Tailwater Raises $1.1 Billion for New Energy-Infrastructure Bets

Tailwater Capital has raised $1.1 billion for its latest energy-infrastructure fund as a coronavirus-driven oil-price slump could force sales of assets such as pipelines and oil-field gathering systems.
The Dallas-based private-equity firm closed its largest investment pool so far, Tailwater Energy Fund IV LP, in mid-February with about $970 million in capital and $130 million in co-investment commitments, said Jason Downie, a Tailwater co-founder and managing partner. About 100 investors backed the fund.
One such investor, the New York State Teachers’ Retirement System, pledged as much as $100 million, while California’s Sacramento County and Merced County public pensions committed $35 million and $5 million, respectively, organization documents and WSJ Pro Private Equity’s LP commitments database show.
Tailwater had set a fundraising target of $1 billion for the new vehicle, matching the amount collected for Tailwater Energy Fund III LP, which closed in 2018, said Edward Herring, Tailwater’s other co-founder and managing partner. The new fund’s upper limit was $1.1 billion.
Before the coronavirus outbreak, Tailwater benefited from an industry capital crunch that accelerated sales of noncore assets and the longer-term trend of transfers of pipeline, gathering system and other infrastructure operations to specialized providers, Mr. Herring said. “That was a source of deal flow that has been propelling some part of our investment strategy for the last 18 months.”
A sudden price war that erupted between Saudi Arabia and Russia, coupled with the rapidly expanding demand-damping effects of the coronavirus, has ushered in a new period of depressed oil prices. Mr. Herring said the slump likely will pressure more companies to sell assets, including through bankruptcies. That will create opportunities for Tailwater’s companies to buy out competitors.
“Going forward, you’re going to see some pretty opportunistic consolidation across the various active basins in the U.S.,” he said.
It could take 18 to 36 months for demand for energy infrastructure in the U.S. to come back to its early January levels, Mr. Downie said. Crude futures traded around $63 a barrel at that time, compared with about $24 now for West Texas Intermediate. He added that Tailwater portfolio companies’ low level of debt would help them weather the downturn.
Only a few of the firm’s more than a dozen portfolio companies carry third-party debt, Mr. Downie said, describing them as “not overleveraged.”
“So we are in a very good position to defend the portfolio and be actively working with our producer customers to try to help them,” he said.
The firm has made five deals from the new fund so far, including a fresh commitment of nearly $300 million to Goodnight Midstream LLC. Made last year, the investment drew from the fund’s $130 million co-investment pool. The water-management company, which Tailwater first backed in 2016, operates 500 miles of pipelines across several U.S. regions.
Also last year, Tailwater pledged $150 million to Triten Energy Partners, a developer of infrastructure for refineries, petrochemical plants and renewable-fuel industries. Businesses that cater to the so-called downstream energy sector have drawn increased interest from energy investors, as the sector is less sensitive to oil prices and competition for deals is lower than in the market for businesses that serve energy exploration companies.
“We’ve had multiple investments in what we call downstream-adjacent,” Mr. Herring said. “It’s just an interesting, value-added segment that just happens to be very niche in the U.S. market for energy.”
Messrs. Downie and Herring, both former executives of now-defunct private-equity firm HM Capital Partners, formed Tailwater in 2013. In addition to its flagship infrastructure-focused funds, the firm has raised two smaller vehicles to acquire interests in oil-and-gas wells. The latest of these funds, Tailwater E&P Opportunity Fund II LP, closed in 2016 with $218 million.
Last year, the firm started Tailwater Technical Consulting to provide engineering services to its portfolio companies and other energy-infrastructure businesses.