EnCap sets $2bn target, $2.5bn cap for second low-carbon energy fund

Fund II has already raised nearly half its target and is expected to wrap up in the fourth quarter of this year.

EnCap Investments, a recent entrant into the fast-growing energy transition space, is seeking $2 billion for a second dedicated offering.

The target for EnCap Energy Transition Fund II, together with its $2.5 billion hard-cap, were disclosed this week by Arkansas Teacher Retirement System.

Unveiled last year, Fund II has already raised $993 million in initial closings, according to ATRS documents. A final close is expected in the fourth quarter of this year.

Private equity has seized on the energy transition – the shift away from fossil fuel-based systems of energy production and consumption to cleaner, renewable sources. Climate-focused funds have proliferated over the past couple of years, some of them sponsored by long-time oil and gas GPs.

EnCap was one of the first traditional energy firms to take this step. The decision owed to a history of “investing up and down the energy value chain”, Chuck Bauer, head of investor relations and fundraising, said in a 2021 interview with affiliate title Buyouts, which helped EnCap adapt to “where the market is going”.

The platform was created in 2019 under the leadership of Jim Hughes, Tim Rebhorn, Shawn Cumberland and Kellie Metcalf, hired for their renewable investment and operations backgrounds. This acquisition of skills was key to a debut fund, closed two years ago at $1.2 billion.

EnCap is now looking to raise a larger vehicle, perhaps because of the greater volume of low-carbon energy dealflow on tap.

Broad-based energy transition investing is on the verge of overtaking fossil fuel investing “for the first time”, BloombergNEF reported in January, with $1.1 trillion deployed globally in 2022. In the US, opportunities are being spurred by government incentives – especially the $370 billion earmarked in the Inflation Reduction Act.

EnCap makes control investments in North American management teams and projects featuring proven renewable technologies. Examples are utility-scale solar and wind, low-cost battery storage systems, renewable natural gas, hydrogen and service businesses that engineer, procure and manage energy infrastructure projects for third parties.

Fund II will make up to a dozen equity investments of $50 million to $400 million, ATRS documents said, and target gross returns of 18-20 percent (13-15 percent net).

Having secured almost half the fund’s target, EnCap has begun doing deals. The most recent involve Parliament Solar, a builder and operator of a utility-scale solar project, and PowerTransitions, an acquirer and redeveloper of thermal generation and industrial assets.

EnCap is presently selling Triple Oak Power, a developer of wind and other carbon-free power generation projects. Originally backed in 2020 by EnCap, Yorktown Partners and Mercuria Energy, the company could see sales proceeds of $500 million to $750 million, sources told PE Hub.

EnCap Energy Transition Fund I was as of June 2022 earning a 37.3 percent gross IRR and a 26 percent net IRR, according to ATRS documents.

Founded in 1988, EnCap is also raising its latest upstream energy offering, EnCap Energy Capital Fund XII, targeted to bring in $4 billion. The firm invests in midstream opportunities through EnCap Flatrock Midstream, a partnership with Flatrock Energy Advisors.

EnCap declined to provide a comment on this story.