Benjamin Belldegrun, managing partner with Pontifax AgTech Management, the first agtech and fifth life sciences fund of Pontifax Group, makes the case for why institutional investors should get excited about agtech companies — in particular, those with proven technologies and established distribution channels.
The mood at February’s SuperReturn conference in Berlin, the annual industry gathering for private equity professionals, was largely bullish. In a low-yielding macroeconomic environment, private equity managers have distinguished themselves in recent years by routinely generating 20 percent-plus IRR figures for their investors. They have been rewarded in kind, raising over $500 billion for the past four years in succession, according to Bain’s 2017 Global Private Equity Report.
For the institutional investors who allocate this capital to external managers, private equity’s outperformance is a double-edged sword – for two reasons. Firstly, the inflow of capital into the asset class and emergence of more firms to manage it will increase competition for the finite number of companies suitable for private equity investment. The consequent asset price inflation will erode the returns generated for pension plans, insurers, endowments, and the like.
Secondly, with many institutional investors increasing their exposure to private equity, what has historically been classed as an ‘alternative’ asset class is becoming more mainstream. Stocks and bonds still constitute the majority of these institutions’ portfolios, but their private equity allocations have become a significant third component. Concerns are mounting among investors about the risk posed by a simultaneous downturn in equities, bonds, and private equity holdings.
Historically, real assets in the agriculture sector – most notably farmland – have been an effective hedge against the staples of stocks and bonds. Morningstar and NCREIF calculate that, from 2000 to 2012, returns on farmland had a near-negligible correlation coefficient of 0.14 with the S&P 500, and were negatively correlated with corporate bonds. When returns on farmland meet their target of c.12-14 percent, this is an attractive proposition. But with these returns having fallen to c.6-8 percent in the wake of the latest commodities downturn, real agriculture assets have become a low-yielding hedging strategy.
Investors feeling these pressures need an asset class that combines private-equity-style returns, an undersupply of capital, and an exposure to the market fundamentals of the agriculture sector. One month after private equity’s Berlin extravaganza and over 5,000 miles away, San Francisco played host to several events which highlighted how agtech could be this solution.
Technology companies focused on the global food and agriculture sector are proliferating rapidly, concentrated primarily in the hotspots of the US and Israel. At the World Agri-Tech Innovation Summit and Future Food-Tech Summit in late March, a succession of these businesses lined up to explain their solutions for revolutionizing agricultural productivity, resource efficiency, and sustainability. They ranged from AgBiome, a leading biologicals discovery platform focused on creating natural crop-protection products through genetic sequencing of microbial organisms, to Conservis, whose farm management software helps farmers make smarter, more data-driven decisions.
Institutional investors should be excited to back these companies. Pioneering tech businesses of any kind are popular with private equity, and growth drivers don’t come much more fundamental than a scarcity of arable land and water compounded by a projected increase in global population to 10 billion by 2050 – hence significant return potential. Focused as they are on facilitating improvements to farmers’ productivity, these companies are heavily exposed to the agricultural sector and its uncorrelated ups and downs – hence portfolio diversification. And because successful deal origination is predicated on establishing a network of growers to pilot and validate the technologies you plan on supporting, barriers to entry are substantial – hence undersupply of capital.
Naturally, institutional investors will retain a healthy skepticism towards this win-win proposition, even coming from the select pool of proven agtech investors. After all, early-stage tech companies notoriously offer a risk level commensurate to their stratospheric reward potential. Moreover, while a comparative scarcity of players within the agtech market is advantageous to those with the network and know-how to invest effectively, it also speaks to the complexities implicit within the sector.
But there are steps that institutional investors can take to reduce these risks when selecting an external manager.
Pontifax AgTech has chosen its portfolio companies carefully, selecting firms with proven technologies and established distribution channels rather than focusing on earlier-stage venture capital investments, which serves to mitigate technology risk.
These companies, which we believe have enormous growth potential, exist in sub-sectors as varied as IT (e.g. Conservis), life sciences (AgBiome and Caribou Biosciences, a gene-editing platform capable of developing traits such as drought tolerance within plants), precision farming (the robotic crop management platform Blue River Technology), and the industry supply chain (Anuvia Plant Nutrients, a producer of high-efficiency fertilizer from organic waste).
In this context, it becomes crucial to identify a manager with the most extensive possible proprietary network of growers, researchers, and strategic partners, ensuring a diverse and high-quality deal pipeline as fast-growing businesses in the industry position themselves to achieve market leadership after the commercial viability of their technologies has already been verified. At the time of Blue River Technology’s $17 million funding round in 2015, for example, the company’s robots were already treating plants on 10 percent of US lettuce fields.
For these reasons, expect agtech strategies to feature ever more prominently in the portfolios of institutional investors seeking to combine private equity returns with the security of agriculture exposure.