Opportunities can become harder – and more expensive – to find as the playing field becomes more crowded. Is there ‘too much capital chasing too few deals’ already?
During 2014, I heard a lot about the growing number of asset management firms turning their attention to agriculture or offering agriculture investment products. At the Agri Investor Forum in Chicago in November, one pension fund manager voiced concern about this trend: “It seems to me that the market may be overheating, looking at the number of managers around,” he said.
He may have a point: according to Agri Investor estimates that there are at least 535 asset management firms that have, or are managing food and agriculture private equity funds. And other estimates of the entire GP universe investing into food and agri in some shape or form are much higher.
The pension fund manager’s main concern was that too many asset managers raising and investing agri-focused funds would make for an unappealing competitive landscape when it comes to acquiring assets. Opportunities can become harder – and more expensive – to find when the playing field becomes more crowded.
But after speaking to various fund managers and investors, many felt the ‘too much capital chasing too few deals’ concern was premature. Few agriculture fund managers, if any, have expressed worries about competitors muscling in on their deals. And if anything, investors usually tend to be concerned about the low number of agriculture funds and investment opportunities to choose from.
“We have not directly bumped into any of our institutional competitors or any substantial overseas buyers when buying farms, and we don’t expect that to change next year,” said Nick Tapp, head of client advisory at Craigmore Sustainables, the New Zealand dairy fund manager. Although Tapp admits that “competition comes from neighbouring and other local farmers” and that there “are a number of interested parties in every transaction as with most markets that have a sensible political environment and commercial situation”.
Alan Hayes, executive chairman at Australian Pastoral Fund (APF), the beef cattle vehicle, holds a similar view.
“Despite the widely-reported macro economics underlying global food production and demand, there is only limited competition from fund managers for livestock-producing properties in Australia at present,” he told Agri Investor. “There has been a small amount of interest from some high net worth foreign direct investors, and potentially from some sovereign wealth groups … But the strongest competition for major land acquisitions in Australia is from the larger, efficient family producers, who operate with minimal to no debt and a tight rein on all costs, with an aversion to publicity and who have sufficient scale and spread of assets – along with the motivation and the ability – to cut back on expenses of all kinds in periods of economic downturn.”
On entering the institutional investor marketplace in Canada, Stephen Johnston, founder of Agcapita, the traditionally retail-focused farmland fund manager, said he wasn’t concerned about bumping into any institutional competition, either. “The Canadian farmland sector is very deep with C$10 billion ($8.4 billion; €7.1 billion) in liquidity every year,” he said, adding that other institutional buyers could in fact be good candidates to buy Agcapita’s retail fund portfolios at exit.
And it is well-known that the main source of acquisition competition in the US farmland market is local farmers who will pay above market value to buy a piece of land next to, or near to, their existing plots.
The private equity world is also in a strong position when it comes to sourcing agriculture-related deals without too much competition, GPs tell me.
“The food and agribusiness sector is underserved from a private equity perspective,” wrote Kevin Schwartz, president of Paine & Partners, in a press release announcing the final closure of the food and agri PE firm’s Fund IV this week.
Sebastian Pope, managing partner at Aqua, the Latin American food and agri private equity fund, says he has never come up against any competition. “We don’t have a lot of competition for acquisitions because there just aren’t many players acting in the agri space,” he said. “The challenges for us are more related to managing volatility and adding operational value.”
And in December, Abraaj Group’s Omar Syed told me that competition for food and agri deals came from strategic investors operating in the region, not from other private equity firms.
In fact, it seems that investors should be more concerned about locals operating in the region or sector they work in as the main source of competition. But APF’s Hayes argues firms should also look to local experts as a source of inspiration.
“These private owner-acquirers have the ability to act and operate and produce at higher levels of profitability with lower costs and less volatility than most corporate producers,” he said. “This attitude provides the competitive purchasing edge in acquiring quality properties, and it is this group of landholders and operators that APF is emulating in its acquisition and operational strategies.”
So let’s hope the institutional investment community understands the competitive edge many agri fund managers out there still have. From midstream private equity transactions to farmland purchases, it appears to be a similar story across the value chain. While this window of opportunity is unlikely to close in the near future, the number of asset managers operating in the sector will only continue to increase.
Happy New Year to you all. Here’s to 2015: the year when more institutional interest turned to actual investment!
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