Five Point’s Perfectly Timed Fund Close

The co-founders of Five Point Capital Partners found themselves closing a fund focused on an energy sector impacted by a precipitous drop in oil prices—midstream—just before the volatility hit fast and furious at the end of 2014.

The $450M Five Point Capital Midstream Fund I and II LP will invest in midstream energy infrastructure and was oversubscribed from the $400M target, with a final close in December 2014. The firm’s founders and managing partners, David Capobianco and Matt Morrow, say the motivation to come together in 2012 to raise a midstream-focused fund was, in part, to leverage their experience in the midstream sector, but also to address an acute need for differentiated capital in the midstream market.

“We found that in transactions broadly, [for those under] $50M, there were few competitors,” says Capobianco. “The 10-year bull run in commodities pushed funds up to larger and larger sizes. Smaller deals take expertise in operating assets. The management team is less built out and sophisticated—they’re doing things more hands-on than in a larger transaction where there’s a manager in each area.”

This is where his and Morrow’s midstream operating expertise is key.

“We designed our fund like an MLP management team,” Morrow says, referring to a master limited partnership, “capitalizing on 25-plus years in the midstream sector running businesses and managing investments as CEOs and chairmen of our companies.”

There is an intense need for capital to build out the infrastructure to transport all of the new hydrocarbons coming out of the ground; and therefore, Capobianco says, he believes it’s “a terrific time” to have dry powder to invest in that sector. There’s an opportunity to participate in the long-term buildout of the North American midstream infrastructure.

As for the current market for midstream deals, Capobianco says the opportunity will come as upstream sells off infrastructure assets. “We now anticipate that two-thirds of our strategy will be based on acquisitions, the inverse of where that would have been one year ago,” he says. “That’s flip-flopped.

“We’re at a time where, if you’re prudent and you structure properly, there’s an extraordinary upside with downside protection.”

Five Point focus areas include the first 25 miles of oil and gas infrastructure, gas and liquids storage and water and sand management. Great quantities of sand and water are being used in drilling horizontal wells. The sand and water need to be sourced and transported to the drilling site, then the flowback or produced water needs to be filtered and treated for reuse or disposal. This is an important part of the energy production process that hasn’t been completely solved.

“If it’s early [-stage] and you understand it and you solve an upstream driller’s challenges, there are terrific returns to be achieved,” says Capobianco.

Five Point has two existing portfolio companies, Redwood Midstream Partners and Twin Eagle Resource Management. Morrow says that he’s been fielding questions from people about the outlook for “a fund that just got raised in a crisis.”

“From our perspective, we’re really excited,” Morrow adds. “We have the ability to invest in midstream assets and connect someone with a product to the people who need it. Wells will continue to be drilled at a robust rate, despite a dramatic reduction from last year.”

Capobianco says that in a period of oil price volatility, having private capital to put to use in midstream is preferable to having an existing portfolio that’s struggling.

“We’re prudently going to use our dry powder,” he says. “There couldn’t be a better time to enter the market for buying and building midstream assets.”