CHART: Make money in resources? Invest privately

Private money flowing into mining slows to a trickle in 2019

Natural resources – oil and gas, timberland, farmland, water and mines – fundraising by the private capital industry hit a five-year low in the first quarter of this year and struggled to regain momentum in Q2 2019, according to private capital tracker Preqin.

The London-based research firm says in its second quarter update that private capital resource investing has been in decline for the past two years. 

The paltry $4.3 billion raised in Q2 2019 is “a question of some concern for the industry,” according to the authors and with both the number of funds closed and the capital raised seemingly in long-term decline, “the future health of the asset class is uncertain”:

North American oil and gas projects account for by far the largest share of fundraising, funds in market, dry powder and investor interest. 

This may be a holdover from the explosion in the Permian Basin – which has seen the US become one of the largest energy-producing nations in the world – but it remains to be seen if this boom can be sustained over the longer term.

We’re talking millions not billions

Apart from agriculture, where five funds raised $1 billion, the rest of the sector also had little luck securing  commitments from investors. Two metals and mining funds raised a combined $100 million, while no timberland or water funds closed in the quarter. 

In the first quarter of 2019 unlisted funds targeting mining were wholly unsuccessful in procuring from so-called limited partners which include sovereign wealth funds, public and private pension funds, endowments, foundations and family offices.

There were 15 funds in the market at the end of June targeting the mining sector, seeking a combined $5.5 billion capital

Four metals and mining funds closed last year, raising $2.5 billion with the bulk of the funds destined for North America. 

There were 15 funds in the market at the end of June targeting the mining sector, seeking a combined $5.5 billion capital. If successful – and at the current pace that seems unlikely – 2019 could be the best year ever for private investment in mining. 

2012 was the peak year for mining fundraising, with $4.6 billion in capital commitments from investors. 

Let’s keep things private

Private capital includes traditional private equity such as buyout, venture capital and turnaround funds, distressed debt and direct lending, private real estate, infrastructure and natural resources funds, and sovereign wealth and hedge funds. 

Returns from natural resources underperform other alternative strategies, but for many investing in the sector the primary motivation is not to seek high absolute or risk-adjusted returns, but rather to find uncorrelated assets and diversification for their portfolios. 

In addition, the returns from private natural resource investment beats the money to be made from public markets. While Preqin’s private capital and private equity indices provide much better returns than private resources investment the same money going into public natural resource investments barely breaks even.    

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