Agriculture offers infrastructure investors a natural extension for their real asset allocations, said a principal with investment manager and advisory StepStone.
Ryan Ramsey said there are StepStone clients with infrastructure programs that have come to include ag after as few as four investments, due to the similarities between the assets’ characteristics.
“When you think about teams that have come out of an infrastructure background and built agriculture portfolios, what have they focused on? Some of them have focused on building portfolios that look a lot like an infrastructure portfolio in terms of their return profile; high-yielding and less reliance on capital growth and that is what permanent crops look like,” said Sydney, Australia-based Ramsey.
The massive scale of infrastructure investments limits any direct comparisons, said Ramsey, and while ag is estimated to be up to two decades behind from an institutional perspective, key similarities do exist. These include low correlation, capital preservation, inflation hedging and the need for specialized management of long-lived, capital-intensive assets.
Agricultural investments are subject to greater volatility and less likely to offer the contracted cashflows more common in infrastructure, conceded Ramsey, but the resilience provided by the durability of global food demand offers potential for even stronger capital appreciation through recessions, which can make ag complimentary.
“We think that it is a trade-off that makes sense and enhances a real asset portfolio with some different characteristics than what you get from infrastructure or real estate for that matter,” said Ramsey.
‘Opening peoples’ eyes to the opportunity’
In a September whitepaper published by StepStone titled Agriculture: Ripe for Institutional Investment, the firm estimates there are nearly 50 managers currently active across a market encompassing farmland, agribusiness, related infrastructure and agtech.
The report highlights how this broad grouping can meet a range of investor objectives including high real asset backing, fixed yield, high total returns and protection from systemic shocks. The report cites opportunities in agriculture-focused secondaries and the amassing of a select number of very large farmland portfolios over the past 10 years, as signs of the market’s evolution.
It also notes the emergence of a co-investment trend already more pronounced in other markets and a “steep change in dealflow” over the past two years, which has seen managers focus co-investments on large or vertically integrated operations and agribusinesses.
“Where we have seen more of the co-investment is around permanent crops and niche crops where real scale can be developed,” said Ramsey of opportunities he said was in the region of least $300 million. “From our perspective, that is a very attractive part of the market and has some different characteristics to traditional farmland investment.”
StepStone’s report maps the range of options available to LPs at various sizes including farmland-focused separately managed accounts of $200 million or more, and primary fund commitments of as little as $10 million.
Ramsey noted that the few LPs active in agriculture that are large enough to invest directly and choose to do so, also often deploy capital into the sector through funds and other hybrid models. This highlights, he said, both the inroads agriculture has made among this sophisticated group of LPs and the benefits that flow to smaller investors from the market’s overall development.
“The fact there is a broader range of GPs, that is as much a benefit for a small LP as it is a large LP,” he added. “It is arguably more of an advantage for a small LP that has more options available to optimize their portfolio with the fewer investments that they are capable of doing.
“The maturing of that GP universe really has broadened the options for institutions,” said Ramsey. “One of the things that comes up quite regularly is: ‘Can we deploy at scale?’ That has been a big question mark for a lot of groups and there are now quite a few groups that have shown it can be done. That is opening peoples’ eyes to the opportunity.”