Natural Resources

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.

Agriculture & Farmland

This strategy can include one or more of the following processes:

• Agtech – investment in the technological processes used in agriculture and farming.
• Land owner – the ownership of land used for farming.
• Operator – a contractor who handles the day-to-day operations of a farm.
• Owner-operator – takes an owner and operator role in agriculture/farmland.

Agriculture/farmland strategies also target one or more of the following commodities:

• Annual/row – crops harvested annually such as grain, vegetables, and cotton.
• Perennial/permanent – crops harvested over many seasons such as vineyards, orchards, and coffee.
• Livestock – animals bred for food production or slaughter.

Energy

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:

• Upstream – the exploration, extraction, and production of oil and natural gas.
• Midstream – the processing, storage, transportation, and marketing of oil and natural gas.
• Downstream – operations taking place after the production phase (including the refining of crude oil), such as readying produce for sale.
• Oil field services – providers of equipment and services used throughout the process.

Energy strategies target one or more of the following commodities:

• Oil – including crude oil or petroleum and its refined components, such as petrochemicals.
• Natural gas – naturally occurring gases and their by-products, including natural gas liquids.
• Coal – fossil fuel formed in coal beds or seams.
• Renewables – including wind, solar, hydro, geothermal, and biofuel/biomass energy sources.

Metals & Mining

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:

• Exploration – the process of exploration and the mining of metals or minerals (upstream).
• Refining – the process of refining metals or minerals into products of value (downstream).

This strategy targets one or more of the following commodities:

• Base metals – common or inexpensive metals such as iron, nickel, lead, and zinc.
• Precious metals – rare metals of considerable value such as gold, silver, and platinum.
• Ferrous metals – an iron compound such as steel or pig iron.
• Non-metallic minerals – examples include limestone, quartz, mica, clay, and gemstones.

Timberland

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:

• Natural forests – naturally occurring areas of land covered in trees or woody vegetation.
• Tree farms – privately owned forests purposely planted for timber production.

This strategy targets one or more of the following commodities:

• Softwood – cone-bearing seed species such as conifer trees (pine, fir, and yew).
• Hardwood – broad-leafed, flower-bearing tree species such as oak, walnut, beech, and elm.
  

Water

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:

• Water industrials – systems for clean and safe water, known as ‘water treatment.’
• Water utilities – systems for pumping and piping water to the end-user.

Natural resources is one of the higher-risk private capital asset classes. Explore the drop-down to find out more about each strategy.

Many different types of institutional investors are active in the natural resources asset class. Natural resources is suitable for large institutions with longer-term investment horizons such as pension funds. 

In a recent survey, Preqin asked institutional investors for the key reasons they invest in natural resources. The chart below shows their responses:



A conservatively managed natural resources portfolio therefore has a number of attractive characteristics for an institutional investor:

• Portfolio diversification. Natural resources display a low correlation with other asset classes and public markets.
• Protection against inflation (inflation hedge). The price of natural resources commodities tends to rise when inflation accelerates.
• Resilient in an economic downturn. The biological growth of some natural resources commodities allows owners to store the commodities until prices change favorably.
• High global demand and rising incomes. Demand for natural resources, such as precious metals, timberland, and water, continues to grow as incomes increase in developing countries.
• Development and infrastructure. As incomes rise globally and urbanization increases, appetite for the resources needed to build essential infrastructure has also grown.
• Political buying. With the availability and supply of natural resources crucial to continued development, governments have become buyers in the natural resources market, thereby increasing demand.
• Store of value. Some natural resources commodities maintain their value without depreciation.

In this lesson, you became more familiar with the natural resources asset class. With a wide variety of investment opportunities and many strategies to choose from, the asset class offers a range of risk/return profiles for investors. As you now know, natural resources provides large institutions with longer-term investment horizons the opportunity to invest, although it is typically viewed as higher risk than some of the other alternative asset classes.