that don’t meet the return threshold of the private equity fund where we would like to look for other pools of capital that can keep us in the position we are in the industry. Then, there are those that require longer dated investment-time horizons, which is what we originally conceived of when we did the London listing, which was to get a longer dated capital source for when those opportunities arise. 

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