• Decided on CV last year after also considering a minority stake sale

• Sponsor’s Fund V invested USD 100m

• Campbell Lutyens served as financial advisor, with Houlihan Lokey providing fairness opinion

Tailwater Capital recognized it wanted to continue growing portfolio company Producers Midstream II (Producers Midstream) after realizing it could expand its gas processing plant in New Mexico.

“When we had a better understanding of the commercial opportunity, we knew it was something we could control if we just had more capital,” said Jason Downie, co-founder and managing partner at Tailwater, in an interview with Mergermarket.

The challenge was that Tailwater’s fourth flagship fund — which closed in 2019 on USD 1.1bn and invested in Producers Midstream a year earlier — was already fully committed.

“We knew we had the tiger by the tail probably this time last year,” Downie said. “We were out of dry powder capital, and we were just not big believers in over-levering businesses.”

The Dallas-based firm weighed selling a minority stake versus extending its hold via a single-asset continuation vehicle (CV). It ultimately chose the CV route, hiring Campbell Lutyens to advise on the process. Houlihan Lokey was also tasked with producing a fairness opinion and valuation.

The process for Tailwater’s first-ever CV was formally launched in March. The CV, announced on 8 October, raised USD 500m, anchored by Goldman Sachs Alternatives’ secondaries group.

“We’re excited to continue to support Producers Midstream. It’s a great business, and we’ve partnered with them for a long time,” said Stephen Lipscomb, partner at Tailwater. “They have a lot of great projects in the works.”

The CV will support Producers Midstream’s growth across its asset footprint. “The fund by itself couldn’t have gotten there without taking some pretty material dilution from a third-party investor,” Downie said. “This was a better way to do it, in our opinion.”

Tailwater rolled its investment and carried interest into the CV. Its newly formed Fund V invested USD 100m into the vehicle. According to Downie, the fund will also invest in another gas-oriented business and a condensate logistics company serving LNG exporters.

About 80% of LPs chose not to participate in the CV — consistent with industry averages — though some Fund IV LPs who exited have re-upped in Fund V.

Despite the success of its inaugural CV, Downie said Tailwater does not expect to heavily rely on the GP-led secondaries market for future realizations, preferring instead to sell to strategic acquirers.

“We would prefer to harvest via either selling to a public company and taking all cash or selling to a public company and taking a combination of units in cash,” he said.

Among recent exits, Tailwater sold portfolio company Tall Oak Midstream to Summit Midstream in a bespoke USD 450m cash-and-stock transaction, receiving both cash and an equity stake in Summit.

by Carlos Martinez

[Editor’s note: This article has been updated post-publication to comply with the latest SEC marketing rules.]