The well-documented rise of agriculture as an institutional asset class has obscured a less intuitive trend: the sector’s transition from public to private in less than a decade.
Valoral Advisors, which tracks 446 funds dedicated to the broad food & agricultural segment, reckons that only 11 percent of total fund assets under management are publicly held, down from 62 percent in 2010.
In a report released this week, the firm admitted that the fall was somewhat “counter-intuitive”, given the strength of public markets of late. But there were good reasons for the shift, it argued: the nature of the broad food and agriculture industry, “with a fundamental real asset base and a relatively fragmented value chain”; and the increasing sophistication of it as an investment asset class, “with a growing number of diverse private strategies that can contribute to specific investment outcomes— growth, income, real return, or a combination thereof.”
Not all private strategies fare the same, Valoral cautioned. Amid feeble commodity prices, private equity, venture capital and private debt have pulled forward, “leaving farmland funds struggling to raise new capital.”
Similarly, it classified the institutions responsible for the asset class’s rise to the mainstream into different types.
It noted a striking shift among pensions funds into direct investment with operating companies, as well as a growing appetite not just for primary production assets but also integrated agribusiness. The hoped-for dividends of such a choice, the firm observed, was “more efficient deployment of capital and larger control.”
Valoral also singled out sovereign wealth funds, highlighting a diversification away from investment in farmland and towards midstream and downstream agribusinesses assets. Trailblazers in the field included Temasek, China Investment Corporation and Mubadala Investment Company, as well as a number of government-owned food companies from the Middle East eager to secure supplies of cereals, oilseeds and animal protein.
Farmland strikes back
A more discreet, yet powerful, group was that of trading houses, in Valoral’s view, with Chinese, Japanese and Singaporean giants displacing their European and US peers as major investors.
Still, amid the diversification drive by many of the institutions involved, the firm said “back to basics” may well pay strong dividends in the long run. “Agricultural real assets offer long-term value after the drops seen in recent years. Despite the current low cash yields, a well-diversified portfolio of farmland assets offers resilience and downside protection in numerous ways.”