PREQIN QUARTERLY UPDATE: NATURAL RESOURCES Q2 217 Insight on the quarter from the leading provider of alternative assets data Content includes: Fundraising Funds in Market Institutional Investors Fund Performance and Dry Powder alternative assets. intelligent data.
PREQIN QUARTERLY UPDATE: NATURAL RESOURCES, Q2 217 FOREWORD - Tom Carr, Preqin Fundraising has been challenging for natural resources firms in the second quarter of 217: just 12 funds have reached a final close, securing $5.2bn in aggregate capital commitments. This represents an 8 decrease from the $27bn secured by 21 funds in the previous quarter. Furthermore, half of all unlisted natural resources funds closed in H1 217 have failed to reach their initial target size, six percentage points higher than the 216 average. In this challenging environment, the number of funds seeking capital has stayed relatively level since the start of 217, with 248 unlisted natural resources funds in market as at the beginning of Q3, collectively targeting $11bn. Unsurprisingly, North America remains the most targeted region in the natural resources industry, while energy is the strategy most commonly employed. In line with the slight recovery in oil prices over the course of 216, the performance of the natural resources sector has improved: the PrEQIn Natural Resources Index increased by 7% from March to September 216 (the most recent data available). IRRs of recent vintage energy strategies continue to outperform those of the wider natural resources industry, narrowing the spread in median net IRRs between the PrEQIn Index and other real assets benchmarks such as the PrEQIn Infrastructure and Real Estate indices. Industry dry powder continues to increase up $2bn since Q1 217 with the vast majority (82%) held in energy funds. As the amount of capital ready for fund managers to deploy increases, asset valuations continue to impact the industry: 34% of all investors interviewed by Preqin in June of this year see asset valuations as a key issue for the next 12 months. We hope you find this report useful and welcome any feedback you may have. For more information, please visit www.preqin.com or contact info@preqin.com. p3 p5 p6 p7 Fundraising Funds in Market Institutional Investors Fund Performance and Dry Powder NATURAL RESOURCES ONLINE Natural Resources Online offers a comprehensive overview of the natural resources fund industry, covering funds, fund managers, performance and institutional investors. Information is constantly updated by our dedicated teams of analysts, ensuring that we provide the most extensive, up-todate information available on all aspects of the industry. Get in touch today to arrange a demo of Natural Resources Online: : info@preqin.com : www.preqin.com/nro All rights reserved. The entire contents of Preqin Quarterly Update: Natural Resources, Q2 217 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Quarterly Update: Natural Resources, Q2 217 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Quarterly Update: Natural Resources, Q2 217. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Quarterly Update: Natural Resources, Q2 217 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Quarterly Update: Natural Resources, Q2 217 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication. 2 Preqin Ltd. 217 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/quarterlyupdate FUNDRAISING In Q2 217, 12 unlisted natural resources funds reached a final close, securing an aggregate $5.2bn in institutional investor commitments, a significant decrease from the $27bn secured by 21 funds closed in Q1 (Fig. 1). Q2 217 saw the fewest fund closures since Q3 29 (8) and the lowest amount raised since Q3 211 ($1.1bn). The largest fund closed was & Minerals Group s & Minerals Group Fund IV which secured $2.38bn to invest globally (Fig. 7). In a similar trend to that seen in Q1, 79% of capital raised by funds closed in Q2 217 will go on to primarily target the North American natural resources market and, in addition, 52% of all capital raised globally will target energy opportunities (Figs. 2 and 3). It is therefore not surprising that nine of the 12 funds closed this quarter target energy, raising $2.7bn between them (Fig. 3). Eight of the funds closed this quarter were raised by North America-based managers, while three were raised by Europe-based firms, including Octopus (Fig. 7). Octopus Renewable Income Partnership will target both mature renewable energy and natural gas assets in Europe with a focus on UK opportunities. Funds closed in the first half of 217 have secured an average 11% of their initial target size, the highest average since 27 (Fig. 4), while half of funds closed in Q2 217 met or exceeded their targets (Fig. 5). The increased proportion of funds achieving their target size, despite half closing below target, highlights that investors are ready to deploy capital to the sector when presented with the right opportunity. KEY FACTS $5.2bn Total capital raised from 12 funds reaching a final close in Q2 217. 11% The average proportion of target size achieved by funds closed in H1 217. 81% Decline in capital raised from Q1 to Q2 217. $4.1bn was raised in Q2 217 by funds targeting North American energy assets. Fig. 1: Unlisted Natural Resources Fundraising, Q1 212 - Q2 217 6 5 4 3 2 1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 212 213 214 215 216 217 Date of Final Close No. of Funds Closed Aggregate Capital Raised ($bn) Fig. 2: Unlisted Natural Resources Fundraising in Q2 217 by Primary Geographic Focus Proportion of Total 1 9 8 7 6 5 4 3 1 2 3 7 No. of Funds Closed.2.9 4.1 Diversified Multi-Regional Rest of World Asia Europe North America Aggregate Capital Raised ($bn) 3
PREQIN QUARTERLY UPDATE: NATURAL RESOURCES, Q2 217 Fig. 3: Unlisted Natural Resources Fundraising in Q2 217 by Primary Strategy Proportion of Total 1 9 8 7 6 5 4 3 1 2 9 1 No. of Funds Closed 2.5 2.7 Diversified Natural Resources Water Timberland Metals & Mining Agriculture/ Farmland.1 Aggregate Capital Raised ($bn) Fig. 4: Average Proportion of Target Size Achieved by Unlisted Natural Resources Funds, 212 - H1 217 Average Proportion of Size Achieved 1 1 8 6 4 93% 98% 1 94% 95% 11% 212 213 214 215 216 H1 217 Date of Final Close Fig. 5: Unlisted Natural Resources Funds by Proportion of Target Size Achieved, 212 - H1 217 Proportion of Funds 1 9 8 7 6 5 4 3 1 14% 16% 16% 47% 21% 24% 23% 18% 18% 14% 28% 33% 17% 21% 8% 39% 7% 11% 1 14% 12% 23% 21% 5% 37% 5 7% 3 15% 212 213 214 215 216 H1 217 Date of Final Close Less than 5 5-99% 1 11-124% 125% or More Fig. 6: Average Time Spent in Market by Unlisted Natural Resources Funds, 212 - H1 217 Average Time Spent in Market () 3 25 2 15 1 5 19 21 19 212 213 214 215 216 H1 217 23 23 27 Date of Final Close Fig. 7: Five Largest Unlisted Natural Resources Funds Closed in Q2 217 Fund Firm Fund Size (mn) Strategy Geographic Focus & Minerals Group Fund IV & Minerals Group 2,38 USD Diversified Natural Resources Global ENR Partners II Edge Natural Resources 65 USD North America InstarAGF Essential Infrastructure Fund InstarAGF Asset Management 74 CAD North America Octopus Renewable Income Partnership Octopus 3 GBP Europe Fund IV: New Capital Infrastructure Credit Fund New Capital 325 USD North America RESEARCH CENTER PREMIUM All of the free research reports, newsletters, statistics and tools Preqin offers can be found in one place: Preqin s Research Center Premium. This free service provides access to analysis of the latest trends in alternative assets, as well as benchmarking tools, useful presentation slide decks from recent conferences and much more. For more information, or to sign up, please visit: www.preqin.com/rcp 4 Preqin Ltd. 217 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/quarterlyupdate FUNDS IN MARKET As at the start of Q3 217, there are 248 unlisted natural resources funds in market targeting an aggregate $11bn in institutional capital commitments. Over three-quarters (78%) of these funds have been raising capital for over a year, although nearly half (49%) have already held an interim close. North America-focused funds continue to dominate the fundraising landscape, accounting for 119 funds targeting $55bn (Fig. 8). Europe remains the second most prominent region for natural resources investment, representing almost a quarter (24%) of all targeted capital. In terms of strategies, energy funds make up the majority of unlisted natural resources funds on the road in terms of both the number of funds (62%) and aggregate capital targeted (74%, Fig. 9). This trend is also present in the largest funds by target size, with four of the top five funds seeking to invest in the energy sector. The largest fund in market is the eleventh flagship fundraise from EnCap Investments, which is targeting $6.5bn for energy opportunities in the US (Fig. 11). Fig. 8: Unlisted Natural Resources Funds in Market by Primary Geographic Focus 12 119 1 8 6 4 2 55.3 North America 62 24. Europe 1 12 13 14 4.4 2.2 4.4 6. Asia Latin America Africa Australasia 14 4.8 4.2 Middle East & Israel Diversified Multi-Regional Primary Geographic Focus No. of Funds Raising Aggregate Capital Targeted ($bn) Fig. 9: Unlisted Natural Resources Funds in Market by Primary Strategy 16 14 153 Fig. 1: Time Spent on the Road by Unlisted Natural Resources Funds in Market 45% 4 41% 12 1 8 6 4 2 48 1.6 Agriculture/ Farmland 74.5 No. of Funds Raising 18 13 12 6.8 3.1 4 1.6 4.6 Metals & Mining Timberland Water Diversified Natural Resources Primary Strategy Aggregate Capital Targeted ($bn) Proportion of Funds in Market 35% 3 25% 15% 1 5% 11% 11% Less than 6 6-12 13-24 17% 25-36 More than 36 Time Spent on Road Fig. 11: Five Largest Unlisted Natural Resources Funds in Market Fund Firm Target Size (mn) Strategy Geographic Focus EnCap Capital Fund XI EnCap Investments 6,5 USD US Alinda Infrastructure Fund III Alinda Capital Partners 5, USD Europe, North America Quantum Partners VII Quantum Partners 4,5 USD North America ISQ Global Infrastructure Fund II I Squared Capital 4, USD Global Power Capital International Resources Fund Power Capital 3, USD Metals & Mining China 5
PREQIN QUARTERLY UPDATE: NATURAL RESOURCES, Q2 217 INSTITUTIONAL INVESTORS Investors in Q2 217 have a greater appetite for natural resources investment than at this point last year: the majority (75%) plan to commit at least $5mn to the asset class in the next 12 months, a significantly greater proportion than one year ago (49%, Fig. 12). Similar to this time last year, the majority (82%) of investors are targeting unlisted funds in the year ahead, and the proportion targeting direct investment opportunities has also remained the same (Fig. 13). However, fewer investors are currently seeking listed funds in the year ahead than 12 months ago. timberland and metals & mining strategies, however, has decreased by 11 and eight percentage points respectively compared to a year ago. The largest proportion (48%) of investors are looking to gain global exposure to the asset class in the next 12 months, while North America remains the most targeted single region (Fig. 15). However, a significantly greater proportion of investors plan to target the Asia-Pacific region in the next 12 months than one year ago. remains the most targeted strategy by natural resources investors (Fig 14). The proportion of investors targeting Fig. 12: Amount of Capital Investors Plan to Commit to Unlisted Natural Resources Funds in the Next 12, Q2 216 vs. Q2 217 Proportion of Fund Searches 1 9 8 7 6 5 4 3 1 7% 25% 17% 51% 25% 12% 38% 25% $3mn or More $1-299mn $5-99mn Less than $5mn Q2 216 Q2 217 Fig. 13: Preferred Route to Market of Natural Resources Investors in the Next 12, Q2 216 vs. Q2 217 Proportion of Fund Searches 9 8 7 6 5 4 3 1 84% 82% 3 3 13% Unlisted Funds Direct Investment Listed Funds Route to Market 8% Q2 216 Q2 217 Fig. 14: Strategies Targeted by Natural Resources Investors in the Next 12, Q2 216 vs. Q2 217 Proportion of Fund Searches 1 9 8 7 6 5 4 3 1 3 3 Agriculture/ Farmland 85% 83% 28% 32% 21% Metals & Mining Timberland Water Q2 216 Q2 217 Strategy Targeted Fig. 15: Regions Targeted by Natural Resources Investors in the Next 12, Q2 216 vs. Q2 217 Proportion of Fund Searches 6 5 4 3 1 38% 34% 34% 33% North America Europe 28% 17% 17% 12% 11% 12% Asia-Pacific Rest of World Emerging Markets 53% 48% Global Q2 216 Q2 217 Region Targeted 6 Preqin Ltd. 217 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/quarterlyupdate FUND PERFORMANCE AND DRY POWDER The PrEQIn Natural Resources Index has increased by 7% over the two quarters up to September 216, its best six-month gain since September 214 (Fig. 16). With the index now standing at 118.5, its highest level in the past 12 months, the asset class appears to be recovering from the disappointing returns of recent years. This coincides with stronger gains recorded by the S&P Global Oil Index, as oil prices increased over Q2-Q3 216. While the wider natural resources sector has underperformed both infrastructure and real estate in recent years, 214 vintage energy funds are currently posting similar IRRs to real estate strategies of the same vintage (Fig. 17). Although IRRs of funds so early in their lifecycle are likely to change, this further highlights the recent improvement in natural resources performance. strategies and North America-focused funds continue to dominate the natural resources landscape, while the amount of dry powder held by funds focused outside North America, Europe and Asia decreased 14% over the quarter (Figs. 19 and 2). Fig. 17: Median Net IRRs by Vintage Year and Strategy Net IRR since Inception 18% 16% 14% 12% 1 8% 6% 4% 2% 26 27 28 29 21 211 212 213 214 Natural Resources Infrastructure Real Estate Fig. 16: PrEQIn Index: Natural Resources vs. All Private Equity and S&P Global Oil Index TR Index Return (Rebased to 1 as of 31-Dec 27) Net IRR since Inception 18 16 14 12 1 8 6 4 2 4 3 1-1 - Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 PrEQIn Natural Resources S&P Global Oil Index TR PrEQIn All Private Equity* 23 24 25 26 27 28 29 21 211 212 213 214 Fig. 18: Natural Resources - Median Net IRRs and Quartile Boundaries by Vintage Year Top Quartile Net IRR Boundary Median Net IRR Bottom Quartile Net IRR Boundary Vintage Year Vintage Year Fig. 19: Unlisted Natural Resources Dry Powder by Primary Strategy, 26-216 Dry Powder ($bn) 2 18 16 14 12 1 8 6 4 2 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Sep-16 Diversified Natural Resources Water Timberland Metals & Mining Agriculture/ Farmland Fig. 2: Unlisted Natural Resources Dry Powder by Primary Geographic Focus, 26-216 North America Europe Asia Rest of World *PrEQIn All Private Equity Index comprises private equity, real estate, infrastructure, natural resources and private debt (excluding direct lending). Dry Powder ($bn) 7 6 5 4 3 2 1 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 61.6 8. 3.7.7 Sep-16 7
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