The second-half 2010 Rodman Private Capital Energy Index shows the continuation of a contracting capital base among established oil and gas investors that began at the end of 2008 and has continued, unabated. Also ongoing are the transfer of asset ownership from privately funded companies to publicly funded ones, and apparent headwinds as private-capital fund managers within the index struggle to raise new funds.

Capital availability. The capital available for investment has fallen by more than half since its peak in the second half of 2008, from $30.5 billion then to only $15 billion at year-end 2010. This is the direct result of a disproportionately high amount of monetizations, which have not been matched by a commensurate amount of new fundraising.

Funding. This lack of funding further explains the decline in capital availability, as private capital purveyors have simply not replenished their investment coffers. While some survey respondents report active fundraising under way at year end, the aggregate of these efforts still falls short of the $4-billion level achieved in 2009 and 2010, possibly indicating a continued trend into 2011.

Investments. New investment commitments declined by nearly 50% from the prior year, falling to $3.5 billion in 2010 from $6.5 billion in 2009, and down nearly 75% from the decade high of $13.7 billion reached in 2008. The actual number of commitments showed an increase, however, from 87 in 2009 to 98 in 2010, with 60% of new commitments occurring during the second half of the year. This second-half uptick may or may not indicate an increase in investment activity. Actual amounts committed were essentially unchanged from the first half to the second; however, the second half increase in the actual number of commitments may portend continued increases into 2011, ultimately applying some pressure on capital available or fundings, or both.

Monetizations. Investment exits continued to dominate 2010, reaching an all-time survey high of 124 monetizations. Respondents reported a 33% decline in monetizations, from 74 in the first half of 2010 to only 50 during the second half. The value of monetizations increased, however, from $2.4 billion to $2.9 billion, as a few large, year-end transactions skewed the average deal size from only $32 million to nearly $60 million.

These results continue to illustrate a classic cycle of private-capital harvesting during a period of ebullient public-company valuations and M&A activity, particularly as unconventional plays are sold by private owners to public ones. This cycle has been driven by the public-capital markets’ embrace of those public companies aggressively acquiring growth, and also by multinational and integrated companies recycling dollars.

Finally, it has also been driven by the arbitrage between private-market valuations, on the one hand, and public-market ones, on the other, where a 50% to 100% difference in value may exist.

Preferred business plans. 2010 saw some increased appetite for risk in those business plans funded. Common themes included experienced management teams aggregating midstream assets; land-aggregation business plans in unconventional-play areas with expectations of rising land values; the funding of joint ventures or companies with lower-risk acquire-and-exploit attributes; and the aggregation of exploitable, proven oil reserves. Venture and growth-stage investments remained generally out of favor, unless compelled by the sometimes large arbitrage between private-asset values and public-market values.

International investing. The index revealed a decline in total dollar commitments to international investments, although the number of such investments increased. At only $900 million, international investments fell from a high of $4.6 billion in 2008.

Conclusion. The index reflects an experienced group of private-capital providers managing their portfolios to take advantage of higher-value exit opportunities, while positioning themselves for further fund-raising at the appropriate time. The private-capital business has already contracted back to its pre-2006 size range, which, given today’s higher-cost environment, is a significant reduction.

—Bill Weidner, managing director, The Rodman Energy Group.