How Agriculture Capital attracted public pensions

After launching with a target of $400 million in early Q2 2016, Agriculture Capital’s second fund closed on $548 million in September, thanks to backing from the Ohio Police and Fire pension fund, the New Mexico Statement Investment Council and others.

AC investor relations executive Atish Babu, who oversaw the fundraise, described the journey from preliminary pitch to actual pledges in an interview with Agri Investor.

“There are investors that you reach for and are surprised that come in.  There’s some that you reach for and they don’t come in, for a variety of reasons. There’s a handful of others that you think are sure things and it works out, and there’s a handful where you think it’s a sure thing and it doesn’t work out,” Babu summarized. “I would say that we had our fair share of all four.”

Setting the sights

The vehicle, which targets low-teen returns with a vertically integrated permanent crops strategy, occupies an increasingly prominent segment of the agri market.

Babu said that AC’s fundraise naturally began with a focus on investors that had committed to the firm’s first fund, which closed on $250 million in 2015. He and his team also took time to identify which prospective investors would likely take more time than most to make their decisions, before setting off for a series of preliminary conversations.

“Where we lose investors is typically in that initial screening where it’s clear that our goals, from a return and risk perspective, don’t match what the investors are looking for. That is not to say that they disagree with our approach, but that for whatever goals they are looking to achieve with that particular allocation in their portfolio, we may not be the best match for them.”

Though the firm’s investors include endowments, foundations and private pensions, public pensions in the US and Europe were the focus of AC’s effort on ACM II. AC’s first fund had a high percentage of capital from public pensions, Babu said, and the firm deliberately aimed to increase that percentage in its second effort.

“Our return profile is fairly well-suited to the return requirements and risk profile of public pensions. Through past experience, we know that we seem to resonate well with them. They seem to understand what we offer to their portfolios and it’s been a happy marriage so far.”

J-Curveball

A key challenge AC had to face in its fundraise was the J-curve effect inherent to permanent crops. On such plantations, the lead time from seeding to reaping the first fruit left it without solid first-fund return figures to present to potential Fund II investors.

In a memo prepared in advance of the NMSIC’s $50 million commitment to the fund in January, NMSIC director of real return and real estate Paul Chapman and analyst Michelle Dubin identified this effect as a key risk to the investment.

Compounding the J-curve challenge, Babu said, was the fact that Fund I’s assets were a mixture of mature, producing acres and new trees planted within the past three years.

While stressing that the challenge of raising a fund without a long track record is by no means confined to agriculture, Babu said that the key to overcoming this challenge was transparency and data.

“To the extent that some of those trees were bearing fruit and we could harvest by the time we were raising money in Fund II, we had numbers as to what we expected those yields to be and what we expected the NOI for those properties to be. What we were able to present was a curve that showed our underwriting,” he said.

In their memo about ACM II in January, Chapman and Dubin acknowledged that while the longer J-Curve of permanent crop investments delays cash returns, the fund’s targeted returns compensate for that added risk. The extra time also provides an opportunity for new trees to take advantage of advancements in disease resistance, water conservation and productivity, they said.

“While we cannot show you what this will be in the end state, we can show the trajectory that we expected, the trajectory that we saw and allow you to draw your own conclusions about our ability to understand and control those and make your own conclusions about our claims on the second fund,” Babu said.

Look out for the second installment of our dive into AC’s latest fundraise, to be published next week.