Today, the oil and gas business has matured and a different skill set is required from private-capital providers. Ken Hersh, chief executive officer of NGP Energy Capital Management, says capital sources have to know the difference between what is good and what sounds good, who has a track record and who doesn't.

"There is a new challenge for private-capital providers," he told an audience at the IPAA Private Capital conference in Houston recently. "They have to look at potential management teams and figure out, 'What will be their edge for the next five years?'"

Looking back on the past 20 years in private capital, he said there was no playbook when this funding was getting started. "In a way, we've been making it up as we go and only in hindsight is its evolution obvious."

As the energy private-capital business evolved from the 1980s, the process was largely fueled by determination and ingenuity. Years ago, major oil companies making asset moves in the Lower 48, and promoters being paid to drill wells, actually marked the beginning of private capital's presence in energy financings, he said. But there was still no concrete plan.

"We were just calling people and wandering into their offices, trying to make something happen. From these efforts, the small group of us that was doing this cobbled together what would eventually become the private-capital business we know today."

By the mid 1990s, the natural-gas bubble ended as supply and demand edged closer, he said. The oil and gas business entered "phase two" of its evolution, marked by a heavy focus on operations and exploitation. Private-capital providers spent a lot of time educating E&P companies on how to go out on their own and teaching investors how to identify a solid investment.

"It wasn't just about a low cost structure anymore, and this demanded a new level of expertise in private capital. The asset buyers were small companies and midsize independents; sellers were majors and large independents. The bigger the companies were, the more they tended to look at certain properties as tied-up capital. Active portfolio management became key."

In the late 1990s, when prices collapsed, oil and gas management teams realized they had to manage costs, know why they were in business, and stay in business. Hersh said this knowledge unleashed a wave of ingenuity leading to a renaissance in the oil and gas business.

"During this phase the pattern of A&D was to develop acreage, 'PUD it up' and sell it to Chesapeake or XTO. But there was no competitive edge in being a good deal guy."

The skill set was in knowing how to raise money, because "you had to feed the beast."

"If you haven't been able to make money in this business during the last few years you should be voted off the island and never come back," he quipped.

"That said, going forward, 'managing in a mature business' is my message. Keep learning because the business is always changing and capital discipline must be maintained."

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