For Joe Dee, the current downturn is a reminder of the cyclicality that he saw in his family’s oil and oil services business during his formative years. His great-grandfather founded Illinois Basin-focused Dee Drilling Co. in Mt. Carmel, Illinois, in 1939. Dee grew up working in that business, cleaning oil tools, painting tank batteries, repairing equipment and working on rigs.

At the University of Illinois, Dee majored in finance and after graduation joined Royal Dutch Shell’s internal finance and management consulting team and, later, its M&A group. He then returned to school, entering the MBA program at the University of Pennsylvania’s Wharton School and interning for Shell at its headquarters in The Hague, Netherlands. Dee’s perspectives range from work as low man on the rig totem pole at a small private company, to providing investment analysis to a global energy giant’s executive team.

After Wharton, he joined Cadent Energy Partners LLC, a private-equity manager based in Stamford, Connecticut, that invests in small to medium-sized energy companies. Founded by former principals of First Reserve, Cadent was formed in 2003 and now manages a pool of about $700 million of private equity.

Dee moved to Houston in 2010. Today he is a director of portfolio companies Liberty Lift, Sherwood and Torqued-Up. He was a director of Pipeline Supply & Service until its sale in 2013. Additionally, he serves on the board of the Houston Private Equity Association.

In a recent interview, Dee discussed Cadent’s strategy.

Investor: What is Cadent’s focus?

Joseph Dee, Cadent Energy Partners Dee: Historically, its investment mandate was broadly defined across the energy spectrum. Going forward, however, we are narrowing our focus away from E&P with controlled investments of $25 million to $75 million in small energy products, services and equipment businesses.

Investor: Why the shift?

Dee: With the advent of horizontal drilling, well costs increased and private-equity firms that focused exclusively on the upstream raised large funds to attract the best managers in the business. Their typical allocation is $200 million to $500 million. We want to play in a space where we have access to the best deals and the best management teams.

Investor: What size fund are you raising currently, and is the market receptive?

Dee: We are targeting $475 million. It’s early, but investors are receptive because of our long track record of successful investment in the energy space, and because now is a great time to enter. We’ve seen a number of potential investors that are now taking a harder look at increasing allocations to the energy space.

Investor: How do you strategize in a downturn?

Dee: It’s a double-edged sword. It creates challenges for the existing portfolio, and we’re compelled to reduce costs and become more efficient. But low prices also create an opportunity to deploy capital at attractive entry points, which in investing is a critical determinant of your success.

Because of our experience with cyclicality, we use conservative valuations and debt levels when we make investments. We like our niche—we are large enough to attract quality teams yet small enough to have an attractive entry point and develop a compelling business plan through reasonable growth assumptions.

In good markets and bad, we aim to partner with our management teams from the start to determine the best way to enter a market and build our businesses. We work closely with our portfolio companies to develop strategy, assemble high-performing teams, create a professional culture and infrastructure and identify optimum exit opportunities.

Investor: An example of how you grow a company?

Dee: Pipeline Supply & Service, a company we purchased in December 2010 and exited in March 2013, is one. The company founder, an entrepreneur, wanted a partner to help professionalize and grow his business. We made a significant investment and brought in a talented COO who transitioned into the CEO role in 18 months. We hired a CFO who led the installation of a professional corporate infrastructure. We made five acquisitions at attractive multiples and took the company from one to 11 locations. We added a board director from Kinder Morgan to help with market outlook and strategy and roughly tripled the revenue and the EBITDA of the company by the time we exited. Pipeline Supply’s distribution business model was attractive because it had a diversified midstream-focused customer base rather than relying on any one geography or construction specialty.

Investor: What general trends do you see?

Dee: With the shift to unconventional resource development, everyone involved has to take a hard look at their business model. All E&Ps are focused on improving efficiencies, driving down well costs and lifting hydrocarbons as cost-effectively as possible. The shift from a geological model to one of how to extract hydrocarbons most efficiently is driving change in the products, services and equipment business.

We think North America will become the marginal producer of oil and gas for the world, and prices will incentivize the growth to supply a robust long-term demand outlook, supported by a desire for emerging economies to improve their standards of living.

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