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In this article
Natural resources are materials or substances that occur naturally on Earth. They can be mined, farmed, or collected in raw form. These raw materials are often engineered into more complex man-made materials and extracted, processed, or refined for the realization of their economic value. As of this year, the total of assets under management in the industry is $230bn, encompassing a range of sectors. These include:
This sector is considered a blend of both private equity and infrastructure. For example, the exploration and production of oil & gas is closely matched with private equity, whereas pipelines, storage, and refineries are lower risk/return, so are more closely aligned with infrastructure investments.
It is therefore unsurprising that private investment in natural resources originally developed as an offshoot of the private equity and infrastructure asset classes, eventually growing to become an asset class in its own right. This growth has largely occurred since 2008, with an increased interest in the asset class from investors searching for yield in the wake of the Global Financial Crisis (GFC). While structured financial instruments have struggled to recover since the GFC, commodities such as gold (which can act as a store of value) have increased in price, making them an attractive option for investment.
The routes to market for investors are discussed in more detail during Lesson 2: Private Capital Fund Structures.
Investment can be made through unlisted funds, listed funds, or direct investment. Listed funds within this asset class include Master Limited Partnerships (MLPs), which are tax-efficient US-based vehicles focused on natural resources and commonly utilized in the energy sector with oil & gas investments. MLPs combine the tax pass-through benefits of a limited partnership with the liquidity of a publicly traded vehicle. In order to qualify as an MLP, the partnership must earn at least 90% of its income from qualified sources, such as oil & gas, coal, or timber.
There are five key strategies for natural resources investment. Within these strategies, there are different processes and stage preferences, as well as a range of commodities extracted.
This strategy can include one or more of the following processes:
Agriculture/farmland strategies also target one or more of the following commodities:
This strategy is defined as the investment of capital in processes involved in the discovery, production, storage, distribution, and retail of energy resources. There is significant cross-over between the private equity and infrastructure asset classes in the energy sector, depending on the process involved. Upstream strategies share some characteristics with private equity and therefore has a similar risk/return profile, whereas midstream and downstream are more closely aligned with infrastructure.
Energy strategies can include investment in the following processes:
Energy strategies target one or more of the following commodities:
This strategy covers the investment of capital in metals or minerals as a raw product, the exploration of these commodities, or the process of refining such materials to produce their pure form. Institutional investors are particularly attracted to metals & mining opportunities for store value purposes, although their value can be impacted by commodity price volatility.
Metals & mining strategies can include investment in the following processes:
This strategy targets one or more of the following commodities:
Timberland is the investment of capital in land covered with trees or other woody vegetation, either in the form of privately-owned tree farms, or naturally occurring forests. Returns on these forestry investments come in the form of biological growth, upward product class movement, (as the trees grow, the requests for timber increase), timber price appreciation, and land price appreciation.
Timberland strategies can include investment in the following:
Water strategies involve the investing of capital in water-related assets and processes. There is significant cross-over with the infrastructure industry in the water sector, with many institutional investors viewing water treatment and water utility systems as infrastructure assets. Water utilities tend to be regulated by the government, which can affect their investment profile as regulations change over time.
Water strategies include investment in the following processes, with water as the only commodity: