This little known private-equity firm booked a 79-fold return

The private-equity firm recently sold the shares it received as part of the August sale of its majority stake in oil-and-gas producer CrownRock, notching what is perhaps one of the buyout industry’s biggest scores.

Energy-focused Lime Rock grossed 79 times the $96.5 million it had invested in Midland, Texas-based CrownRock since forming the oil patch operator some 17 years ago, according to fund investors and people familiar with the matter. The return includes dividends representing roughly 15 times Lime Rock’s outlay that were paid from CrownRock’s cash flow over the life of its investment, the people said.

“It’s the highest return I’ve ever seen, certainly in the natural-resources space but also in private equity—a 79-times gross return, cash on cash, during the entire holding period," private markets investor Greg Jansen said. He spent more than two decades with asset manager Commonfund Capital, now called CF Private Equity, ultimately leading investments across strategies such as natural resources, private equity and venture capital before retiring in 2016.

Lime Rock held its CrownRock investment far longer than the typical five- to eight-year period common among private-equity firms. As a result, the company’s development correlates with the evolution of the shale industry itself, benefiting from improvements in oil-extraction technologies early on and energy buyers’ increased focus on cash flow-generating oil fields at a later stage.

CrownRock was acquired by Warren Buffett-backed Occidental Petroleum in a $12.4 billion deal that included cash, stock and the assumption of CrownRock debt.

The deal with Occidental followed a number of mergers among large energy companies and acquisitions of other private equity-backed oil patch assets in recent years, particularly across the Permian Basin in Texas and New Mexico, as U.S. industry consolidation accelerated. The total value of mergers and acquisitions among U.S. oil-and-gas producers reached a record of $192.24 billion last year, more than three times the $58.57 billion total in 2022, according to industry researcher Enverus. This year through September saw deals totaling $94.4 billion, Enverus said.

Before the sale, CrownRock survived deal frenzies as well as oil-price downturns that tested Lime Rock’s resolve to hold on to the company, said Jonathan Farber, a Lime Rock co-founder and managing director.

“There have been many opportunities over the 17-year holding period of CrownRock to sell the business. There’s been significant pressure coming from various parties for us to sell," he said. “An understanding of the ultimate value of the asset and confidence in the management team gave us the conviction to hold the investment far longer than most people would."

Jansen also benefited from Lime Rock’s patience, as he participated in a $1.9 billion continuation fund that the firm raised about six years ago to extend its ownership of CrownRock while letting earlier investors cash out. That fund returned 3.8 times invested capital for Jansen and other new investors, before expenses.

The long-term approach meant CrownRock could be patient while oil producers were experimenting with various hydraulic-fracturing, or fracking, techniques, said J. McLane, chief investment officer at the Lime Rock Partners strategy, which invested in CrownRock. For example, CrownRock drilled its first horizontal well in 2015, years after directional drilling had become widespread in the U.S. That helped the company avoid the issues of interference with other wells and pressure drops in unextracted crude that plagued early adopters of the method, McLane said.

“We waited long enough to understand what the optimum drilling strategy was going to be in terms of well design," he said.

Lime Rock and CrownQuest Operating, an oil-and-gas investment firm founded by Texas oilman and future billionaireTim Dunn and his longtime business partner Bobby Floyd, formed CrownRock as a partnership in 2007. Lime Rock owned a roughly 57% stake in the business, Farber said.

CrownQuest managers, employees and others connected to the firm owned the remaining 43% of CrownRock, which operated on 94,000 acres in the Midland Basin of West Texas, part of the broader, oil-rich Permian.

As CrownRock’s profits rose, a debate began brewing about the right time to sell, McLane said. Those discussions intensified in 2012, when the firm was looking at a fivefold return.

“The pressure started mounting inside Lime Rock" by the next year, McLane said of the internal debate. He said the discussion centered on questions such as: “Why are we holding a 7x, 8x [return] investment in the portfolio? Why are we not even talking about whether we should be selling this thing?"

A crucial moment came when Lime Rock’s investment team went through a three-hour, 50-page presentation in 2013 that resulted in an “eerily accurate" forecast of the returns the company would generate if it followed its drilling plans, Farber said. That convinced Lime Rock’s managers to hold on to the investment, he said.

The firm invested in CrownRock through its Lime Rock Partners IV fund, which wrapped up in 2006 with $750 million. In 2018, Lime Rock raised another vehicle to buy that fund’s assets while giving its investors the option to cash out or roll over their stakes into the new fund. Private-market investor HarbourVest Partners led a group of new and existing backers that committed a total of $741 million in fresh capital to the new, $1.9 billion continuation fund.

Meanwhile, managers of publicly traded energy companies had largely abandoned a growth-at-any-cost mentality and retreated from acquisitions of undeveloped assets that weren’t generating adequate cash flow. CrownRock responded by doubling its daily output to the equivalent of 140,000 barrels of oil in mid-2022 from the end of 2019. It was producing nearly 160,000 barrels a day by the time Occidental bought it.

Fast consolidation in the U.S. oil-and-gas sector more recently helped Lime Rock conclude earlier this year that the time to sell CrownRock had finally arrived. The need to return capital to fund investors, especially the ones who had never “taken a nickel out" of the business in 17 years, was another factor, McLane said.

“We have an obligation to these investors to give them liquidity within the time frame that we communicated to them," McLane said of the firm’s thinking. “If we don’t do it early enough, when the market is pretty good, we could find ourselves with our hands tied when the market is not good."

Write to Luis Garcia at luis.garcia@wsj.com