Appian’s Michael Scherb: accommodative capital and the new private equity investor in mining

Michael Scherb is the 32-year-old founder of Appian Capital Advisory LLP, a mining-focused private equity investment firm established in 2012.

Mr. Scherb has already advised on over $150 billion in mining sector transactions in his accelerated career. JPMorganCazenove (“JPMC”), where Mr. Scherb cut his teeth, was one of the first investment banks in Europe fully dedicated to the mining sector. As a result, Mr. Scherb was an advisor to some of the industry’s most transformational deals as part of the wider JPMC team, including advising Xstrata’s growth from $200m to $50bn and other major diversifieds including BHP and Rio Tinto and advising on some of the most successful and largest IPOs in London.

Mr. Scherb says that many of these deals happened because the mining companies were early private clients of the bank.

The JPMC model was to identify a promising resource asset or management team early on and commit both capital and strategic financial and corporate advice to its growth plans.

“Once I saw the bank heading more into the transaction-based model, I decided to leave and continue the private equity model on my own, mirroring long-term capital to a long-term industry,” Mr. Scherb told CEO.CA in an interview.

Appian are primarily a private equity investor, however they are comfortable holding 30-40% of their assets in public companies, with the remainder in privates, where they typically play a much more hands on role. After value has been created, Appian will exit their positions by way of sale or listing on a stock exchange.

Mr. Scherb says Appian sees itself as a stable and supportive long-term cornerstone investor, which provides advice on how best to maximise value through the firm’s experienced financial and operational teams.

Many traditional private equity players are weary of mining due to the complex risks and long term nature of the business.

“Appian is different from many private equity firms,” Mr. Scherb explains. “We benefit from having a veteran operational and financial team that enables us to prudently deploy capital in this specialized space.”

Appian consists of 13 professionals at the fund level across London, Johannesburg and Melbourne.

The team includes some operational heavyweights including Tony Redman, a former technical director of the AngloAmerican Group and the CEO of AngloCoal who developed that division into a 100Mtpa producer. Also Robin Mills, previously a technical director for both AngloPlatinum and DeBeers, CEO of Konkola Copper, and a senior AngloGold exec, and Jos Haumann, a 28-year old former head of African exploration for Rio Tinto.

On the financial side, Verne Grinstead, a 30+ year banking veteran and Managing Director at JPMorgan and Vincent Jacheet, a founder of Bain Capital in Europe round out Appian’s senior management team.

Many mining companies go public prematurely because they cannot access sufficient private capital for funding exploration and development work. Private equity offers miners the chance to secure the funding necessary to develop their projects all the way through to their ultimate value recognition.

The mining sector is extremely cyclical so having money that is uncorrelated with market volatility is especially important. The traditional capital raising route of reversing into a public shell seems to be shifting to pairing longer-term backers with private opportunities so that value is maximised and companies IPO closer to the point of production.

Management of these companies also get to spend the majority of their time focused on the operations of the business as opposed to ‘the business of the business’ which includes investor communications and listing requirements.

When Mr. Scherb left his six-year post at JPMC two years ago, he did so knowing that traditional sources of capital were drying up in the mining industry and that private equity, if created with the right people in place, could help fill in the funding gap.

Although, how much of the funding gap should be filled by private equity is debatable, given the fact that many publicly listed juniors should not have been able to raise equity to begin with.

Mr. Scherb soon found out that others believed in his thesis as well. Originally, he went fundraising for $100 million, but soon received commitments for many multiples of this.

“We cut back the funding to $375 million so that we would have a small group of focused investors that understand the need for long-term capital in a long-term industry like mining, and we are extremely grateful for the backing of the Limited Partners which we have. It’s also critical that we return capital with what we have rather than raise too large of a Fund I,” Mr. Scherb explains.

Appian are targeting 10-15 investments in select mining companies with enterprise values between $100 and $150 million. They want to deploy $150 million this year by investing between $10 and $100 million in each opportunity and Appian has the unique ability to hold an investment for up to 10-12 years, although earlier exits are envisioned.

Co-investment also provides the potential for larger ticket sizes if an attractive opportunity presents itself, as it has done on various spin-offs from mid-tier and major mining companies.

“Access to deal flow in this space only comes with relationships and experience,” Mr. Scherb says. “Most generalist private equity firms do not have the expertise in metals and mining that we have. Traditional private equity will continue to struggle with pricing volatility, and differing styles of leverage as well as quantifying permitting, social and environmental risks.”

Appian are becoming known in the industry for the depth of their technical diligence, looking for projects which are defensive to the pricing environment and where perhaps some of the technical upside hasn’t been priced in by the wider market.

Most recently, after what Mr. Scherb describes as “an extremely thorough diligence process”, Appian invested $12.5 million in the West African gold developer, Roxgold Inc. and now owns 12% of the company. He is very complimentary of Roxgold’s management team and board, whom Mr. Scherb describes as “great stewards of capital.”

“We like the term ‘accommodative capital’ because we like to be partners with our portfolio companies,” Mr. Scherb explains. “We have the internal management expertise, both in terms of operations and capital markets, to add value as a cornerstone investor if the management team requests it.”

Given the lack of available capital and the amount of mining companies gasping for life from financiers currently, Appian has no shortage of opportunities to consider.

“We only invest in companies with a clear timeline to cash flow, typically no later than three to four years out or producing already,” Mr. Scherb says. “We maintain an operational focus.”

As for what Appian is currently looking at, Mr. Scherb tells me he is geographically focused in Africa, Latin America and North America. As for what commodities he likes, he sees value in fertilizers, base metals, precious metals as well as some speciality minerals such as niobium.

Mr. Scherb believes there are many deals to be done, however he is dedicated to prudence.

As the market improves, the challenge for Mr. Scherb, Appian and the rest of the resource investing community will be to maintain that type of prudence in the throes of another bull market.

By Travis McPherson

For more information, visit Appian’s Web site.