Annapolis Capital’s Fund VII closes in on $300 mln target

Canadian private equity firm Annapolis Capital confirmed that it has secured $200 million to date in commitments for its seventh partnership, Annapolis Energy Fund VII LP.

That’s effectively two-thirds of the way to the fund’s $300 million hard-cap target — a target that should be met no later than the fall of 2014. In that event, Fund VII will close at double the capitalization of Fund VI (2011) — and bring in as much money as the combined raise of Annapolis Capital’s previous six funds.

That’s quite an achievement for the young Calgary-based firm, founded in 2006 by managing partners Peter Williams and Jody Forsyth. And it augers well for a domestic oil and gas sector that has hefty investment spending requirements over the long run but relatively few sources of risk financing.

In a recent peHUB Canada interview, Peter Williams told me that any challenges currently being faced by Canada’s upstream industry will be addressed with “capital, steel and ingenuity.” He also spoke about his firm’s fundraising, dealmaking prospects, and PE’s changing role in the oil patch.

Fund VII appears poised to raise a lot more money than your last fund. Who are its backers?

Annapolis CapitalWilliams: We have received a very enthusiastic response to Annapolis Energy Fund VII LP from investors in our previous partnerships. These include Canadian and U.S.-based institutional investors — endowments, foundations and funds-of-funds — and high-net wealth investors. In many cases, existing LPs have increased their capital commitment sizes to create a larger fund.

Will a larger fund pool result in changes to Annapolis Capital’s investment strategy?

Williams: We will continue to invest in conventional early-stage ventures, and play a significant role in financing unconventional projects, in the Western Canadian Sedimentary Basin and the Williston Basin. We believe that gives Annapolis a full suite of deal options. As drilling has grown more expensive — particularly for new horizontal multi-stage fracked wells — everything has to be scaled up. That includes the firm’s preferred investment sizes, which will rise from a range of $5 million to $30 million in Fund VI to a range of $15 million to $50 million in Fund VII. But otherwise, we are determined to stay where we are. We see powerful economics and major opportunities in small and mid-size financings in the conventional market and the shallower unconventional market. For that reason, Fund VII has been limited to a $300 million hard cap. If our cheque sizes get too large, we will be forced out of a profitable space.

Do you plan to syndicate with other PE investors on larger transactions?

Williams: For larger financings, yes. We have great relationships with other private equity firms in the energy sector. For example, my own professional relationship with ARC Financial Corp stretches back to the 1990s when I was chairman and CEO of Passage Energy. ARC invested in that company (acquired by Bonavista Energy in 2001) and in my subsequent venture, Krang Energy (acquired by Harvest Energy in 2005). Generally speaking, Annapolis will do club deals with groups like ARC, Camcor and others when the total equity raised is greater than $75 million. For activity below this level, we prefer to be the primary capital provider.

Do you think your traditional focus has given the firm a competitive edge?

Williams: Very much so. We aim to get a 2.5x MOC (multiple on capital) from our investments. Since inception, an intentional weighting on oil over natural gas has contributed substantially to our overall returns. That is partly why we want to continue with a traditional emphasis of conventional deal flow and the best of unconventional opportunities. A key variable in our performance is the fact that senior investment professionals at Annapolis began their careers as oil and gas entrepreneurs. All of the firm’s partners have experience in starting, growing and selling energy businesses. They are operators who have been company chairs, directors, CEOs or other top executives. That makes a big difference to returns, and we view it as our calling card.

Oil Pump on Prairie 2Investment spending in Canadian and global oil and gas is expected to rise substantially in the years ahead. How will that impact deal-making?

Williams: The energy sector is undergoing a number of important competitive changes. These will bring some dislocation to upstream explorers and producers, but I believe they will overcome all market challenges through a combination of capital, steel and ingenuity. With broadly based change and associated volatility in the sector, there will certainly be more deal opportunities for firms like Annapolis. We do not view things in the short term. We operate according to a four- to eight-year investment horizon. From that perspective, we like what we see going forward.

Are firms like Annapolis Capital important to filling a funding gap in the energy sector?

Williams: Absolutely. In the past, junior companies could go to retail markets to raise most of the funding they needed. But with the sharp decline in public energy company financings, there is now a real scarcity of risk capital. And it is not clear to me that things will go back to the way they were once retail markets have rallied. It is much harder for public sources to respond to current startup funding requirements of between $50 million to $100 million. For this reason, the landscape might have changed permanently and early-stage ventures will in the future have to depend more on alternative sources, such as private equity. That’s a distinct possibility.

To what extent has the firm re-upped with past management teams in its deals?

Williams: We like partnering with management teams that have proven their mettle in successfully establishing and building a number of oil and gas ventures. Re-upping with these teams in new transactions has perhaps happened less often recently due to reduced M&A activity in the sector. However, as liquidity returns in the market’s next cycle, we expect to do significant re-ups with previous partners.

Will a larger fund result in new hires at Annapolis?

Williams: We are fully staffed at the moment. The firm currently has five partners, including Jody and myself, and nine professionals in total. We will consider adding further depth to the team in the coming years.

Photo of oil pump no. 1 courtesy of Shutterstock

Photo courtesy of of Peter Williams (right) and Jody Forsyth (left) courtesy of Annapolis Capital

Photo of oil pump no. 2 courtesy of Shutterstock