Weidner Advisors Private Capital Index

The second half of 2011 saw an extended expansion of private capital activity that was observed during the first half of the year, according to the semiannual Weidner Advisors Private Capital Energy Index. This places real pressure on the need for new fund raising, as available funds have remained unchanged, while new commitments have increased significantly. What’s more, average deal sizes have doubled. More money will be needed to replenish private capital stores.

Capital availability. The capital available for investment among index participants fell during the second half of the year, from $17.4 billion at June 30 back to $15 billion, the same level observed at year-end 2010. This flat year-over-year amount of funds available contrasts with the doubling of new commitments, from only $4.5 billion in 2010 to $9.2 billion in 2011.

Funding. Only two survey participants noted closing funds during the second half of 2011, increasing funds raised on the year by 8%. Prodigious first-half fund raising drove the 165% increase in 2011 fund raising over the prior two years lull. However, the significant increase in new commitments—and commitment sizes—illustrates the pent-up need for more capital to be raised.

At press time, 11 funds are reportedly in the market seeking to raise $28 billion, which, if it occurs, will more than double the highest amount reported to date, when $13.6 billion was raised in 2008.

Investments. New investment commitments increased at a 40% rate, reaching the 140 level, on track with the pace established during the first half of the year. However, these new commitments more than doubled in size in absolute dollar terms, reaching $9.2 billion, versus $4.5 billion for 2010. This stems from the 42% increase in average deal size, along with a 40% increase in commitments. New investments in existing transactions remained essentially unchanged, at 349, but more than doubled in dollar terms as the average deal size doubled.

While the survey does not explore the underlying reason for the growing investment size, the trend likely reflects increased drilling and completion costs as capital-intensive unconventional plays soak up more private capital, and increasing enterprise values as higher oil prices boost capital required for M&A.

Monetizations. Investment exits increased during second-half 2011, extending the 2010 uptrend slightly, while remaining unchanged from 2010 in absolute dollar terms, as the average transaction size fell 14% from $43 million to $37 million.

These results appear unsurprising. The 2010 snap-back in activity would have been difficult to build upon significantly, since 2011 lacked the capital gains tax fear that partially fueled 2010 monetizations, and since 2011 didn’t have a weak prior year to make up for. Moreover, the long decline in natural gas prices to surprisingly low levels during 2011 placed a further damper on what might otherwise have been a more propitious time for monetizing portfolio companies. This dampening effect may continue in 2012, but it may be offset by renewed fears of changes to capital gains tax law.

Preferred business plans. Little change in preferred business plans over the prior period was seen, once again favoring unconventional upstream and related midstream private-equity issues, contributing to the increased investment sizes.

International investing. The amount of international investing activity declined in number again in 2011, but increased in absolute size due to a handful of larger investments. The 35% drop in number of international investments, from 63 down to 40, was offset by the increase in absolute dollar size, from $0.9 billion to $1.9 billion, with a three-fold increase in average deal size. The overall decline in international investments appears to illustrate an overall waning of interest among survey participants, as domestic capital needs have gained greater favor.

Conclusion. The survey uncovers an underlying need for more capital, as investments and investment sizes grow, while the reported available capital remains unchanged. Of course, this survey does not reflect significant new sources of capital from new entrants to the space. Nonetheless, reports of record-breaking raises are consistent with the trend identified in the survey. First-half 2012 survey results may well show a large increase in private capital available for investment to meet growing capital needs.
—William E. Weidner, managing
director, Weidner Advisors