Private equity funds are supposed to apply leverage to each portfolio company individually to diversify away from the risk that any single loss will affect the rest of the portfolio. Unfortunately, EnerVest Ltd., a $2 billion private-equity fund, learned first-hand the risks of applying leverage to a levered portfolio of investments. The fund used $1.3 billion of debt across the fund to increase the amount of capital it could deploy in energy investments.
Unfortunately the fund had two variables with the capacity to affect all of it’s investments simultaneously: (1) the aforementioned debt, and (2) the price of oil.
When the price of oil started to plummet in 2014 the firm began to realize losses that ultimately could not be sustained. Per the article, it may be the largest private equity fund loss to date:
“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.”