PE Hub’s ongoing series of Q&As with PE thought leaders continues here, as we turn to energy private equity firm Tailwater Capital co-founder and managing partner Jason Downie, who shared insights on the upstream and midstream private equity investment horizon under the incoming administration, as well as decarbonization trends.
Tailwater Capital is a Dallas-headquartered mid-market investor with $4.5 billion of capital under management. The firm typically invests $150 million-$250 million for minority stakes and co-investment opportunities in energy infrastructure development.
Subsectors of focus include midstream gathering, processing and transportation for oil, gas and water, as well as pipelines, carbon capture and sequestration and natural gas storage. In the upstream market, Tailwater makes non-operated working interest investments into oil and gas wells, as well as minerals and royalty rights investments.
What’s your outlook for the energy market under the incoming administration?
My expectation is that the “magnificent seven” technology companies (Apple, Meta, Microsoft, et al) need immense power resources for new data center rollout. You can’t get there without natural gas power generation.
As a country, we want to win the Al race. I’ve never talked to institutional investors that disagree.
The expectation is Trump may be helpful deregulating and streamlining the permitting process. It would support his talking points around proactively using natural resources like gas as a trading tool like in liquified natural gas and export capacity.
We’re actively looking at behind-the-meter power generation and providing gas supply infrastructure to the power generation market. We want to partner with data center operators to provide that infrastructure.
Trump can help with carbon capture usage and storage technology. There’s no way to get to net zero without it. It’s really a tax on the business now.
The government needs to tell the Al providers they need to have carbon sequestration in addition to power resources.
Where do you see M&A and investment opportunities arising outside of the Permian Basin in the coming years?
In M&A, the upstream market has been very consolidated, but the midstream M&A market has not yet been as active.
The Bakken story is interesting. Over the last 15 years people said it would die multiple times over. But horizontal well drilling was first done in the Bakken back in 2004. Those wells are six generations old so we’re watching that new recompletion trend in the Bakken, where there will be investment opportunities.
In the Permian, there is a core inventory limitation, but there’s a lot of Tier 2 and 3 inventory assets remaining. These areas are likely constrained from an infrastructure perspective. Constrained infrastructure areas are where we see new deal opportunities.
For midstream, private equity is in a buy cycle. Private midstream assets are undervalued and will continue to trade between private equity firms or to some public company buyers. Midstream M&A deals remain few and far between but there’s plenty of assets.
For four years Tailwater has been buying midstream assets and pursuing accretive tuck-in acquisitions with $1.2 billion purchased over the last four years, averaging an EV/EBITDA investment basis of 5.5x for investors, allowing us to attractively sell to public buyers.
How does Tailwater differentiate itself from other energy PE firms?
Our position is that our business model is finding the highest returning assets with the least risk for our investors.
Now as inflation hits the complex of wind and solar assets, pricing a power purchase agreement at a 9 percent rate of return can result in a nearly zero net return.
Tailwater has actively participated in decarbonization and environmental solutions deals that do not require a federal subsidy.