APG Asset Management, the €374 billion Dutch pension manager and arguably one of the more experienced agriculture investors globally, has never invested into the US farmland market.
This could come as a surprise considering that the US farmland market is one of the most developed globally; North America accounts for 38 percent of the world’s agricultural assets under management – the largest portion, according to Valoral Advisors, the consultancy firm.
“We are not excluding the US; it just hasn’t come to it yet,” Jos Lemmens, senior portfolio manager commodities at APG, told Agri Investor. “Perhaps we will look at the US later; obviously looking from a distance it seems that the US is quite expensive, although it is getting more expensive every year.”
Instead the firm has investments in Australasia, Europe and Latin America and is considering Eastern Europe.
“Investing in the Eastern European Union is absolutely a possibility although we think that investing further East is a brave thing to do, and we are not that brave,” said Lemmens. “The European Union gives us some comfort on the rule of law and the level of development. The size of land parcels especially in countries like Romania is certainly a concern, although sometimes a few bigger deals are on the market; you need a lot of patience there.”
APG invests into agriculture through its commodities division that added a natural resources allocation in 2007. It started investing in timber funds that year and then added an agriculture fund in 2008. The natural resources portfolio later went on to include oil & gas and mining assets.
The firm decided to add these real assets to its commodities exposure after around six years of investing into commodities because it wanted to avoid overexposure to listed commodity futures.
“If you hold long exposure to commodities in the listed commodity market you run the risk of negative roll yields when futures are in contango and this can be a real drag on returns,” said Olav Houben, managing director commodities. “There are also a limited amount of agricultural products to invest in and we wanted to offer our clients more diversity, so we decided to provide commodity exposure via real assets, next to the existing listed commodity futures offering.”
“By offering investments in these productive real assets, we are trying to get more efficient exposure to commodities, and potentially for lower costs,” he added.
Searching for managers to fill this portfolio has been a challenge because APG is determined to invest with managers that have a proven track record in the jurisdiction they are in or in the specific agricultural activity involved. They also need to show that they are able to manage all stakeholders.
“Finding experienced agriculture managers is much more difficult than finding experienced managers in, for instance, oil & gas or mining,” said Lemmens. “Agriculture is the newest kid on the block so finding managers working on their third or fourth fund is very hard.”
“Some of the more experienced managers tend to invest globally,” added Houben. “However if we invested with several of them, we might become our own competition in the market.”
Instead APG prefers to invest in separate countries, or regions, and would like to diversify across sectors but this is a challenge considering the large number of different agri products, according to Houben who added that APG is invested across the three general sectors – livestock, crops and permanent crops.
The limited universe of managers can be restricting and APG often finds opportunities where they are no suitable firms to partner with, according to Lemmens.
APG is relatively fussy, too.
“It takes quite some time to build up a portfolio but it is also fair to say that we are focusing on established agriculture markets,” said Houben. “We are not too interested in frontier areas or in areas where conversion of nature into agricultural land is a requirement.”
The Dutch investor prefers to invest in own-and-operate assets although buy-and-lease investments are a possibility.
APG does not disclose its fund roster although it is understood to be invested in Macquarie’s Pastoral Fund.
It worked with other institutional investors such as ABP, PGGM and TIAA-CREF to create the Principles for Responsible Investment in Farmland in 2011 and takes responsible investing very seriously.
APG’s pension fund clients prescribe their ideal exposure to each asset class on an annual basis, taking into account their liabilities. They tend to stick to this allocation but could make some short term deviation occasionally, according to Houben and Lemmens.
It is very rare that APG uses an investment consultant but would consider doing so if entering a new region where the team has no previous investment experience. In this instance the Dutch investor would use a consultant to “make an assessment of the region, identify key stakeholders, determine general sustainability or economic risk fundamentals”, according to Houben.