Investors stay on the sidelines

The deal-making environment in Western Australia is as challenging as ever, as the once-buoyant mining sector recalibrates to the so-called ‘new normal’, which appears to be the old normal as far as I can tell.

Most dealmakers I spoke to over the past few weeks tell me they have plenty of people who want to do deals but are cautious to commit. They don’t want to be first, in case the market goes down again. They only want to buy quality, because they need the assets to work. They are wary of the macro-environment, because that can postpone even a subdued recovery.

While such thinking would be in order during other brief downturns that occurred during our prolonged boom, there is a difference – the explosive global growth and the associated cheap credit that fuelled the boom are no longer expected to return.

Instead, we have returned to markets that resembled something more like the 1990s, albeit more positive for resources because the longer-term growth story out of China and other parts of Asia remains stronger than it did more than a decade previously.

So investors and dealmakers have recognised that, even though the world has become bigger, so has the supply side needed to meet that increased demand.

Compared to just a decade ago there are more mines, more gas fields, more factories, more land devoted to food … and more dealmakers to help companies in these fields transact. They all have to cope with sharing a pie that won’t grow as quickly as it did.

And while assets are, relatively to 1995, in abundance, buyers are not. The new normal reflects the fact that many former investors are out of the market because they are paying off debt, simply have insufficient appetite for risk, or face insurmountable restraints from financiers.

That will disappoint past investors, but once they recognise their optimism was caused by over-exuberance, many will accept that prices for their assets have to reflect the new normal.

This is a challenging period as we adjust but, quite likely, a far more stable one once the trough is reached. The boom had its bright spots, including the emergence of WA as a powerhouse economy, but it was also exhausting for many who struggled to keep up.