Mining industry veteran Hugh Morgan is looking to build a multi-billion-dollar private equity powerhouse as a vehicle to swoop on unloved resource assets.
The controversial former chief executive of Western Mining Corporation and Reserve Bank board member has set up shop for Arete Capital Partners in Flinders Lane, the former heart of Melbourne’s rag trade district, which is better known now for its hip bars and restaurants.
Four projects initially targeted by Mr Morgan’s Arete Capital Partners are collectively worth as much $US1.3 billion ($1.7bn).
An energetic 74-year-old, Mr Morgan is executive chairman of Arete. He follows in the footsteps of another mining veteran, Owen Hegarty, who has set up resources private equity fund EMR Capital, which recently lured $US450m ($585m) from investors.
Along with other resources-specific funds, Arete and EMR will be competing for deals with the $US5.6bn X2 Resources, the London private equity fund of former BHP Billiton executive and Xstrata boss, Mick Davis. But Arete is unlike EMR and X2 Resources in that it does not yet have any committed equity with which to pursue deals. That put Arete at least 12 months behind, Mr Morgan told The Weekend Australian from London yesterday .
Arete has yet to appoint a placement agent to search out a lead funder, which in the world of resources private equity can be a sovereign wealth fund, a pension fund or a commodities trader.
“We’re just out of the blocks,’’ Mr Morgan said. “But we’ve got four projects that we are looking at right now, all at the same time, as we go into the marketplace looking for funders both here in London and the US and elsewhere.
“They (the projects) are not in the public arena. They are opportunities that we have self-generated through our contacts across the group and we can continue to bring them forward, illustrative of what we can do to the fund managers, if they were to advance funds.”
Mr Morgan said there was certainly an appetite for resources private equity funds, which currently make up only a small part of the private equity sector.
“There are not many resource PE funds, but there is emerging PE interest in the resources sector.”
He noted that the new funds each had a different area in which they sought to act. He said Mr Davis at X2 was really about trying to buy a business. “Then there are the other funds that are looking at sharemarket opportunities with the small ‘zombie’ companies that need $5m to $30m,” he said.
“Arete’s focus is on the unloved asset that could be placed in the market by any of the leading mining companies as they go through their portfolio to match the downturn in prices.
“They have the pressure to focus on their core businesses. There is a whole raft of companies that have publicly stated that is what they are doing, and there will be quite a portfolio of assets placed in the market over the next 24-36 months.
“We are saying that we want to be in that marketplace. We are looking at projects that are in the $US200m-$US300m bracket,’’ Mr Morgan said.
He said the focus would be at the asset level, not corporate plays.
The rise of resource private equity funds is based on the premise that the rapid decline in commodity prices in response to China’s slowdown and oversupply makes for a happy hunting ground for distressed or jettisoned assets.
It requires a longer-term view of the commodities markets and is built on the belief in what Arete says is the demand pressure coming from the ongoing urbanisation of the world’s most populous nations — China and India.
Traditionally, private equity has steered clear of the resources industry, seeing it as too risky.
X2 Resources has yet to pull the trigger on any significant deal in the mining space. That lack of action has prompted gossip its equity backers could look elsewhere to park funds.
EMR, on the other hand, has made a big play in potash through its investment in ASX-listed Highfield and a US group with a solar potash project.
It is estimated that as much as $US20bn has been amassed by resource-focused PE funds, with pension funds, sovereign wealth funds and high-net-worth investors buying what is essentially backing a straw hats-in-winter movement. Leveraged with debt, the $US20bn in (committed) equity could support $US40bn in transactions.
Absent from the mining scene since his departure from WMC in 2003, Mr Morgan says in an information memorandum sighted by The Weekend Australian that Arete had identified a $US50bn target market of undervalued but high-quality assets across the industry.
The memorandum says Arete seeks to “capitalise on the current opportunity in global natural resources and mining by acquiring quality mining and resource assets (primarily gold, copper and other base metals) at below fundamental intrinsic value, and build therein to high value assets to generate outsized returns’’.
Mr Morgan describes four “immediate term’’ pipeline opportunities for the new fund across gold and copper assets in North and Latin America, and the Middle East. The biggest involves a potential $US500m investment in a copper project with associated port infrastructure in Latin America.
On the absence of Australian assets under the gaze of Arete, Mr Morgan said it reflected the need to “go where it was most competitive’’.
Arete’s chief executive is private equity specialist Campbell Olsen who established Polarity Capital and has managed mining operations around the globe in his career.
Shaun Treacy is executive director and chief investment officer. He was formerly head of natural resources at JPMorgan.
Senior advisers include Russell Scrimshaw, a founding director of Andrew Forrest’s Fortescue until 2001, and John Macfarlane, former chairman and chief executive of Deutsche Bank Australia.
The Australian Business Review