Fundraising in the Minerals & Royalties Space: What you might need to know
Published 13th October 2021
by Desire Matabane, Data Analyst & Research Associate, Energy Council
Fundraising in any shape, capacity or form can be a tedious and stressful process for companies of any size or make up. The Minerals and Royalties industry is no exception to this phenomenon. Before understanding this process one should get rid of the ‘Go Fund Me account’ thought process as that is not the case in this industry. A vast mixture of expertise and experience will always come into play. Along with other requirements, a somewhat strict due diligence process needs to be followed, and at the onset of any fundraising campaign one needs to have a clear fundraising target and strategy.
Having a goal in mind before raising a Royalties Fund is key. Whether a fund is being raised to buy some minerals and flip that quickly or have them as a long term holder, the exit plan and strategy needs to be clear at all times. A viable fundraising target is collectively-dependent on a company’s track record, size of previous funds, whether you have any previous funds and current Assets under Management.
One point players should note is that SEC registration is not a requirement in order to have a mineral fund. However, it would be in ones best interests to deal with an accredited investor as this greatly reduces the level of risk one takes on. An accredited investor is one with a net worth of over one million dollars, excluding the value of their house.
Registered broker-dealers tend to be registered across different states, which can be beneficial since some mineral rights and interests are often active across more than one state. Broker-dealers can be useful in getting a foot in the door to institutional capital and family offices due to their reputation and track record of success.
Structures and pools of capital
The minerals and royalties industry has close-knit players who thrive based on the relationships and connections they have with each other. In light of this, new entrants might want to invest greatly in networking events related to the Minerals and Royalties industry. Due to the fact that many of the players are high-yield hungry individuals, family offices and high net worth clients are well sought after by companies specializing in royalty acquisitions. For growth-oriented clients, one .
A number of institutions, however, cannot exceed a certain percentage of the mineral fund in terms of exposure and might have minimum cheque sizes that could require other institutions to be a part of the fund already. A lot of large institutions interested in minerals want to participate at a certain level and the due diligence they have to go through is the same for their small funds or large funds –for instance, they would rather seek the returns of a $50 million investment, instead of $1 million as this is more efficient use of their time. Having a smaller fund means, for example, if you want $50 million you will not want to be over 25% exposed in the mineral fund.
These standards and caveats tend to work as a governor in determining who can participate in these funds however not in a way to discourage first timers but to encourage them to have better and stronger partnerships aligned with their strategies. Larger funds in excess of $100 million have been proven to benefit from diversification whereas smaller funds tend to use more focused strategies when investing in minerals.
Fund structures differ greatly across the board. Pledge funds are collective investments that allow backers to make decisions on a deal to deal basis. For first time funds, pledge funds are usually popular as they help demonstrate their credibility and track record. Having an outline of the kind of structure the fund structure and the tax implications involved will lead you to a specific niche of investors who understand your structure. Having some parallel fund structures may be feasible for some of those clients who may have a similar strategy in goal in mind yet are looking for a different fund structure. This can work for non-registered investors.
So creating multiple channels and avenues for investors to work with on strategies and assets will not limit you in terms of who can invest with you, however take note of the fact that conflicts of interest may arise from these different avenues and one must be careful of the legal implications where conflicts arise. Having more than two funds invested in the same basin, in many cases, can create a potential conflict of interests which is why investors will generally need a clear allocation policy.
The significant difference between the structure of aggregators and royalty trusts lies in the fact that aggregators reinvest earnings into the acquisition of properties whereas royalty trusts allow investors to speculate directly on commodities such as gas, oil, or iron ore without having to buy futures contracts, or use the other investment vehicles traditionally associated with commodities—since the trusts trade like stocks. Unlike royalty trusts, aggregators do not see a decline in production as they are continually reinvesting in new properties and therefore offer an opportunity for growth not typically seen in a trust.
Blind Pool Funds and Secondary’s
Most Minerals fund are ‘blind pool’ in nature and are quite difficult to raise capital for – meaning that the fund lacks a stated investment goal for the funds that are raised from investors. A strong track record of success is key in raising funds for these. Club deals and pledge funds are another way of getting around blind pools and showing investors the opportunity and selecting certain investors to participate. Secondary Funds are generally funds used by other LP’s and GP’s via portfolios. A major benefit to these is that they tend to outperform most transparent funds in the industry.
Investor Due Diligence
Whenever one buys an illiquid asset, one needs to take into account who they are selling to, to ensure there are other issues, especially environmental issues that a buyer might be conscious of. If you are not conscious of environmental issues, for example, as a buyer you will be crushed as a seller. Your exit plan after buying minerals is important in this respect too.
The buying of mineral rights for cash are generally smoother than buying for equity, since transferring equity tends to have a plethora of securities laws associated with them. The broad expertise of family offices can help navigate the administration and legalities as far as M&R are concerned.
Fundraising in Minerals and Royalties requires a paramount level of esoteric knowledge of the industry, lucrative leads, trusted networks and a good understanding of required compliance statues and knowledge of what is not required. It is a very facts and circumstances-oriented industry, where a keen eye for opportunity and risk would be beneficial as a buyer, seller, borrower or lender. While this market will become more saturated with time, at the moment, they offer an attractive alternative for investor appetite for decent yields with reasonably low risk.