As the youngest and smallest alternative asset class, natural resources arguably has the most to gain over the next five years. The falling commodity prices that have for so long hampered natural resources performance have begun to stabilize amid generally improving market conditions. Despite a competitive fundraising environment, with capital concentrated among fewer managers and funds spending longer on the road each year, increasing proportions of funds closed in recent years are meeting or exceeding their target sizes. With assets under management (AUM) continuing to break records – industry assets surpassed $150bn in 2013 – and annual fundraising achieving an all-time record in 2015 ($85bn), the future looks bright for natural resources investing.
Based on the responses to our surveys with over 300 fund managers and 120 investors across alternatives, and using our own proprietary data, Preqin believes that the natural resources industry will quadruple in size by 2023, with a growth rate of 300% over and above that of all other alternatives by some way. Spearheaded by the dominance of energy funds, our prediction is that industry AUM will reach $0.8tn by 2023, up from $0.2tn at the end of 2017. Together with infrastructure, we think real assets will represent 13% of the $14tn alternatives industry in five years’ time, up from 8% of an $8.8tn industry currently.
Preqin predicts that the growing demand for alternative assets across investors globally – 84% of those surveyed intend to increase their allocation in the next five years – will ensure a rise in the total number of fund managers. However, we think this increase will be small, largely because of the high levels of consolidation expected in the industry. Among all fund manager respondents to our survey, 46% expect there to be more active managers in 2023 than there are at present, and 84% feel there will be some or significant consolidation in the next five years. Among natural resources fund managers exclusively, these proportions are 44% and 87% respectively, aligning them with the wider alternatives universe.
In terms of manager expansion, most alternatives managers feel organic growth will form the largest part of their expansion plans over the coming five years. Notably, 40% of natural resources firms are expecting to acquire other alternative assets businesses in order to expand their own. With industry growth largely dependent on investor demand, though, what are investors’ plans for their allocations over the next five years? Our study found that only 17% of natural resources investors intend to increase their allocation to the asset class in this period, which is the smallest proportion among all alternatives. Although this corresponds with 17% expecting to decrease their allocation, the largest proportion recorded, this figure is not significant and a healthy 66% are looking to maintain their current level.
Natural resources investors and fund managers are largely united in the view that environmental, social and governance (ESG) practices and policies will become more important over the next five years, as cited by 85% and 77% of respondents respectively. This is the largest proportion of investors across all asset classes, indicating that ESG is integral to their decision-making; since fund managers clearly recognize the importance of this, we expect a greater focus on responsible investing and ESG reporting going forwards.
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