The natural resources industry can be significantly affected by global, political and environmental developments: notable movements in commodity prices as well as corrections to China’s growth expectations are putting pressure on fund managers operating in the industry. In Q4 2016, Preqin spoke with fund managers to ascertain the key issues they face, with many citing volatility and uncertainty in the market, and the overall performance of the asset class.
Data on Preqin’s Natural Resources Online shows that 77 funds reached a final close in 2016, securing an aggregate $66bn in investor commitments, not far behind the record $75bn in 2015. Despite the negative effects of certain macroeconomic factors on performance in recent years, investors remain committed to the asset class: a survey of investors for the 2017 Preqin Global Natural Resources Report revealed that a quarter of respondents planned to allocate more capital to natural resources in 2017 than they did in 2016. This is supported by an eight-percentage-point drop in the proportion of investors that felt the asset class had fallen short of their performance expectations over 2016, when compared to results at the end of 2015.
Rebound in Performance
The PrEQIn Natural Resources Index captures the average returns distributed to investors in their natural resources portfolios, based on the actual amount of money invested in each partnership. In the chart above, natural resources has outperformed the S&P Global Oil Index in every year since 2008. In addition, the PrEQIn Natural Resources Index has shown a slight improvement in Q2 2016, rising 5% to 116.4 index points – this is the first increase seen in a year and represents the fastest growth across all alternatives that quarter. Commodity prices have had a significant effect on the returns of unlisted natural resources funds in recent years, particularly for vehicles that acquired assets just prior to the slump. A sustained commodity price rebound in 2017 could mean a continued improvement in returns for investors.
While there are some significant challenges, the outlook for the asset class is promising: LPs remain committed to natural resources and tailwinds from commodity price rises in H2 2016 and OPEC’s commitment to cutting oil production may well help the asset class in 2017 and beyond. With a significant number of funds on the road – 245 unlisted vehicles, targeting $109bn in capital – the fundraising environment will remain competitive, with demand likely outstripping the supply of investor capital. With this in mind, managers need to address concerns over volatility and performance, and demonstrate how they can deliver alpha in uncertain times.