EnCap’s Recent Fundraise: $3B in Four Months

If you have doubts about investor demand for energy assets, the story of EnCap Investments’ most recent fundraising will dispel these. While it took 18 months to raise EnCap’s debut midstream fund, launched in 2008, it’s latest fund hit its hard cap in less than 18 weeks.

The third EnCap Flatrock Midstream fund was launched on Jan. 24 and closed on May 15, raising $3 billion after targeting $2.25 billion. This fund was the third to hit its hard cap: Fund I launched in July of 2008 and by its close in January 2010 had raised $792 million after targeting $750 million; Fund II garnered $1.75 billion of investments between its launch in November 2011 and close in July 2012, after targeting $1.25 billion.

The most recent fund will invest in independent, startup midstream companies.

Houston-based EnCap was founded in 1988 and has since become a top provider of capital to independent companies in the U.S. oil and gas industry. In all, the firm has raised 18 institutional oil and gas investment funds totaling about $21 billion.

Demand has increased steadily since the firm began raising money in funds focused on midstream and upstream assets, says Chuck Bauer, EnCap’s head of investor relations and fundraising. “In the past four to five years, you’ve seen more institutional investors moving energy fund commitments out of PE and placing it into their real asset allocation or creating a specific natural resource allocation,” he says.

The numbers prove the story. The firm has also done well with its upstream-focused funds, closing EnCap Fund IX on January 31 after raising $5 billion in five months. The fund hit its hard cap after targeting $4.25 billion.

Bauer notes that investors have become ever more sophisticated and demanding in their due diligence. Bauer and his partners spent the last half of 2013 visiting with EnCap’s investor base, providing updates on existing portfolios and the current market environment, while starting early diligence for the next Flatrock Midstream fund.

“The diligence that investors are going through to make commitments is more robust than five or six years ago,” Bauer says. “There’s been a lot of time spent with investment teams. We spend a considerable amount of time discussing the market opportunity and how we intend to invest to capitalize on the current environment.”

Investors are energized by the sheer amount of capital needed in the upstream and midstream sectors; in the U.S., $150 billion to $170 billion of capital is needed in upstream just to maintain production, Bauer says. According to the Barclays Research 2014 E&P Spending Outlook report from December 2013, a survey of U.S. and Canadian exploration and production companies showed plans to spend about $199.2 billion on upstream this year. And for every dollar spent on upstream, there’s 20 cents to 30 cents—or $30 billion to $40 billion—to be spent on midstream to transport and process the products before they’re ready for market, says Bauer.