David McNew / Stringer / Getty Images
- An executive of an oil-and-gas company that Warburg Pincus just backed is the brother of one of the private-equity firm's energy-focused managing directors, Business Insider has learned.
- The unusual situation, a potential conflict of interest, meant that Warburg managing director David Habachy could not be involved in decision-making on the deal, according to a person familiar with the matter.
Private equity firm Warburg Pincus had to work around an unusual complication when pursuing a $1 billion oil-and-gas deal - one of the private-equity firm's managing directors is the brother of a top executive at the company Warburg wanted to back.
To avoid potential conflicts of interest and abide by firm policies given the uncommon circumstances, Warburg executives consulted with legal and compliance staff and then decided to remove Houston-based David Habachy, a member of the firm's energy team, from all decision-making on its recent deal, a person familiar with the matter told Business Insider.
That meant he was not involved with steps like management evaluation and negotiating terms with the company where his brother is chief operating officer.
Warburg last week said it would provide $1 billion alongside smaller private equity firm Kayne Anderson Capital Advisors to WildFire Energy I LLC, a company being launched by two former executives of an oil explorer bought by Chesapeake Energy five months ago.
Private equity firms have been seeking steady cash flow from companies that are already producing a stream of oil and gas, as opposed to those that are drilling to find it.
WildFire CEO Anthony Bahr and COO Steve Habachy spent the past several months speaking with private equity firms to negotiate the deal. The relationship between the WildFire COO and Warburg's David Habachy has not yet been reported.
It is notable becuase private equity is an industry where reputation is critical and firms generally shy away from doing any deals that would even give the perception of a conflict in investment decision-making.
"The default would be to avoid that type of deal flow," said Gregory Brown, a finance professor at University of North Carolina who studies private equity.
"It certainly raises the bar on the type of diligence you do. You would want to be extra careful with (communicating the deal to investors) to make sure they are fully aware of the circumstances."
Warburg, which has more than $65 billion in assets under management, has firmwide policies saying that neither the firm nor any individual can put their interests in front of the funds, and that fiduciary responsibilities to investors are paramount, the person familiar with the matter said.
The brothers' relationship created early familiarity that provided "nice momentum," said the person familiar with the matter. Warburg then did the same due diligence as it does on any transaction, the person said, reviewing WildFire's track record of investments, the technical expertise of their management team, and checking references.
After seeking guidance from legal and compliance about the family tie, Warburg executives took David Habachy off of the deal, according to the person familiar with the matter, who declined to speak publicly.
Warburg made a "conscious decision," the person said, noting that David Habachy did not participate in management evaluation, negotiating the terms, and final decision-making. Nor will he help manage the company going forward, while at least two of his Warburg colleagues will sit on the board of directors of WildFire, the person said.
Neither of the brothers responded to a request for comment.
WildFire will focus on purchasing shale acreage that is already producing oil and gas, a business that has traditionally produced steady stream of cash flows and is attractive to private equity because of its predictable nature.
"If [a company is] producing already, you don't have the risk of a dry hole," said Mark Solomon, a Texas lawyer who has represented private equity and energy firms. "You already know what the production has been for some time. And based on geology, you can make good assumptions for how long it will produce at that level."
Oil prices, however, tend to fluctuate and are based on many factors, like global demand and trade talks. This has meant that investors in oil and gas tend to be private-equity firms with deep expertise in that sector, so that they understand the ebbs and flows and know how to manage the investment.
Before launching WildFire, its CEO and COO were executives at Wildhorse Resource Development Corp, which oversaw drilling throughout Eagle Ford in Texas. Chesapeake bought the company for almost $4 billion in February. Since then, one of Wildhorse's co-founders, Jay Graham, has started an energy startup, Spur Energy Partners, with financing from private-equity firm KKR & Co. The energy firm will develop oil and gas acreage in the Permian Basin.
Bahr and Habachy, who parted ways with Graham, were pursued by a number of private equity firms.
Solomon, the lawyer, said private equity deals where there is a sibling on both sides didn't happen often, but that there was nothing wrong with that sort of situation so long as it was disclosed and there was no preferential treatment in the transaction.
David Habachy, the managing director at Warburg, previously worked at Kayne Anderson, the private-equity firm that is providing financing alongside Warburg for WildFire. He worked there between 2008 and 2017 and left as a managing director, according to his LinkedIn profile. Steve Habachy, the chief operating officer of WildFire, previously worked as an executive at WildHorse Resource Development. Both went to college and graduate school at the University of Texas at Austin.
Terms of the financing arrangement were not disclosed.
It was not the first time a private-equity firm has managed a possible conflict of interest stemming from a relationship between brothers. In 2017, Blackstone told The Wall Street Journal that its then chief operating officer, Tony James, was not involved in decisions related to a company Blackstone co-owned purchasing a software company that his brother's firm had been invested in. His brother's firm also invested personal wealth for James.