Natural-resource funds are among the most successful at raising capital this year, materially so. That trend represents an abrupt shift in the texture of private markets, which have been dominated since 2015 by technology opportunities. Institutions largely lost interest in natural resources, after the sharp drop in oil prices in the second half of 2014.
According to data from Preqin, a data aggregation service, institutional investors allocated some $111 billion to natural-resource funds in the first six months of this year, representing a 73% increase over the same period last year. This relationship was reported earlier this month by The Wall Street Journal.
Some caution is warranted. “Natural resource” is a broad category of convenience for the investment industry. It includes agriculture and farmland, energy, mining and minerals, timberland, and water. Aspects of these components are akin to “infrastructure.” The overwhelming bulk of new money into the natural-resource category, though, has been driven by energy investments, including upstream and downstream crude operations, petrochemicals, coal, and some renewables. Energy infrastructure, such as pipelines and transport, are also in the mix.
The renewables allocation in “natural resources” is limited; it may include geothermal or biomass opportunities. For private-market players, many sustainable ideas have been captured in broadly-apportioned technology categories. The asset-management industry has long assumed that technology was a smoother sale, than more conventional natural-resource stories.
Institutional names are pouring money into these funds for at least two reasons:
Cash Distributions. Prior to this year, limited exit opportunities for fossil-fuel deals meant scant returns to investors. Sharp gains in oil prices are now translating into generous cash flows to be parceled out to limited partners.
Portfolio Hedge. Building exposure to oil—among other commodities—is viewed as a baseline risk-management tool during periods of high inflation. The idea is that the value increases alongside gains in consumer and producer prices, mitigating concerns about other investment positions.
For institutions that are allocating to natural-resource funds, the question on the table may be how long the fossil-fuel story will remain buoyant, even at diminished levels. Generous oil-price increases this year are due to one-off factors, including surging demand amid a dwindling pandemic and the Russian invasion of Ukraine. Fundamentals are wildly askew.
After the United States, Saudi Arabia and Russia are the world’s largest oil producers. Consider these points for forward-looking context:
Saudi Arabia. The Kingdom is viewed as the swing producer in global oil markets. The nation appears unable to increase its output on a sustained basis until 2025. The issue is not proven reserves, but technical aspects of oil extraction, including pressure levels in some fields, according to Riyadh.
Russia. The war in Ukraine grinds into stalemate, indicating that Russian oil will remain unwelcome in the major economies. Even if the war were to end quickly, Russia will continue to be isolated by many of its one-time trading partners. There is no “back to normal” scenario for current leadership in Moscow.
Alternatives are certainly part of the bigger picture in global energy markets. Many experts suggest that wind, solar, hydro, among others, can soon capture most of the growth in energy demand. But that is different than meeting existing, core requirements. Royal Dutch Shell, admittedly a biased voice, asserts that renewables will not begin to dominate electricity generation worldwide until the 2050s.
Institutional investors often have different priorities than climatologists, politicians, and environmentalists, particularly among names with annual reporting or asset-liability matching requirements. For now, those gatekeepers are benefiting from generous returns in fossil fuel-related deals, at a time when many of their portfolios likely hold below-average positions in natural resources. Last year, the internal rate-of-return in this fund category was almost 35%, according to Preqin. ■
Our Vantage Point: Near-term enthusiasm for fossil fuels is being veiled by broad references to natural-resource investing. Extraordinary fundamentals are luring institutional investors back to the asset class after a seven-year hiatus.
Learn more at The Wall Street Journal
© 2022 Cranganore Inc. All rights reserved.
Unauthorized use and/or duplication of any material on this site without written permission is prohibited.
Image Credit: Mark Mareen at Adobe Stock.
On the surface, The 
