Commodity houses court outside investors The world's largest commodity trading houses have revealed how they are courting outside investors including private equity firms and sovereign wealth funds as they seek to expand beyond their traditional business of buying and selling raw materials. The alliance with private equity and SWFs could help trading houses avoid the need to follow the model of Glencore, whose multibillion-dollar flotation in London last year thrust the industry into the limelight, senior executives at leading traders told the Financial Times Global Commodities Summit in Lausanne. The Swiss-based trading industry has traditionally been owned by its employees and funded by European banks, but a push to buy mines and oilfields as well as distribution assets has created a greater requirement for capital. Moreover, bank lending has become scarcer as European banks boost their capital buffers. "We, like others, are looking to invest in the whole supply chain," said Ian Taylor, chief executive of Vitol, the world's largest oil trading house. For certain types of assets public capital markets can be used, but the private equity sector is so big today you can use the private equity sector very effectively. Paul Chivers, chief investment officer at Mercuria, agreed. "I don't think there is necessarily going to be a rush for the door to list on public markets," he said, pointing to the potential for investments by sovereign wealth funds. Certain sovereign wealth funds have broadened their investment strategies outside public equities ... They've made specific forays into the commodities sector. Several SWFs have already taken stakes in listed trading houses, with CIC of China investing in Noble Group and Singapore's GIC recently revealing a 5 per cent stake in New York-listed Bunge. Temasek, another SWF of Singapore, is also a leading shareholder in Olam and of Glencore's largest investors Aabar of Abu Dhabi, while First Reserve, a US private equity firm, is also a leading investor. The trading houses are looking to new sources of funding as they slowly shift their business model from a "middleman role" into vertically integrated companies, bringing together production, distribution and trading under the same umbrella. The move towards physical assets is in a response to a drop in trading margins due to increased competition and transparency. The push into assets forced Glencore to look for extra capital through an initial public offering. Alex Beard, head of oil at Glencore, said the world's largest trading house felt it had no alternative if the group wanted to continue growing. "You have to have access to public funds," he said. But Mark Echlin, co-head of global industrials at Credit Suisse and one of the top bankers involved last year in Glencore's landmark IPO, said that private equity had "potentially a very big role to play" in commodities trading houses that wanted to avoid a public listing. He said the number of private equity houses which were ready to take on commodity risk was still limited, however.