The first-half 2013 Weidner Advisors Private Capital Energy Index reveals a marked slowdown in investment and fundraising activity compared to the brisk pace reported by survey participants at the end of 2012.

In fact, participants raised less money on an annualized basis during the first half of this year than in any previous period surveyed. With less money raised, there has also been less investing. However, the size of new investment commitments has increased significantly.

Capital availability. The modest 3% increase in initial capital available for investment stems largely from two firms that reported new fundraising, offset by a modest pace of new commitments. The net effect between these two variables is reflected in an overall 5% decline in capital available for investment. This is the first such decline since 2010.

Funding. Three survey participants noted raising an aggregate $1.8 billion in new funds during the first half, or less than one-third the 2012 fundraising pace and the lowest rate ever recorded by the survey. Continuation of this low ebb in fundraising could result in even less funds raised this year than during the previous back-to-back annual lows of 2009 and 2010.

Investments. New investment commitments fell by half on an annualized basis to only 31, a dramatic slowdown from the 124 commitments recorded in the full year of 2012. The dollar amount of new commitments also fell, from $9 billion in 2012 to only $3.4 billion during the first half of this year. However, the average new commitment size rose by more than 50% to a record of $111 million per deal. So, while survey participants committed less capital during the first half, new commitments were made in significantly larger amounts.

As capital-intensity and scale within the industry grow, this is a trend that may continue among survey participants that are forced to concentrate on fewer portfolio companies with larger capital requirements. Several survey participants reported having made no new investments since the previous reporting period, and one was unable to report due to restrictions during a period of fundraising.

Monetizations. Unlike new investments, monetizations continued at a brisk pace during the first half, up 23% from last year. However, the average size of each monetization event fell by 45% to only $26 million per deal, down from $48 million last year. This may demonstrate the acceleration of a trend that first appeared last year, when the survey found that more portfolio company exits are occurring in a series of smaller tranches instead of as single, corporate equity sale transactions.

The trend may reflect changing exit dynamics for the industry. In particular, many firms have reported difficulty realizing any exit value from undrilled reserves. Furthermore, the current natural gas price environment, while stronger than in 2012, still lags in comparison to the prevailing natural gas prices in effect when many existing portfolio company investments originated in 2007–2008. As mentioned in our last survey, gas-concentrated assets have simply proven less desirable to sell. Accordingly, monetizations have grown piecemeal.

Preferred business plans. Respondents halfway through 2013 continue reporting interest in midstream as well as upstream business plans. Although last year there was a more noticeable bias toward midstream investments, the preferred business plans in this most recent survey appear to be more balanced.

International investing. International investments moderated slightly from the 2012 year-end survey, but fell significantly in size from an average of $27 million per deal last year to only $14 million in this survey. Not only was the average size down, but also reported international investing was limited to Canada, and in one instance, to the UK

Conclusion. The survey illustrates a plateau in capital available for investment and a reduction in overall activity. Participants invested less during the first half of 2013, and fundraising also slowed. However, the average new commitment size increased significantly, implying that survey participants have more unfunded commitments on the books. The last survey predicted that larger capital investments and an apparent bottoming of the natural gas price cycle would lead to larger exit transactions, but with the slower pace of activity, it may be some time before that occurs.

—William E. Weidner, managing director, Weidner Advisors