Energy Capital Partners Case – Costs Related to Bridge Financing

Summary:

• Energy Capital Partners (“ECP”) was an infrastructure private equity firm that utilized a line of credit to purchase a large asset to which its funds and co‐investors allocated capital.
• The commitment fees for the line of credit amounted to approximately $27 million and while ECP attempted to recover those costs from co‐investors, not all co‐investors agreed to pay the fees.
• One of ECP’s funds absorbed line commitment costs attributable to co‐investors without disclosure.

Allegations and Conduct:

• ECP’s Fund III entered into an agreement to purchase a portfolio holding for $5.5 billion which was beyond the capacity of the Fund.
• ECP solicited co‐investors some of which committed before the signing a purchase agreement (“PreCommitment Co‐Investors”) and some of which committed after the purchase agreement was signed (“Post‐Commitment Co‐Investors”).
• Not all $5.5 billion was available at the time of the signing of the purchase agreement and ECP bridged the funding gap by establishing a financing facility and incurred certain commitment costs.
• While ECP attempted to recover the full amount of the commitment costs from co‐investors, some PreCommitment Co‐Investors refused to bear their pro‐rata share.  ECP allocated the financing commitment costs attributable to those investors to Energy Capital Partners III, LP (“Fund III”).
• The disclosure in the formation documents of Fund III required that fund expenses be allocated “based on the relative investments and/or benefits derived among the ECP III Funds” and/or “in any manner determined equitable, in the good faith judgment” of ECP.  No additional disclosure was made and no consents were sought.
  • Analysis:
    • There are three components to fund financing fees: (1) the interest rate; (2) the commitment fees; and (3) fees for undrawn commitments.  All three need to be considered as costs of any financing facility.
    • The most important fact in this case is the view that co‐investors benefited directly from the use of the bridge facility.   This fact pattern wouldn’t be applicable in most situations where, for example, a subscription line of credit is used to carry only a fund’s portion of an investment.
    • Without clarity on who benefitted for the credit facility, the safest approach would have been for ECP to either (1) seek LPAC approval to allocate commitment costs to Fund III; or 2) for the management company to absorb the costs.