Tailwater Capital, a private equity firm focused on the energy sector, said July 24 it raised $1 billion for its latest fund in a bet on the demand for oil pipelines in North America.

The fundraising underscores how private equity firms are looking to invest in pipeline assets amid undercapacity that has stranded crude oil in areas like the Permian Basin in Texas and New Mexico. Unconventional drilling techniques have allowed oil companies to tap previously inaccessible shale reservoirs.

The likes of Blackstone Group LP and BlackRock Inc. have also invested in oil pipelines in recent years.

"It's just a general rule of thumb but for every $1 of capital that has the opportunity of drilling an oil and gas well, there's probably 30 cents of midstream capital that's required," Tailwater co-founder Edward Herring said in an interview.

Firms like Dallas-based Tailwater invest in companies which provide oil pipeline services, referred to in the industry as midstream assets, with the aim of selling them at a profit a few years later.

Tailwater's latest fund, Tailwater Energy Fund III LP, closed at its maximum limit of $900 million and raised a further $100 million co-investment for Silver Creek Midstream, a platform company in the fund. The fund was oversubscribed, Tailwater said.

Fund III will have the same investment strategy as its $650 million predecessor which targeted mid-market companies with a deal size between $25 million and $350 million.

The preference for smaller companies appealed to investors in private equity funds, referred to as limited partners (LPs), according to Jason Downie, Tailwater's other co-founder.

"Our opportunity is pretty rich relative to, I think, what LPs are seeing from some of the bigger funds that are chasing bigger deals and obviously paying what would be materially higher valuations," Downie said.