Apr 1 2016 at 12:15 AM Updated Apr 1 2016 at 12:15 AM
Mining legend Hugh Morgan still hunting investors for private equity fund
by Amanda Saunders
Mining veteran and former Reserve Bank board member Hugh Morgan is still to win over investors for his mining-focused private equity outfit, Arete Capital Partners, about 12 months after launching the venture.
Mr Morgan told The Australian Financial Review Arete is trying to drum up about $2 billion, about half of which would be equity. But he said that given the state of the market, it was important to be cautious.
"The hunt is still on," he said
"Do we have interested funders, yes. Committed funds? No. But we are not going to move forward unless we've got a package of funds."
Mr Morgan said he is talking to funds in the United States and Europe about backing Arete.
The market is awash with assets of the kind Mr Morgan is looking for – mid-tier and decent quality – thrown up by major players trying to fix their balance sheets.
"We are of course, very keen to be moving forward but we are matching that keenness with an appropriate caution on our own personal behalf, as well as [on the behalf of] the investors."
"There are always opportunities that give the prospect of higher, short term speculative rewards but we are not interested in that."
Mr Morgan is the former chief executive of Western Mining Corporation, where he managed iconic projects like Olympic Dam, now owned by BHP Billiton.
He may still be seeking funds and a maiden investment, but there is a long list of the new breed of mining specialist private equity vehicles that are yet to buy anything meaningful – or anything at all.
Critics of the model suggest there is a major disconnect between the private equity model and mining assets.
Not like real estate
But Mr Morgan said the time taken to deploy private equity money in resources is very different to investing in industries like real estate.
"You always want to do it sooner rather than later, but you can't compromise what you want to do. Time is one thing but that should not in any way impact your judgment."
When asked if he was surprised that X2, the $US5.6 billion fund founded by another mining veteran, Mick Davis, had not yet bought anything, he said: "I'm not surprised in the sense that they have been either smart or lucky enough not to have moved early as the market has continued to fall.
"In retrospect, there is a list of projects which would have presented, which were turned down in earlier negotiations, which if they been completed may well have embarrassed the purchasers.
"By good luck, as much as anything, they have avoided an embarrassment, because the market has declined."
Mr Morgan said there was still ample opportunity to buy, and that opportunity was not about to go away.
"There is still a great deal of balance sheet repair work to be done by many large companies, and I think they will continue to find that it is not a buyer's market into which they are increasingly having to present their projects."
Fellow mining veteran, Owen Hegarty set up resources private equity fund EMR Capital, a hop skip and jump away from Arete in Melbourne, and has raised $US450 million, much of which has been spent.
Mr Morgan is looking across all commodities, saying there is "hardly a commodity that private equity couldn't invest in" but singled out base metals, and speciality metals. But the case for coal was less clear.
"The challenge is whether to participate, or not, in sectors like coal, which have both upside attached to them but are also having to acknowledge increased investor reluctance in some areas."
Arete is aiming to buy about five or six projects between $300 and $400 million each. The projects should be able to generate positive cash flow within two to three years.
But Mr Morgan admitted he was caught in something of a vicious cycle - it is hard to get a cornerstone investor without explaining on how funds will be deployed, and it is difficult to secure assets that come to market without pre-committed funds.
He remained confident in the "tremendous upside" in the resources sector.
"But it's hard work," he said.
"Looking forward, it is a business that cannot rely on increasing prices to turn a sow's ear into a silk purse. It would be luck and not good planning that relied on forward prices, and if one was planning on luck then you may as well go to the races."
(20min delay)
