New Equity Sources for Private Energy Companies

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New Equity Sources for Private Energy Companies

Hedge Funds
January 19, 2006
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Hedge Fund Overview
Typical Characteristics of Hedge Funds

• 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.

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Hedge Fund Overview

• There are approximately 8,350 hedge funds that
  have an estimated 1.4 trillion under management
  worldwide and are growing at about 20 per year.

Source Hedge Fund Association
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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.
• In 2005, approximately 1,585 PIPE transactions
  were completed for total proceeds raised of
  approximately 22.1 billion.

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PIPEs Overview
Over the past five years, public companies have
raised 98.1 billion in 6,889 transactions
(representing an average of 19.6 billion
annually in 1,378 transactions).
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PIPEs Overview
Over the past two years, energy related companies
have raised the most capital from investors in
PIPE transactions. Energy Resources and Related
comprised 11.1 and 16.9 of total PIPE
transactions completed in 2004 and 2005,
respectively.
Source Private Raise
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Hedge Funds Focus on Private Equity

• 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.

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Hedge Funds Focus on Private Equity

• 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.

Source Hedge.Funds World 12/15/05
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Hedge Funds Focus on Private Equity
The following is a list of selected hedge funds
that consider, or have previously made,
investments in private energy companies

• Advisory Research
• Amaranth
• Angelo Gordon Co.
• Centaurus
• Cerberus
• D.B. Zwirn
• Elliott Advisors

• HBK
• Laminar Direct Capital (DE Shaw)
• Laurus Funds
• Reservoir Capital
• Ritchie Capital
• Touradji

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Hawk Energy Fund I Case Study

• Fund Size 38.3 million
• Oversubscribed Offering The initial Fund size
  was targeted at 15-20 million. After successful
  marketing in New York, Dallas and Houston, the
  Fund size was increased to 38.3 million (200
  oversubscribed).
• Investor Base
• The investors in the Fund are energy,
  specifically oil and gas exploration and
  production, knowledgeable.
• The Funds largest investor is an 8.0 billion
  hedge fund based out of New York City that
  historically has not made investments in private
  companies.

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Overview of Energy Capital Solutions
Energy Capital Solutions (ECS) is a
Dallas-based energy focused investment banking
firm founded in 2001 that raises equity and debt
capital and provides MA advisory services for
public and private energy companies.

• ECS has raised 358 million of private equity in
  24 transactions and 237 million of debt capital
  in 6 transactions over the past three years.
• ECS has advised on 8 MA transactions totaling
  over 1 billion since inception.
• ECS knows the private equity and debt markets
  very well and has worked with virtually every
  capital provider over the last few years.
• As a result of the significant experience of ECS
  with energy capital providers, we believe that we
  are well positioned to continue to assist energy
  companies in arranging private equity.

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ECS has completed thirty private capital
transactions since May 2002
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ECS has completed thirty private capital
transactions since May 2002
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ECS has completed thirty private capital
transactions since May 2002