“The problem with the commodities space if you have a high gearing is that you are not running Boots pharmaceutical where you have a pretty constant earnings base… you just don’t know your earning base. When you hit bad times, like we did recently, it goes down (quickly). How are you going to feed your debt?”
Who said it: Ivan Glasenberg Chief Executive Officer, Glencore Xstrata
In Context: Private equity players are creating more specialized and sector specific funds, targeting non-traditional sectors and emerging markets, in their efforts to raise funds in a highly competitive global marketplace that makes it more difficult to attract LP money and find reasonably priced deals. (See Natural Gas buyout below). One of those sectors they are expanding into is the extraction or mining industry (including gas and oil companies) but mining industry insiders are not exactly optimistic about PE’s role in their industry. And this trend is what Glasenberg is commenting on in the quote above. He says that PE’s business model, which typically relies on steady cash flows to finance debt, does not fit with mining’s need for patience and deep pockets to make large investments for exploration and lumpy revenue flows. Volatility in the price of commodities is another issue, as is dealflow.
Mining industry executives quoted in the article said they are willing to sell non-core assets but they are not about to sell them at valuations that fit PE’s model. His views are complemented by opinions expressed elsewhere in an article in The Financial Post, which adds the time horizon for generating returns in PE being shorter than that of the mining sector, and the need for specialized technical know-how, as two more challenges facing PE investors. That said, the same article described one PE fund manager that has been successful, namely Waterton, which has made returns by limiting its geographical scope, and the range of commodities sought by its portfolio companies. (Image source: Reuters)
Where we found it: Reuters