Natural Resources Fundraising Faces Tough Environment

The environment has been unfriendly for investors in natural resources as the sector produced “lackluster” returns in 2019 and the number of funds that closed declined for the second straight year, according to a report from data and information provider Preqin.

On the surface, the natural resources sector as a whole looked like it had a pretty good year last year with assets under management surpassing $750 billion as of June. But that figure is dominated by large private equity and infrastructure funds, with pure natural resources funds accounting for less than one-third of that total.

The number of natural resources funds closed dropped 14% to 128 vehicles from 149 in 2018, reflecting tougher fundraising in the asset class. At the same time, performance in the sector disappointed investors as the rolling one-year median net internal rate of return (IRR) in the first half of 2019 plummeted to a 10-year low of 1.5%. Preqin said the industry struggled to gain momentum amid volatility in commodity prices and rising geopolitical tensions.

“At first glance, the headline numbers for 2019 are strong … but these figures were bolstered by the closing of mega infrastructure funds that also invest in energy assets,” Audrey Ne Win, editor of the report, said in a release. “For pure natural resources funds, 2019 proved to be a challenging year. … Performance has been underwhelming, and this may impact future growth for the asset class.”

The report also said that investments in natural resources are increasingly shifting toward renewable sources of energy as the global economy moves away from fossil fuels. It said enviromental, social, and governance (ESG) practices are driving growing investor interest in sustainable farming and in agricultural technologies that make greener methods of food production. Preqin said the increased focus on environmental sustainability is generating new opportunities for investment in the agriculture/farming sector, with aggregate capital raised by agriculture funds doubling to $3.6 billion from $1.8 billion in 2018.

Not surprisingly, as investor appetite for sustainability surges, interest in conventional energy sources is diminishing, the report said. In 2019, the number of conventional energy funds closed fell 59% compared with the previous year to its lowest number since 2010, while aggregate capital raised declined 32%.

At the start of 2020, Preqin said there is a “challenging outlook” for the year with 318 vehicles in market seeking a total of $205 billion. Approximately 56% of funds in market have held at least one interim close with only 28% secured so far, which the report said indicates a crowded fundraising environment.

“That’s not all. Fund managers are having to grapple with a tough exit environment, rising asset valuations, commodity market volatility, and geopolitical uncertainty,” the report said.