capital markets update: hedge funds as a financing source & impact of the credit crunch january...

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

$50,000,000Exclusive Placement Agent

Umbria Natural Resources, LLC

Senior Secured Credit Facility




Senior Revolving Credit FacilityProvided By

$18,000,000Financial Advisor






Tranche B Senior Secured Credit

Facility

Exclusive Placement Agent

$120,000,000

Tranche A Senior Secured Credit

Facility


Common Stock

$7,710,006

Private Placement


Series E Convertible Preferred


Private Placement


Sale of East Texas Assets to Devon Energy

Financial Advisor

Has acquired Forest Oil Corp.

Alaska Operations


Has acquired the US operations from Santos USA Corp.


Has acquired Vaughn Guidance

Systems



Private Placement

$15,000,000

Alpine DrillingProgram, L.P.

Mezzanine Debt


$3,750,000

Senior Secured Term Loan and Equipment

Line


23,000,000



60,000,000

Common Stock


65,500,000

Certified Technical Services, L.P.

Has been recapitalized by SCF Partners and B-29

Investments, L.P.

Financial Advisor

Heartland Oil and Gas Corp.

Has been acquired by Universal Property Development and

Acquisition Corporation

Financial Advisor

Overview of Energy Capital Solutions


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


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.


5

Institutional Private Equity Sources

Selected Investor Comments

ArcLight Capital Partners Current fund size - $2.5B. Focused on project equity.

Ares Management Current fund size - $4.0B. Interested in energy investments.

Avista Capital Current fund size - $2.0B. Spun out of Credit Suisse.

CCMP Current fund size - $4.0B. Spun out of JP Morgan Chase.

EnCap Investments Current fund size - $2.5B.

Energy Spectrum Capital Interested in midstream, services and E&P drilling investments.

Evercore Interested in energy investments.

First Reserve Current fund size - $7.8B. Interested in energy manufacturing and services, energy infrastructure, and energy reserves investments.

Goldman Sachs Mainly a mezzanine player but have made private equity investments.

Greenhill Capital Current fund size - $1.3B.


6

Institutional Private Equity Sources

Selected Investor Comments

HM Capital Looking at midstream and upstream investment opportunities.

Kayne Anderson Current fund size - $950MM.

Lime Rock Current fund size - $750MM.

Metalmark Capital Current fund size - $5.0B. Spun out of Morgan Stanley.

Natural Gas Partners Current fund size - $2.5B.

Post Oak Energy Capital Private equity energy investing arm for energy of Magnetar, a $6.0B hedge fund.

Quantum Energy Partners Current fund size - $2.0B.

Riverstone Holdings Current fund size - $6.0B.

Touradji Current fund size - $2.0B. Focused on energy.

Warburg Pincus Current fund size - $8.0B.

Westport Energy Partners Funded by Fortress. Focused on project equity investments.

Yorktown Energy Partners Current fund size - $1.5B.


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


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


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

Hedge Fund Capital Under Management - Worldwide ($MM)

$10 $50 $56$156

$256$356

$456 $500$600

$900

$1,350$1,500

$2,079

$0

$500

$1,000

$1,500

$2,000

$2,500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

($ in

mill

ion

s)


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.


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

$22.5

$16.6 $18.4 $18.6 $23.1

$38.7

$50.5

1,290

1,054

1,324

1,642 1,590

1,872

1,940

0

500

1,000

1,500

2,000

2,500

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

2001 2002 2003 2004 2005 2006 2007

PIPE Activity 2001-2007 : Transactions vs. Volume

Vo

lum

e ($

in

bil

lio

ns)

Tra

nsa

ctio

ns


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.

$0.4

$0.5

$0.5

$0.6

$0.8

$1.0

$1.1

$1.3

$2.4

$2.5

$2.7

$2.7

$2.7

$4.4

$9.1

$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0

Electronics & Related

Transportation & Related

Auto/Truck & Related

Telco: Equipment

Financial Services: Investment

Financial Services: Insurance

Healthcare: Medical Facilities

Mining & Related

Banks: Savings & Loans

Metals, Minerals & Stones

Pharmaceuticals & Related

Healthcare: Medical Equipment

Biotech: Biomedical/Gene

Banks: Commercial

Energy Resources & Related

2006 PIPEs by Sector

$0.5

$0.6

$0.6

$0.7

$0.7

$0.9

$1.2

$1.5

$1.7

$1.9

$2.7

$2.8

$2.9

$3.0

$12.8

$0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 $14.0

Electronics & Related

Holding Companies

Telco: Equipment

Real Estate & Related

Healthcare: Medical Equipment

Banks: Commercial

Computers: Misc

Entertainment & Related

Media & Related

Biotech: Biomedical/Gene

Financial Services: Mortgage

Metals, Minerals & Stones

Mining & Related

Pharmaceuticals & Related

Energy Resources & Related

2007 PIPEs by Sector


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


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


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


16

Pacific Energy – Case StudyTransaction 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.

Pacific Energy Resources, Ltd.

August 2007

$460,000,000The undersigned acted as Exclusive Financial Advisor

and Placement Agent.

has acquired the Alaskan Assets of Forest Oil Corp.


July 2007

$464,000,000

has acquired the Alaskan Assets of Forest Oil Corporation

The undersigned acted as Exclusive Financial Advisor and Placement Agent

to Pacific Energy.


August 2007

$460,000,000The undersigned acted as Exclusive Financial Advisor

and Placement Agent.

has acquired the Alaskan Assets of Forest Oil Corp.


July 2007

$464,000,000

has acquired the Alaskan Assets of Forest Oil Corporation

The undersigned acted as Exclusive Financial Advisor and Placement Agent

to Pacific Energy.


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


has raised

$85,000,000 of Common Equity

and obtained a

$100,000,000Credit Facility

The undersigned acted as a Placement Agent and Financial Advisor.

PACIFIC ENERGYPACIFIC ENERGY

December 2006


June 2006

Secured Term Note with Equity

Participation Interests

$21,500,000

The undersigned acted as Placement Agent.

PACIFIC ENERGY

December 2005

The undersigned acted as Placement Agent.


Convertible Term Note

$5,000,000

Secured Term Note

$8,000,000

PACIFIC ENERGYPACIFIC ENERGY


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

Barnes Barnett, LLC

has obtained a

$100,000,000

Senior Credit Facility

The undersigned acted as a Placement Agent .

March 2007

www.energycapitalsolutions.com

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

Dallas Office: 2651 N. Harwood, Suite 410 Dallas, Texas 75201 214-219-8200 Houston Office: 1990 Post Oak Blvd., Suite 1370 Houston, Texas 77056 713-933-0380

capital markets update: hedge funds as a financing source & impact of the credit crunch january...

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