Natural Resources Fund Performance And Dry Powder In Q2 2016 by Preqin
Natural Resources Fundraising in Q2 2016
Both the number and aggregate capital raised by unlisted natural resources funds fell in Q2 2016: 10 funds secured $5.6bn in Q2 2016, a reduction on the 13 funds that raised $11.8bn in Q1 (Fig. 1). Consequently, fundraising for H1 2016 is lower than in H1 2015, when 35 funds reached a final close securing $37bn in capital commitments.
The majority of capital raised in H1 2016 has been for funds focused primarily on North America (Fig. 2). Seventeen North America-focused funds closed, raising an aggregate $13.1bn, three times the amount secured by all other unlisted natural resources funds. Contrastingly, Europe- and Asia-focused funds have secured $3.3bn and $0.2bn respectively since the beginning of 2016, while funds focused on countries outside the aforementioned regions secured $0.7bn.
Of the 23 funds closed in 2016 so far, 70% primarily target assets in the energy sector, and have secured 90% ($15.7bn) of the aggregate capital raised (Fig. 3). Comparatively, one primarily metals & mining-focused fund raised $700mn in institutional capital in the same period.
On average, funds closed in H1 2016 have achieved 96% of their initial target size, the lowest figure since 2012 (Fig. 4). Furthermore, half of the funds closed this year have failed to reach their initial target size (Fig. 5). However, funds that did a reach a final close in H1 2016 spent less time in market, spending an average of 20 months on the fundraising trail, compared with 23 months for funds closed in 2015 (Fig. 6).
Funds in Market
As of the start of Q3 2016, there were 255 unlisted natural resources funds in market, targeting $142bn in institutional capital commitments. Just over a third (34%) of these vehicles had already held an interim close, having raised an aggregate $52bn towards their respective targets.
The developed markets of North America and Europe remain the investment destination of choice for natural resources fund managers bringing funds to market: 65% of the number of and 78% of the aggregate target capital is focused on these two regions – North America-focused funds are particularly dominant with 105 vehicles targeting $88.6bn from institutional investors. Outside these markets, there are a significant number of funds on the road, albeit with typically smaller target sizes. There are 24 Latin America-focused funds seeking $6.0bn, 16 Africa-focused funds targeting $5.4bn, 13 Australasia-focused funds seeking $2.2bn and 19 vehicles seeking $7.9bn for investment in assets across a range of markets.
The majority (62%) of funds in market are focused on the energy sector, seeking nearly three-quarters (74%) of aggregate target capital (Fig. 2). Agriculture/farmland is the next most targeted industry, with 49 funds in market seeking to raise $12.9bn, a 33% increase on the amount of capital targeted in Q1 2016.
Institutional Investors in Natural Resources
Investor sentiment towards the natural resources asset class appears positive. A notable 32% of investors plan to commit at least $100mn to the asset class over the next 12 months, including 7% planning commitments of $300mn or more (Fig. 1).
Unlisted funds will remain the primary route to market for the majority (84%) of natural resources investors in the next 12 months, while 30% of institutions will invest directly in assets and 13% are looking to invest via listed funds during this period (Fig. 2).
Despite continued volatility in global energy prices, 85% of investors seeking to make a commitment to natural resources in the next 12 months are targeting energy-focused funds (Fig. 3). Nearly a third (32%) of investors will be targeting timberland funds, followed by funds focused on agriculture/farmland (30%), metals & mining (28%) and water (20%).
The majority of investors (53%) are seeking to invest on a global basis in the next 12 months, while North America and Europe remain the most preferred regions, targeted by 34% and 33% of investors respectively (Fig. 4).
Fund Performance and Dry Powder
With natural resources commodity prices continuing to struggle, it is unsurprising that the performance of the asset class has dropped; the PrEQIn Natural Resources Index fell from 171.5 at the end of September 2014 to 151.6 at the end of September 2015 (Fig. 1).
Further evidence of the difficulties faced by the asset class can be seen in Fig. 2: the median net IRR of both energy funds and the wider natural resources asset class has dropped from 7.0% for 2012 vintages to -5.0% for 2013 vintages. In comparison, the median net IRR for infrastructure has remained relatively stable and real estate continues to outperform all other real asset vehicles for vintage years 2008-2013.
The amount of dry powder held by natural resources managers has grown rapidly since 2010, increasing by $85bn in the five years to 2015 to stand at $162bn at the end of Q3 2015 (Fig. 4). The majority of this growth has come from energy-focused funds and funds investing primarily in North America (Fig. 5).
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