Agriculture investment structures are still very much at an experimental stage, speakers at Agri Investor’s Forum in Chicago told delegates last week. This is likely to be the case for some time to come, they added.
“The market is testing new structures,” said Bernd Meissner, managing director at placement agent Kronstein Alternative Investment Advisors, pointing to TIAA-CREF’s evergreen investment structure.
“We are still going through a process of the industry testing different strategies and maybe 10 years from now it will be clear that there are a few different structures and strategies that will appeal to a large group of investors,” added Agustin Araya, partner at Cordillera Investment Partners. “Most of us here are pioneers in the asset class.”
The experimental stage will last for some years to come as portfolio managers start to convince investment committees about the benefits of new structures, the panellists said.
“We have all grown up with the 10 year 2-and-20 fund model so suggesting an unconventional structure to your board will be a very different conversation,” said Noel Kullavanijaya, principal at Equilibrium Capital. “We are in the process of machinating around that.”
The variety of agriculture sectors and the different return profiles they present make structuring a much more complex scenario than in other more established alternative asset classes, argued the panellists.
“What’s the total return? What’s the value add component? What is the fund size? And then you have the terms,” argued Araya.
“Johannes Zhou of CIC mentioned the difference between alpha and beta strategies. In our experience, we would be more willing to pay traditional private equity fees for funds that we think have a more alpha strategy where the rates of return, and obviously the risks, are higher.”
Jim Schultz, founder of Open Prairie, the agtech venture capital firm, said whether the investment pursued a development strategy or a core strategy governed what structure should be pursued. He added the size of the fund was also a factor. “We think that the 2-and-20 fee structures fits funds that are sub-$100 million in size,” he said.
Many development, alpha or value-added strategies tend to be more downstream private equity opportunities where businesses are created or grown dramatically, investors argued.
“I do think there are value-added strategies upstream where you can take a more private equity model,” said Araya. He gave the example of a small fund Cordillera is invested in, which converted pasture land to permanent crops and achieved mid-to-high-teen rates of return. “That was a large value-add play and we were happy to pay that manager something like 2-and-20 to achieve that.”
“Once it is up and running, you no longer want to pay that much so perhaps the manger should sell to another type of manager for a more beta proposition and fee structure. And we would struggle to pay 2-and-20 for a core beta strategy. In this case we would focus more on an absent management fee or try to think about performance fees above a benchmark – which is hard with these types of assets, but conceptually we would start there.”
The 10-year term of a typical private equity firm could also fit with the value-added upstream proposition, Araya added. The permanent crop conversion project took five years to produce a fully mature orchard, which meant Cordillera was comfortable with the manager realising its profits after 10 years.
“If you have an asset that is already core, up and running and yielding, you now just want great management and that’s very difficult to fit into a 10-year typical term,” Araya added.
The panellists suggested a variety of alternative structures such as a separately-managed account where investors have some control over how long they hold the assets, an evergreen structure or a real estate investment trust which can go public and give investors the choice whether to be involved for longer.