Lots of Demand for EnCap’s $3.5B Pool But Fundraising Not So Easy

Just how different is the fundraising market these days? Just consider the case of EnCap Investments LP.

On Monday, EnCap announced it raised $3.5 billion for its eighth “upstream” fund, which will invest in companies that drill and produce oil and gas. David Miller, an EnCap co-founder and a managing partner, estimates that the PE shop spent nine to 10 months marketing for EnCap Energy Capital Fund VIII. By contrast, the buyout shop spent roughly four to six months fundraising for each of its last four to five funds.

“The world changed in 2008,” Miller told me. “There was huge demand. But it took longer to get people to the finish line because the due diligence was more extensive.”

Miller wouldn’t say EnCap had a difficult fundraise but that marketing for pool VIII was “protracted.”

Fundraising for fund VIII began in the spring of 2010 and shortly after distributing its PPM, EnCap set a $3.5 billion hard cap.

“Once we got into marketing efforts, the interest and demand was extensive and substantially oversubscribed,” he says. “We had almost $6 billion of demand.”

Daniel Prendergast, of Park Hill Group, acted as placement agent. Thompson & Knight was EnCap’s law firm.

The PE shop’s last fund, EnCap Energy Capital Fund VII LP, raised $2.5 billion in 2007 and posted a -1.79IRR, according to CalSTRS data as of March 2010. Results for Fund VI are better. EnCap Energy Capital Fund VI has a 15.54 IRR, CalSTRS says.

EnCap supplied more up-to-data information. As of Dec. 31, the net IRR for Fund VII was 15% and the net IRR for Fund VI is 23.6%. Both IRR’s include unrealized investments, an EnCap spokeswoman says.

Fund VIII attracted about 190 investors and several reupped, including the Public Employees Retirement Association of New Mexico, the Minnesota State Board of Investments and CalSTRS. Kansas Public Employees Retirement System is a new investor, Miller says.

Due to overallocation and liquidity issues at some U.S. institutions, EnCap decided to seek out international investors for the first time, he says. “We felt it would make sense given the size of the fund to broaden our scope of efforts and bring in international investors,” Miller says.

Of the $3.5 billion, about $850 million is coming from foreign investors, public pensions committed $1.2 billion and roughly $1 billion is from the endowments, foundations and trusts.

While there was much demand, EnCap did have to deal with environmental concerns due to the BP oil spill. EnCap fielded “lots of questions” from the institutional community which was wondering about potential environmental risk, Miller says. “We haven’t done anything offshore for quite some time,” he says. “We got them comfortable that that was not something to be concerned about.”

Miller also maintains that the U.S. oil and gas industry “has done a marvelous job of drilling wells in a safe and environmentally conscience manner in the last 40 years.”

“There is no question that the Gulf spill was a disaster,” he adds.” I’m not trying to minimize the significance of what happened in that spill. But thousands and thousands of wells are drilled every year and the vast majority is drilled without incident.”