November 2, 2017 / 9:39 AM / in a year

North American institutions eye mining sector, co-investments with PE firms

MELBOURNE (Reuters) - North American institutional investors are raising their exposure to metals and mining partly through co-investments with private equity, which offers them greater transparency and lower risk, industry sources at a mining conference said this week.

Private equity (PE) managers who specialize in mining said that North American institutional investors - who have a higher degree of mining and metals expertise than counterparts from other regions - are more likely to make such investments.

This was increasing the amount of capital that private equity could tap to find and develop new mining projects. For institutional investors, such joint investment partnerships give them more control over deals above the amount they have committed to a PE fund.

“Certainly in the U.S. market today you find a section within the pension funds that deals with mining and metals that is very specialist,” said Chief Executive Jason Chang of Australian private equity house EMR Capital.

“In the U.S., you’re talking to a person that has a (mining) strategy, not to convince them that it’s the place to be,” Chang told a panel at the Imarc mining conference in Melbourne.

EMR raised $860 million last year to invest in copper, gold, potash and coking coal projects and has since bought a copper project in West Australia. It is looking to find at least one other project to invest in over the next 12 months.

Chang did not specify how much of EMR’s investment funds have come from institutional investors.

Annual fundraising from private equity markets across all sectors reached nearly $625 billion last year, a level last seen in 2007/08, consultancy firm McKinsey said in a report. Out of that, allocation to co-investments and direct investments has grown every year since 2012, McKinsey said, without giving specific figures.

Pacific Road Capital, a Sydney-based PE firm has also seen sector specialists in North America drive specific investments.

“Institutional funds are saying, ‘Great ... show me more co-investments,’” Pacific Road partner Matt Fifield said at the same Imarc panel.

“What that does is take a (PE) fund and allow it to expand the breadth of opportunities and size,” Fifield said.

Recent investments by private equity into the commodities sector include EMR’s purchase of Golden Grove copper mine in West Australia in January, and Pembroke Resources’ purchase of the Olive Grove coal mine last year.

Private equity is also ready to buy into two Australian coal mines up for sale by Rio Tinto.

Still, private equity investments in mining have underwhelmed after metal prices crashed 18 months ago.

X2 Resources, the $5.6 billion mining-focused fund founded by former Xtrata chief Mick Davis, released investors from their financial investments last year after failing to make any investments over three years.

Investment in Australia’s mining sector fell by 23.7 percent in 2016/17, according to the Australian Bureau of Statistics, a fourth consecutive annual drop. Annual mining investment is now nearly 60 percent lower than it was in 2012/13, the bureau said.

Reporting by Melanie Burton; Editing by Tom Hogue

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