Many of the world’s leading private equity (PE) firms have, for a long time, famously been avoiding investing in the precious metals markets. The volatility of these markets has always been cited as the reason for not wanting to invest, particularly post financial crisis when the levels of diligence prior to entering deals has been sat at an all-time high.
While this has determined activity for PE funds, many savvy investors have long been invested in mining companies and businesses connected with these, rather than investing in the commodity itself. However, this has also been a risky strategy given that, if little in the way of precious metals is being found, it becomes harder for mining companies to make the profits they need to sustain themselves.
Many mining companies had turned, in recent years, to selling off equipment to try and stay afloat. PE firms have generally avoided the industry in the knowledge that many mining corporations are heavily in debt, or that debt would be needed to finance the deal, and that unfavourable market conditions made it difficult to justify an investment here.
What is Happening?
While there are not believed to be any deals in the immediate pipeline, it is thought that several funds are already making long-term preparations to enter the sector. These preparations include headhunting senior industry professionals, both for their expertise in the industry and consultation value, but also presumably to use them should they complete a buyout or standard investment and need to place someone on the board of the business.
Several are also thought to be planning specific fundraising initiatives for the mining industry. Industry giants Apollo Global Management and TPG Capital are among those known to be actively planning ventures into the mining industry in the short to mid-term.
Private Equity Beat notes that the deal flow projections for the mining industry across the next 5 – 10 years are favourable, and that the industry should find itself as self-sustaining from a cash flow perspective within this period. Isser Elishis, of Waterton Global Resource Management, told Private Equity Beat, “I think the industry is going through a period of transition and will be stronger when it comes out of this period.”
Waterton Global are an industry presence that focusses fully on the metal and mining industries, and closed a $1billion fund earlier this year. Despite the new wave of optimism surrounding the metals and mining industries, many PE houses are remaining cautious about the likelihood of them entering the industry.
Blackstone Group is one such example, having admitted these deals are “on the firm’s radar” but also that they aren’t likely to move on them in the short-term. Private Equity Beat earlier reported on Blackstone’s position at this link. If mining deals start to happen, they could prove to be among the headline deals of 2014, although the extent to which we will see activity in this sector currently remains unclear.