Natural Resources Performance & The Impact Of Investor Sentiment by Preqin
Natural Resources Performance
Using data from Preqin’s Natural Resources Online, Alastair Hannah and Joe McGee analyze the performance of unlisted natural resources funds and the impact of recent developments on investor sentiment towards the asset class.
The natural resources asset class has experienced considerable growth in recent years: assets under management* (AUM) reached a record $400bn in September 2015. Despite this growth, fund managers investing in natural resources assets have faced considerable difficulties since 2014, as the prolonged downturn in commodity prices has put pressure on the revenue of firms involved in extracting, processing and transporting natural resources.
Investors are understandably concerned regarding the impact that this may have on their portfolios: among investors surveyed by Preqin at the end of 2015, 43% identified performance as a key issue for the natural resources industry in 2016, making this the second most prominent concern after continued volatility in global markets (Fig. 1). In order to understand these developments, we take a look at natural resources AUM, performance and investor sentiment towards the asset class using data from Preqin’s Natural Resources Online.
Assets under Management & Dry Powder
Unrealized value as a proportion of AUM has remained relatively consistent in recent years, representing approximately 60% of total industry assets each year since 2010.
Funds primarily focused on investment in the energy sector represent the largest fund type in terms of both unrealized value ($179.9bn) and dry powder ($131.3bn as of September 2015, Fig. 3). In terms of geographic focus, North America-focused funds hold the largest amount in AUM ($279.8bn), more than double the total AUM of funds focused on Europe, Asia and Rest of World combined ($48.7bn, $20.5bn and $51.5bn respectively, Fig. 4).
With investment by unlisted natural resources funds primarily focused on the energy sector, the decline in energy prices since 2014 appears to have had a significant impact on returns. Fig. 5 shows the performance of the PrEQIn Natural Resources Index against the PrEQIn All Private Equity Index and the S&P 500 Total Return Index, depicting the average returns earned by investors in their natural resources portfolios.
This is based on the actual amount of capital invested in these partnerships. Although the PrEQIn Natural Resources Index outperformed both benchmarks in the period from December 2007 to September 2012, it has underperformed since. Following its peak of 135.9 in September 2014, the index declined to 120.2 by September 2015, while the PrEQIn All Private Equity Strategies and S&P 500 Total Return indices reached 159.18 and 154.81, respectively.
Partly as a result of this recent decline in performance, energy funds have a lower median net IRR than both the infrastructure and real estate asset classes for all vintages from 2008 (Fig. 6). The median net IRR for all natural resources funds, including energy, has performed similarly – with the exception of vintage 2010 funds, which have slightly outperformed infrastructure.
Underperformance in comparison with other asset classes has been particularly noticeable for vintage 2013 funds, which began investing capital while commodity prices were relatively high. However, these funds are at earlier stages in their life-cycles and may move closer to historical averages as the fund moves through its investment life-cycle. Crucially, although IRRs are lower for vintage 2013 median and bottomquartile funds, top-quartile funds have performed similarly to recent vintages, suggesting that top-tier managers can identify assets that can perform, despite commodity price volatility.
Fig. 8 shows the risk/return profile of different natural resources fund types; the size of each sphere represents the capitalization across vintage years 2003-2013. Energy funds have the highest median net IRR (+5.9%) but the second highest risk profile, with a standard deviation of net IRR of 14.9%. Unlisted metals & mining funds have the highest risk (19.6%) and the second highest median net IRR (+5.3%). Of the funds examined, agriculture/farmland-focused funds have the lowest risk/return profile for all other natural resources strategies.
Investor Sentiment and Outlook
Of investors interviewed by Preqin in December 2015, 62% felt that their natural resources investments had underperformed over the past 12 months (Fig. 9). In comparison, only 2% felt that their investments had exceeded expectations.
Nevertheless, it is important to note that although most investors reported disappointment with recent performance, the majority (58%) of investors recognize the effect that recent commodity price declines have had on these funds and tend to view the asset class from a longer term perspective. This proportion of investors reported that their confidence in the ability of their natural resources investments to achieve portfolio objectives had not changed over the past 12 months, and 15% reported that their confidence had actually increased during this time (Fig. 10).
Similarly, a larger proportion (28%) of investors stated that they planned to increase their allocation to the natural resources in the longer term than those that planned to decrease it (23%), with 49% intending to maintain their current allocation (Fig. 11). Although performance will need to improve for the natural resources asset class to keep growing over the longer term, new capital will likely continue to enter the asset class, while fund managers and investors seek to take advantage of the opportunities created as existing natural resources companies experience the impact of low commodity prices.
Women in Real Assets
Jeanne Kroeger examines the representation of women in junior, mid-level and senior positions at infrastructure and natural resources firms worldwide, using our extensive contact data.
Key Information – Methodology
The data in this article is sourced from Preqin’s online databases, which feature profiles on over 490 infrastructure firms and 809 natural resources firms, including full contact information.
Over 9,200 staff at infrastructure firms and 15,700 staff at natural resources firms worldwide were analyzed for this study. All administration and other support staff were excluded from the analysis.
Seniority was allocated on the following basis:
- Junior employees included Associates and Analysts
- Mid-level employees included Senior Associates, Vice Presidents, Managers, Directors and Principals
- Senior employees included Managing Directors, Partners, Senior Managing Directors/Advisors, Managing General Partners and C-Suite Executives
Contacts were also split into the following functions: Investor Relations/Marketing, Finance/Accountancy, Operations, Portfolio Management and Investment Team.
Globally, women represent approximately a fifth of all staff across infrastructure and natural resources firms combined (Fig. 1). This is similar to the proportion of women in real estate firms (21%) seen in Preqin’s analysis of women in real estate from our May edition of Real Estate Spotlight.
The proportions of female employees in infrastructure remain relatively consistent when broken down regionally (North America: 20%, Europe: 19%, Asia: 19%, Rest of World: 20%). However, 21% of employees in Europe-based natural resources firms are women, which is two percentage points more than the proportion of women in Europe-based infrastructure firms. Conversely, in all other regions, natural resources firms have a lower representation of female employees, particularly in Asia, where women constitute only 16% of staff – this is significantly below the global average for both asset classes.
With respect to seniority