The natural resources industry has experienced unprecedented growth over the past decade. Assets under management (AUM) have grown at a compound rate of 16% per annum, increasing from $175bn in 2009 to $668bn as at June 2018. Fundraising has also been strong, with a record $93bn secured by the 91 funds that reached a final close in 2018.
The natural resources opportunity
The fund manager and investor universe has undoubtedly expanded during this time. Preqin now tracks over 1,100 fund managers; while the majority are based in the established markets of North America, Europe and (increasingly) Asia, 16% are located elsewhere, demonstrating the truly global and diverse nature of the natural resources industry. On the other side, over 3,800 investors are active in the industry – while a significant number, it is relatively small in comparison to the 14,000 alternative assets investors tracked by Preqin, so there is still plenty of room for growth and expansion.
Accounting for 95% of the capital raised by funds closed in 2018, energy clearly dominates the industry; however, on the flip side, this also means the growth opportunity for other strategies – such as agriculture/farmland, metals & mining, water and timberland – is huge.
The performance of the natural resources asset class in recent years has clearly been disappointing for investors. When looking at vintage 2005-2015 funds, the risk/return trade-off of natural resources funds is poor: natural resources funds have provided a median net IRR of only 6.9% and risk (standard deviation of net IRRs across funds) of 15.8%.
It is important to remember, however, that high returns are not the primary motivation for investors when allocating to natural resources funds – factors such as low correlation to other asset classes and diversification rank much higher. This can come at a price: periods of strong economic growth, as witnessed over the past decade, can coincide with commodity price weakness and dampened natural resources returns.
Although investors are dissatisfied with performance, they are somewhat less disappointed than they were a few years ago – returns of natural resources funds compare favourably to the public market. As a result, investors are sticking with the program, motivated by the uncorrelated returns the asset class can deliver. Twenty-eight percent of surveyed investors are looking to commit more capital to natural resources funds in 2019 than they did in 2018, and over the longer term, 29% intend to increase their allocation to the asset class.
Consolidation a concern
The outlook for continued industry growth is largely positive, but, of course, challenges lie ahead. Consolidation is occurring at an alarming rate: $2bn more capital was secured between 2017 and 2018, but by 54 fewer funds. Average fund size was pushed above $1bn in 2018, and the largest and most established managers are dominating the market. Over 300 funds are currently in market seeking to raise an aggregate $188bn – 3x as many vehicles closed and twice as much capital secured than in 2018, meaning that, for fund managers, winning this capital in 2019 will be as challenging as ever.
For expert commentary, key trends, historical statistics and survey results, take a look at the newly-released 2019 Preqin Global Natural Resources Report – the most complete and in-depth review of the industry available.