According to a report today in the Wall Street Journal, Energy Future Holdings, formerly known as TXU, is in final preparations for bankruptcy protection, having been unable to restructure its $41.6 billion debt. If the report is confirmed, this will be the largest private equity failure ever. Energy Future Holdings was acquired for $45 billion in 2007 by private equity firms KKR & Co. L.P. (NYSE:KKR), TPG Capital and Goldman Sachs Group Inc (NYSE:GS).
Energy Future Holdings: Indictment of private equity model or just bad timing?
One of the key questions raised by the bankruptcy of Energy Future Holdings, and the loss of billions of dollars of PE investors funds, is what does this say about the risks taken by PE firms. It can certainly be argued that a failure of this size should never have happened, and the PE firms involved obviously did not do sufficient due diligence.
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On the other hand, it can also be reasonably argued that the collapse of Energy Future Holdings is basically a failure of energy pricing predictions not of the overall PE model. The PE firms involved back in 2007 were highly confident that U.S. natural gas prices would remain stable or increase like they had for decades — so EFH’s coal-fired power would be cheaper than natural gas-generated power. However, the new technology of fracking emerged just at this time, and this completely changed the natural gas markets, with low prices almost certainly here to stay for some period of years.
Who’s to blame?
The researchers and executives of the PE firms who signed off on the TXU deal back in 2007 certainly should shoulder a fair share of the blame for the expensive debacle — you didn’t have to be a genius to see the that there was at least a chance that fracking could have a major impact on the industry in a relatively short period of time. That said, you can’t lay all the blame on the PE dealmakers. In the go-go days of the early 21st century before the financial crisis, mega-deals ruled the day in Wall Street, and utilities were generally considered a “safe” sector with the possibility for above-average returns.