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Waterton easily beats target for second fund, as LPs see gold in mining

Canadian private equity firm Waterton Global Resource Management has raised just over $1 billion for its second fund focused on the metals and mining industry, handily beating its $750 million target.

Waterton Global Precious Metals Fund II was oversubscribed, with a small group of institutional LPs – primarily endowments, pension funds and sovereign wealth funds – committing large individual sums, said Isser Elishis, the Toronto-based firm’s managing partner and CIO. He added that Waterton’s partners also “heavily invested” in the fund.

The new fund is five times the size of its predecessor, Waterton Global Value LP I, which raised $200 million in 2010. Like Fund I, Fund II will focus on investing in producing and late-stage development of precious metals assets around the world. Transactions will typically be structured as acquisitions, joint ventures or partnerships.

The Wateron announcement adds to the growing momentum of PE fundraising in the mining sector. Commitments to mining-focused funds totaled $3.2 billion in 2013 and $5.2 billion in 2012, well above levels recorded in prior years, according to Preqin. U.S.-based Resource Capital Funds, which recently raised over $2.0 billion for its sixth fund, is among the managers that have helped drive these trends.

The emergence of well-capitalized PE mining funds is being spurred by economic upheaval in the mining industry.

Robert Noronha, M&A partner at Deloitte, said that after years of expansion, mining companies are coping with “a new reality” of weakened demand, sagging commodity prices and sky-rocketing project costs. Many lack “sufficient cash on the balance sheet” to fund operations and further growth, causing them to turn to alternative strategies.

Noronha said that external financing is also scarce. Public debt and equity – a traditional funding source – is now largely unavailable to all but very strong mining businesses. The Toronto Stock Exchange, which accounts for a major share of the world’s public mining listings, has seen sharp declines in related equity financings and IPOs. And non-traditional sources, such as Asia-based investors, have also reduced significantly, he said.

Private equity has increasingly been viewed as mining’s potential White Knight. That’s perhaps not surprising as PE investors are liquid, operate with long-term horizons and risk tolerance, and are hungry for opportunities that reveal under-valued assets. On the other hand, PE generally has had a limited history in this specialized market segment.

Waterton prides itself for having developed substantial in-house infrastructure for evaluating, analyzing and implementing mining transactions. Many members of its investment and technical staff are former employees of mining businesses such as Barrick Gold and Teck Resources.

“You can’t buy your way into this business or chance upon the perfect mine,” Elishis said. “Without having the expertise and all of your ducks in a row, successful investments simply won’t happen.”

Elishis said Waterton’s “multi-disciplinary and technically grounded approach” has positioned the firm to move quickly as quality opportunities arise. “We’re always ready to converge like a little army.”

Waterton has completed 25 transactions since 2010, five of which were invested through Fund II. Its recent deals include last year’s purchase of the Hollister gold mine and the Esmeralda Mill in Nevada. Earlier this year Waterton made a $59 million bid for Chaparral Gold, a precious metals producer with development projects in Nevada.

After a quiet market last year — something Elishis attributes to conditions in the mining industry and too few “Triple-A PE management teams” – he expects this year to see more activity.

“We are extremely bullish about the deal environment in the United States, and we are beginning to get bullish about the environment in Canada,” he said. He expects most of Waterton’s North America-focused transactions will emphasize gold and copper assets, and to a lesser extent, silver assets.

Atlantic-Pacific Capital acted as the global placement agent for Waterton Fund II.

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