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Talking Top Quartile with Billy Lemmons of EnCap Flatrock Midstream

Talk about the genesis of this fund in the EnCap family.

Prior to 2008, our team at Flatrock Energy Advisors had spent decades working in both the upstream and midstream segments of the energy business and had developed a unique and very successful midstream advisory business. In 2008 we exited the advisory business and joined with EnCap Investments to establish the EnCap Flatrock Midstream partnership. The combination of our industry experience and contact base with EnCap’s upstream knowledge and track record created some great advantages for us.

What was the fundraising environment like at the time EnCap Energy Infrastructure Fund (EFM Fund I) and how much did you raise? Was there much interest in energy funds compared to now?

When we started the fundraise for EFM Fund I in the summer of 2008, the reception from investors couldn’t have been better. Then the financial crisis hit in the early fall, and the whole world changed. But because EnCap had such a strong track record and excellent relationships, LPs continued to meet with us. Our approach was to be diligent and patient in our marketing. We had a first close in December 2008 and a final close in early 2010 at $792 million, above our $750 million target. There’s always a lot of interest in energy funds because it’s such a large and capital-intensive business, and the energy sector is such a natural fit in most investment models.

Talk about one or two deals that drove performance of the fund.

We’re really proud of the management teams we’ve partnered with and they’ve done an exceptional job capturing and building quality opportunity sets in our business. We made eight commitments from EnCap Energy Infrastructure Fund I, and four of those have been realized to date. Each of the Caiman, Rangeland, Cardinal and Meritage investments that have gone full cycle were great. They all exceeded our investment targets because those teams had quality leadership that focused on building the right assets in the right places.

How did this fund shape the evolution of your firm?

We’ve been fortunate that the fund has validated what our team and EnCap’s first saw as a very attractive opportunity in the space. Looking back on the past six and a half years, our firm has transitioned from industry executives leading an advisory firm into a midstream energy private equity firm. For the most part we’re using the same skills, disciplines and industry contacts we’ve relied on throughout our careers. We’re very fortunate to have some outstanding LP partners in our funds. Those relationships have really grown as we’ve raised two successor funds including EFM III, which closed in May of this year at its $3 billion hard cap. We were really privileged to be substantially oversubscribed and well over our $2.25 billion target.

This fund seems a bit different than your classic private equity fund that buys out companies. It seems more related to accessing cash flow from midstream assets. What are the similarities and differences to more typical private equity funds?

Our funds are different from traditional private equity buyout funds. In general, we expect our funds to be about 75 percent new construction and 25 percent acquisition. The energy industry has a huge requirement for midstream infrastructure investment to support upstream drilling and production and bring that supply to market. And that investment in infrastructure is most organic closest to the wellhead. It’s also the part of the business where we can apply our unique experiences and strengths. We also tend to have a venture capital approach to what we do; most of the time we are backing experienced management teams that don’t yet have assets. We’re backing teams based on their prior experiences and track records by providing the value-added capital needed to successfully build asset-based midstream systems that generally get sold to the bigger players in the business.