EnCap Plotting Fund Eight; Halfway to Target on Infrastructure Pool

EnCap Investments LP is plotting its eighth fund and may need a placement agent to help it tap international investors. David Miller, a co-founder of the Houston based firm, told Buyouts that EnCap will start raising the fund late in first quarter or early in second quarter 2010.

The firm will likely target somewhere in the range of $3 billion to $3.5 billion for the fund. EnCap Investments closed its seventh fund at $2.5 billion in 2007, and its sixth at $1.5 billion in 2006. The firm typically commits $100 million to $150 million per investment, a sum that gets drawn down over three to five years, almost like an equity line of credit.

The firm employed Credit Suisse First Boston as placement agent for its third and fourth funds in 1997 and 2001, respectively, but did not hire one for Funds V, VI, and VII because of strong demand. Indeed, those funds took an average 90 to 120 days to close, Miller said.

But executives anticipate a more challenging fundraising this time around, so EnCap is hoping to attract international investors to supplement its U.S. base. Miller said they expect Fund VIII could take as many as nine months to raise. “We see a scenario where we might lose a few LPs, or some might make smaller commitments, and those dollars will have to be replaced, so we might have to go abroad to achieve our target,” he said.

The firm’s 160 limited partners include the University of Texas Investment Management Company, the University of Virginia Investment Management Company and the California State Teachers’ Retirement System.

EnCap is also in the market trying to raise $750 million for EnCap Energy Infrastructure Fund, as previously reported in Buyouts. That fund seeks to provide growth capital to companies involved with oil and natural gas gathering and processing, water handling and disposal, and carbon dioxide gathering and transportation. The firm closed on $340 million in the first quarter and has gathered $450 million in total this year. Encap Investments expects to close its first infrastructure fund near its $750 million target by Jan. 15, according to sources familiar with the firm’s plans.

EnCap’s sixth and seventh funds have yet to yield notable returns for its investors, although they are still in the early part of their investment periods. Its early funds have fared well, according to UTIMCO data as of May 31, 2009. EnCap Energy Capital Fund III-B LP, a $492 million fund EnCap raised in 1997, has returned 1.87x the $51.3 million that the Texas pension invested with the firm, generating a 21.23 percent internal rate of return; and EnCap Energy Capital Fund IV-B LP, a $613 million fund EnCap raised in 2001, has returned 1.65x the $17.3 million UTIMCO invested, generating a 51.16 percent IRR.

A version of this story appeared in Buyouts magazine, where Bernard Vaughan is a senior editor.

—Alexander Haislip contributed reporting.