Tailwater Capital

Dallas Private Equity Firm Expects ‘Active 2021’

Tailwater Capital announced three acquisitions in the last month, and the firm’s co-founders and managing partners said there will be more to come in 2021.

The Dallas-based private equity firm, which focuses on middle market infrastructure associated with energy, expects this to be an active year for acquisitions, about one year after it closed its fourth midstream fund for $1.1 billion.

“We are fully immersed in the energy spectrum, and always have been. And so what that means is, we intend to play a significant role in energy and how it is delivered today, how it’s delivered tomorrow and how it’s delivered in 5-10 years,” Herring said. “We’re just going to be present in all of that. And that’s the punchline.”

The firm announced at the end of January in two separate transactions that it would acquire Oklahoma pipeline operators Tall Oak Midstream III and a majority of Tall Oak Midstream II — servicing the Arkoma Basin and mid-continent, respectively. The acquisitions would be made from and with San Antonio-based EnCap Flatrock Midstream.

Tall Oak III, made as part of Tailwater’s Energy Fund III, runs more than 120 miles of pipelines and will be folded into an existing portfolio company, Connect Midstream. Tailwater will operate most of Tall Oak II, which is more than 750 miles of pipelines, in its Energy Fund IV, though it will share ownership with EnCap.

Downie said the Tall Oak deals allowed Tailwater to acquire underutilized assets for good valuations, though financial details weren’t disclosed.

The firm also recently announced it would acquire NorTex Midstream Partners, a Houston-based natural gas storage and transportation company as part of its Energy Fund IV portfolio. The 60-year-old, independently owned company operates the largest portfolio of non-utility gas storage facilities in North Texas. It will retain its headquarters and management team. Herring, who led the deal, said it took about six months of negotiations to close. Downie added that a gas storage company with NorTex’s proximity to North Texas is relevant in supporting the increasing role of renewables.

Downie said the firm believes hydrocarbons will be a big part of providing cheap, reliable energy to the U.S., but that will be in combination with an increasing amount of renewable energy, like wind and solar or hybrid renewables, like renewable diesel. Tailwater is looking at renewable diesel investment, as it looks across evolving energy markets.

“How do we be participants in smarter, cleaner delivery of energy to our constituents, meaning the population of the U.S., and be good deep value investors as well?” Downie said. “Because at the end of the day, we’re charged with generating rates of return for our investors…We think gassy assets and liquid rich assets meeting NGLs are going to be fundamental to supporting that strategy.”

Downie and Herring said the firm still has about $650 million across funds three and four left for acquisitions, but isn’t on a rigid timeline for fundraising. Tailwater has closed six funds since its founding in 2013 — four in midstream and two in upstream — and isn’t currently in the market for any more capital. Downie said the firm will keep steady with its strategy of acquiring assets in the middle market energy infrastructure space, even as Tailwater’s employee base grows.

The firm also recently made three promotions of employees to partner. Downie said there will be more promotions within the company over the next 12 months, with plans to also hire two new associates and a mid-level employee. Tailwater has 42 employees total.

The Dallas firm also has 16 portfolio companies across several sectors in the energy infrastructure space, with about 450 employees within those. Tailwater has completed more than 100 transactions in the upstream and midstream sectors for more than $20 billion in transaction value.

“We are believers that for better or for worse, most of the developed world is addicted to reliable cheap energy,” Downie said. “And we need to be responsible stewards.”

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