Agriculture Capital targets $500m for citrus-focused third fund – exclusive

AC Fund3 will target low to mid-teens net IRR through a focus on fresh citrus in the US, Australia and Spain that builds upon the firm’s previous experience in permanent crops.

Agriculture Capital is seeking $500 million for its third fund, which will target low to mid-teens net IRR though a strategy focused on cash-yielding fresh citrus fruit assets.

A source familiar with the strategy told Agri Investor AC Fund3 will target an average annual cash yield of between 6 and 8 percent through investments in citrus farmland and related midstream assets. AC’s strategy envisions two thirds of capital invested in California, with the remainder divided between investments in Australia’s Murray-Darling Watershed and Southern Spain. AC declined to comment.

The California-headquartered firm closed its second fund on $548 million in 2017, after drawing commitments from LPs that included the Ohio Police and Fire Pension Fund, the New Mexico State Investment Council and Swedish pension Kapan Pensioner, among others.

That vehicle included citrus investments as well as properties devoted to tree nuts and blueberries. The source explained AC’s decision to now focus almost entirely on crops such as oranges, grapefruit and limes (among others) stems from investor desire for cash yielding assets and a heathy pipeline of mature citrus properties in the market.

“Inflation-sensitive yield is highly desired by all LPs,” the source added.

As a result of the preference for yield, they added, AC Fund3 will veer from the firm’s traditional 50/50 split between mature assets and development investments in favor of a two-thirds share for existing properties.

Farmland in the penalty box?

Fundraising for AC Fund3 will formally begin in the third quarter and the firm expects the effort will focus largely on existing investors, US public pension plans and their equivalent in Europe, the source said. A combination of geopolitics, inflation concerns and interest in natural capital, they added, have been the most important drivers of recent sentiment among potential investors.

Some larger institutions have come to view farmland returns over the past decade as a disappointment, according to the source.

“Many LPs that were looking at the space throughout the 2010s have, because of performance, either put farmland in a penalty box for a ‘wait and see’ or have decided altogether to move away and are not looking at farmland,” the source said. “That is a huge chunk of the LP community that was there seven years ago, that is not there anymore.”

Whereas there are now fewer large institutions interested in farmland fund commitments of as large as $100 million as opposed to building-out direct investment platforms, the source added, the largest growth in the number of investors interested in ag and farmland recently has been among large family office, endowment and foundation investors interested in commitments of about $25 million.

“They’ve seen such strong returns across their portfolios, particularly in terms of alternative assets, during the past three years, and are now looking to round out and become a little bit more defensive in their positioning for the next two to five years,” the source explained.

They added that current LP efforts to update inflation and geopolitical risk assumptions in light of recent events serve to raise farmland’s profile across investor types.

“I have heard an expectation that the asset class has more opportunity to perform and hit investments targets [now] than it has historically,” they said. “On a relative basis, that’s now attractive against other things in real assets, and across a broader alternatives portfolio.”

AC’s first fund closed on $250 million in early 2015 and the Equilibrium Capital affiliate managed $734.8 million as of March, according to a regulatory filing.