Presentation on theme: "Capital Markets Update: Hedge Funds as a Financing Source & Impact of the Credit Crunch January 2008 IPAA Private Capital Conference Keith Behrens, Managing."— Presentation transcript:
Capital Markets Update: Hedge Funds as a Financing Source & Impact of the Credit Crunch January 2008 IPAA Private Capital Conference Keith Behrens, Managing Director
Capital Markets Update 222 Twelve Bankers with over 100 Years Combined Wall Street investment banking experience Private equity & debt financings – Raised $2.4 billion through 68 transactions M&A strategic advisory services – Advised on 18 transactions valued at $1.9 billion Energy Capital Solutions LP (“ECS”) is an investment banking boutique, with offices in Dallas and Houston, focused on private capital raising and M&A advisory assignments for mid-size public and private energy companies. Energy Capital Solutions 2007 Transactions Credit Facility $50,000,000 Exclusive Placement Agent Umbria Natural Resources, LLC Senior Secured Credit Facility $35,000,000 Exclusive Placement Agent Senior Secured Credit Facility $18,000,000 Exclusive Placement Agent Senior Revolving Credit Facility Provided By $18,000,000 Financial Advisor Senior Secured Credit Facility $54,000,000 Exclusive Placement Agent Senior Secured Credit Facility $28,000,000 Exclusive Placement Agent $305,000,000 Exclusive Placement Agent Tranche B Senior Secured Credit Facility Exclusive Placement Agent $120,000,000 Tranche A Senior Secured Credit Facility Exclusive Placement Agent Common Stock $7,710,006 Private Placement $54,000,000 Exclusive Placement Agent Series E Convertible Preferred $30,000,000 Exclusive Placement Agent Private Placement $100,000,000 Exclusive Placement Agent Sale of East Texas Assets to Devon Energy Financial Advisor Has acquired Forest Oil Corp. Alaska Operations $460,000,000 Financial Advisor Has acquired the US operations from Santos USA Corp. $69,000,000 Financial Advisor Has acquired Vaughn Guidance Systems $7,000,000 Financial Advisor Exclusive Placement Agent Private Placement $15,000,000 Alpine Drilling Program, L.P. Mezzanine Debt Exclusive Placement Agent $3,750,000 Senior Secured Term Loan and Equipment Line Exclusive Placement Agent 23,000,000 Senior Secured Credit Facility Exclusive Placement Agent 60,000,000 Common Stock Exclusive Placement Agent 65,500,000 Certified Technical Services, L.P. Has been recapitalized by SCF Partners and B-29 Investments, L.P. Financial Advisor Has been acquired by Universal Property Development and Acquisition Corporation Financial Advisor Overview of Energy Capital Solutions
Capital Markets Update 3 Current Private Capital Environment Have more capital under management than ever; little impact from the credit crunch Traditional Energy Private Equity Funds Traditional Energy Mezzanine Lending Hedge Funds Have Entered the Mezzanine Lending Market Mezzanine Lending Universe has Changed Public Companies and Trading PIPEs Mezzanine / Senior Financing Competing with Traditional Private Equity Hedge Fund Capital Impact
Capital Markets Update 4 The Energy sector represents an area where hedge funds have been active investors over the past several years. Hedge funds have become more selective in their investments in the energy space. –In upstream investments, focus on development drilling vs. exploration funding. –In PIPE investments, focus on larger cap stories vs. investing in small cap companies. Investment terms tightened over the course of 2007. In the following pages, I discuss the importance hedge funds have become as a source of capital for the energy sector, so any pullback by hedge funds could have a material impact in terms of the amount of capital available for the energy sector. Impact of the Credit Crunch on Hedge Fund Energy Investing Market dynamics as relates to the credit crunch have impacted numerous funding sources including Hedge Funds, who experienced mixed results in 2007.
Capital Markets Update 5 Institutional Private Equity Sources Selected InvestorComments ArcLight Capital PartnersCurrent fund size - $2.5B. Focused on project equity. Ares ManagementCurrent fund size - $4.0B. Interested in energy investments. Avista CapitalCurrent fund size - $2.0B. Spun out of Credit Suisse. CCMPCurrent fund size - $4.0B. Spun out of JP Morgan Chase. EnCap InvestmentsCurrent fund size - $2.5B. Energy Spectrum CapitalInterested in midstream, services and E&P drilling investments. EvercoreInterested in energy investments. First ReserveCurrent fund size - $7.8B. Interested in energy manufacturing and services, energy infrastructure, and energy reserves investments. Goldman SachsMainly a mezzanine player but have made private equity investments. Greenhill CapitalCurrent fund size - $1.3B.
Capital Markets Update 6 Institutional Private Equity Sources Selected InvestorComments HM CapitalLooking at midstream and upstream investment opportunities. Kayne AndersonCurrent fund size - $950MM. Lime RockCurrent fund size - $750MM. Metalmark CapitalCurrent fund size - $5.0B. Spun out of Morgan Stanley. Natural Gas PartnersCurrent fund size - $2.5B. Post Oak Energy CapitalPrivate equity energy investing arm for energy of Magnetar, a $6.0B hedge fund. Quantum Energy PartnersCurrent fund size - $2.0B. Riverstone HoldingsCurrent fund size - $6.0B. TouradjiCurrent fund size - $2.0B. Focused on energy. Warburg PincusCurrent fund size - $8.0B. Westport Energy PartnersFunded by Fortress. Focused on project equity investments. Yorktown Energy PartnersCurrent fund size - $1.5B.
Capital Markets Update 7 American Capital Strategies Black Rock Energy Capital BNP Paribas CIT Business Credit Fortis Bank GasRock Capital GE Capital Goldman Sachs (E&P Capital) Guggenheim Laminar Mezzanine Lenders Lenders MacQuarie Energy Capital NGP Capital Resources Petrobridge Prospect Energy Royal Bank of Scotland Silver Point Trust Company of the West Union Bank of California Wells Fargo WestLB
Capital Markets Update 8 Hedge Fund Overview Hedge funds are unregulated private investment funds that seek to profit from non-traditional opportunities using alternative investment strategies. Hedge funds have a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage. This flexibility, which includes the use of hedging strategies, enables hedge funds the ability to best manage investment risks. Hedge fund investors include endowments, pension funds, mutual funds and wealthy individuals. While the number and size of hedge funds are small relative to mutual funds, their growth reflects the importance of this alternative investment category for institutional investors and wealthy individual investors. Typical Characteristics of Hedge Funds
Capital Markets Update 9 There are an estimated 9,000+ hedge funds that have approximately $2.1 trillion under management worldwide and are growing at about 30% per year. Dallas / Fort Worth is sixth among global cities with eight $1.0 billion funds accounting for $29.7 billion. Source: HedgeFund Intelligence Hedge Fund Overview
Capital Markets Update 10 PIPEs Overview Private Investments in Public Equity, or “PIPEs”, transactions have increasingly become a popular investment vehicle for hedge funds and a preferred financing strategy for small and mid cap companies over the last five years. PIPE transactions are privately issued equity or equity-linked securities that are sold to accredited investors by public companies. PIPE investors have traditionally included hedge funds, however they have broadened to include mutual funds, private equity funds, venture capital funds, buyout funds and wealthy individuals. PIPE issuers range in size from small OTC Bulletin Board companies to large-cap NYSE-traded companies. The PIPE investment structure is ideal for hedge funds because it allows them to establish substantial positions without having a big impact on the stock price. A PIPE issue to fund an acquisition is a preferred use of proceeds for hedge funds. In 2006, approximately 1,872 PIPE transactions were completed for total proceeds raised of approximately $38.7 billion and 1,940 PIPE transactions were completed in 2007 for total proceeds raised of approximately $50.5 billion.
Capital Markets Update 11 Over the past five years, public companies have raised $188.4 billion in 10,712 transactions (representing an average of $23.0 billion annually in 1,462 transactions). PIPEs Overview
Capital Markets Update 12 Since 2004 energy related companies have raised the most capital from investors in PIPE transactions relative to other sectors. PIPEs Overview Source: Private Raise Energy Resources and Related comprised 23.3% and 31.0% of total PIPE transactions completed in 2006 and 2007, respectively.
Capital Markets Update 13 The substantial increase in the number of hedge funds over the past five years has increased competition for quality deal flow. Hedge funds find it necessary to consider alternative opportunities to deploy substantial amount of capital that they have under management. Numerous hedge funds are venturing outside of the traditional investments in public companies and looking towards more of what has traditionally been defined as private equity investments in private illiquid companies and other private equity funds. –Hedge fund managers have participated in private equity transactions in the past and are increasingly doing so as competition for public transactions increases. –It is important to note that most multi-strategy hedge funds typically have 5-10% of their total capital under management set aside to invest opportunistically. Hedge Funds Focus on Private Equity
Capital Markets Update 14 Hedge funds offer issuing companies quick execution and delivery of capital in a timely manner. Hedge funds typically do not require control positions in companies. Hedge funds are interested in private equity transactions for a couple of reasons: –They have substantial discretionary capital that needs to be deployed and they need to find new investment arenas in which they can generate returns. –As many traditional hedge fund strategies have become crowded in the last few years, managers are seeking to invest in less competitive areas and in areas where they can generate returns. –Funding an acquisition is a preferred use of proceeds for hedge funds looking to invest in a private equity offering. Source: Hedge Funds World 12/15/05 Hedge Funds Focus on Private Equity
Capital Markets Update 15 The following is a list of selected hedge funds that consider, or have previously made, investments in private energy companies: Ableco Finance (2) Advisory Research (1) Angelo Gordon & Co. (1) (2) Atalaya Capital (2) Blue Wave (1) Carlson Capital (1) (2) Centaurus (1) Cerberus (1) D.B. Zwirn (1) (2) Elliott Advisors (1) Eschelon (2) Hedge Funds Focus on Private Capital Farallon (1) (2) Gas Rock Capital (2) GLG (1) (2) GSO Capital (1)(2) Guggenheim (2) HBK (1) (2) Laminar Direct Capital (DE Shaw) (1) (2) Laurus Funds (2) Och Ziff (1) Petrobridge Investment Management (2) Placeholder (1) Polygon (1) Post Oak Capital (2) Promethean Capital (2) Ramius Capital (1) Reservoir Capital (1) SAC Capital (1) Sandelman (1) (2) Silver Point Capital (1) (2) Third Point (1) Touradji (1) (1)Focuses on Equity (2)Focuses on Mezzanine Debt
Capital Markets Update 16 Pacific Energy – Case Study Transaction Summary March 9, 2007 – ECS was engaged by Pacific Energy Resources Ltd. (“Pacific Energy” or the “Company”) as its exclusive financial advisor to advise the Company on the acquisition of Forest Alaska Operating, LLC (“FAO LLC”) and Forest’s Other Alaskan Assets (“FOC Assets”) (combined “Forest Alaska”) and raise the financing necessary to complete the acquisition. May 15-22, 2007 – Pacific Energy and Forest Oil executed the PSA on May 22, 2007 for an anticipated total consideration of $460.0 million. Summary Acquisition Price – $460.0 million. Transaction Structure – Total consideration consisting of $400.0 million in cash, 10.0 million shares of common stock in Pacific Energy valued at $25.5 million and a seven year seller note to Forest with a net present value of US$30.0 million Fairness Opinion – ECS provided its opinion (the “Fairness Opinion”) to the Board of Directors of the Company as to the fairness of the consideration to be paid by the stockholders of Pacific Energy in connection with the transaction from a financial point of view. Transaction Highlights Strong Financial Sponsorship – The Company’s existing lenders, Silver Point Finance, LLC and Goldman Sachs & Co., were approached by ECS and Pacific Energy to provide a $425.0 million bridge loan to finance the transaction and provide additional working capital for development. Quick Execution – Silver Point and Goldman Sachs enabled the Company to submit an LOI that proposed an expeditious close of the transaction which strategically positioned Pacific Energy to be chosen as the winning bidder.
Capital Markets Update 17 Debt Financing – On December 28, 2005, ECS raised $13 million of capital in the form a $5 million convertible note and an $8 million secured term note to fund Pacific Energy’s acquisition of a working interest in Shell’s Pacific Creek, Wyoming project. Debt Financing – On June 29, 2006, ECS raised $21.5 million of capital in the form of a secured term note to fund Pacific Energy’s acquisition of Carneros Energy, Inc. for a total consideration of $26.2 million. Equity Financing – On November 29, 2006, ECS raised $85 million of common equity and obtained a $100 million credit facility to fund Pacific Energy’s acquisition of AERA’s (50/50 JV between ExxonMobil and Shell) offshore Beta Unit. Pacific Energy Resources Case Studies
Capital Markets Update 18 Transaction Summary January 10, 2007 – ECS was engaged by Barnes Barnett, LLC to raise capital to develop the Company’s acreage in the Barnett Shale. March 30, 2007 – The transaction closed with a $100.0 million Senior Credit Facility. Summary Terms Transaction Size – $100.0 million. Transaction Highlights Quick Execution – The Company received the capital commitment from the investor less than three months after ECS was engaged. Expanded Transaction – Barnes Barnett was initially seeking capital to develop 10,000 acres. The investor funded most of the Company's existing 10,000 acres, an additional 10,000 acres and the drilling program for all 20,000 acres. Barnes Barnett Case Study
www.energycapitalsolutions.com Russell Weinberg Managing Director Ron Montalbano Managing Director Brad Nelson Managing Director Keith Behrens Managing Director Scott Trulock Director Chris Czuppon Vice President Jonathan Shepko Vice President Josh Wolf Vice President Brandon Neff Senior Associate Michael Chiste Associate Benjamin Baldwin Associate Joseph Allio Analyst