The first-half 2011 Weidner Advisors Private Capital Energy Index reveals an industry expansion following a two-year contraction. This expansion has come as the pace of asset transfers from privately funded companies to publicly funded ones has slowed, and as private fund managers have refilled their coffers with several significant reports of successful fund-raising.

Capital availability. The capital available for investment among index participants recovered to $17.4 billion at June 30, a level last seen in 2006, but still 43% below the peak reached in 2008 on the eve of the financial crisis. This increase stems directly from increased fund-raising, although the effect of those funds has been tempered by an increased pace of investment.

Funding. Several survey participants noted success in closing new funds during the first half, while others reported actively seeking new fund commitments during the second half. Participants reported an aggregate of $9.8 billion in new funds raised, a 245% increase over the full-year 2010 fund-raising activity. Furthermore, if participants with new funds in the market prove successful during the second half, this increase may exceed 300%, as indeed it must to keep the expansion alive.

Investments. New investment commitments increased at a 45% rate during the first half, reaching a level of 71, or 142 per annum, significantly outpacing the 2010 rate of 98 for the entire year. These new commitments increased at a 51% annualized rate in absolute dollar terms, reaching $3.4 billion for the first half versus $4.5 billion for all of 2010. Average deal size remained static, however, at $46 - to $47 million per commitment over both time periods.

New investment amounts in existing transactions increased at a 66% clip, reaching $2.9 billion for the six months compared to $3.5 billion for the entire previous year. However, these investments occurred in larger increments, as the pace of investments went sideways, at an annual rate of 330 to 340.

The trend likely reflects increased drilling and completion costs as capital-intensive unconventional plays soak up a growing supply of private capital.

Monetizations. Investment exits finally broke their explosive 2010 uptrend, dropping by 20% to a rate of 53 during first-half 2011 compared to the previous year record of 125. The absolute dollar amount and average size of monetizations also declined, with individual transactions falling in size by 15% to $36 million apiece from $43 million, resulting in an overall 29% decline in the gross monetization amount.

From a cyclical perspective, these results do not surprise, insofar as the previous year monetization peak coincided with a fund-raising low point, while now those trends have reversed. However, the current ebullient public-equity market for master limited partnership and trust vehicles may well reverse this trend during second-half 2011. Judging by public demand for yield and commodity ownership, the total dollar amount of monetizations may only have taken a breather during the first six months. Year-end survey results may quantify this unfolding trend, which could then underpin additional fund-raising activity in 2012.

Preferred business plans. The first-half survey found little change in preferred business plans over the prior period, once again favoring upstream and midstream private-equity issues. If anything, there is a trend toward even more land aggregation and exploitation plans, as evidenced by increased investment numbers and sizes.

International investing. The amount of international investing activity declined for the first time in six years, as U.S. unconventional reserve development continued to absorb relatively more capital. However, the average size doubled for international investments during the first half, leaving the absolute dollar amount largely unchanged. One firm reported its first international investment, and at nearly three times the average deal size, though the circumstances were purely opportunistic and not emblematic of any discernable trend.

Conclusion. While the industry is finally expanding again, the public markets' voracious appetite for yield and commodity exposure may apply downward pressure on private-capital availability unless fund-raising activity remains sufficiently strong. Those firms reporting second-half fund raising efforts must aim high to check the erosion of private capital through public market exits during the second half.

—William E. Weidner, president, Weidner Advisors