Area One’s Fund IV at halfway point as covid-19 sharpens focus on farming

The health crisis has drawn more attention to food production and security issues, renewing a focus on farmland investing, Area One Farms CEO Joelle Faulkner said.

Area One Farms collected C$160 million ($114 million; €104 million) for a fourth farmland private equity fund, founder and CEO Joelle Faulkner told sister title Buyouts.

Area One Farms IV held an initial close in March, putting it roughly midway toward a final target of C$250 million to C$300 million, Faulkner said. The Toronto firm was originally raising two vehicles – one institutional and the other earmarked for wealthy investors – but merged them.

Commitments to date have already made Fund IV 23 percent larger than its predecessor, which closed in 2017 at C$130 million.

Capital was secured from new and returning limited partners, mostly endowments, insurers and pension plans. They include a Canadian institution that early on provided a cornerstone investment.

Area One’s marketing of the fund has “slightly slowed” since the outbreak of the covid-19 pandemic, Faulkner said. Some potential new investors, most of them without existing farmland allocation policies, recently paused their due diligence activities. The firm has until March 2021 to wrap up Fund IV.

The health crisis has also drawn more attention to food production and security issues, renewing a focus on farmland investing, Faulkner said.

At a time of market volatility, farmland “is holding its value and maintaining its profitability,” Faulkner said, giving investors “a good proof point.” Farmland’s ability to deliver long-term, uncorrelated returns with an income and appreciation component also is of greater interest to LPs in the current environment, she said.

‘Shared-value’ strategy

Area One forms joint ventures with family farms, helping them scale operations and transfer ownership to the next generation over a 10-year period. The firm provides most of the equity for acquiring agricultural land and invests in the equipment, research and land improvement and conversion.

Area One calls its investment strategy a “shared-value” model because operators share in the earnings and in the 10th year are able to buy the expanded property.

This emphasis on sustainable farm ownership and alignment among the parties, Faulkner said, runs counter to the sale-and-leaseback model used by many other farmland PE firms. Area One targets a per-fund net internal rate of return of 12 percent, which has been met or exceeded by prior vehicles.

Fund IV will maintain the strategy, backing producers in Canada’s grain and oilseed industry. It will give more priority to land improvement measures, which will account for 50 percent of portfolio acreage, compared with Fund III’s 25 percent.

“Productivity-enhancing land improvement is the highest performing part of our portfolio,” Faulkner said. “We’re also seeing more opportunities brought to us than ever before.”

Fund IV’s deeper capital pool will allow for increased geographic and operational diversification, Faulkner said. The fund has so far deployed 10 percent of its capital to two family farms.

Global food demand rose sharply with the onset of the pandemic, a UN agency reported. Producers, however, are facing challenges to their ability to cope, among them liquidity issues and potential disruptions in supply chains. The Trump administration last week unveiled a $19 billion relief program for US farmers.

The nature and impact of challenges will vary across agricultural commodities and producers, Faulkner said. She cited the example of Canadian grains and oilseeds, which is faring well in part due to strong export markets.

Faulkner and her brother Benji Faulkner launched Area One in 2011. They are members of a London, Ontario family of dairy farmers. She today leads a team of 11, including CFO Derrick Rolfe, a PE professional who formerly worked with Borealis Capital Corp and Penfund.

Since inception, Area One has invested in 17 farms and 20 operators overseeing more than 140,000 acres of land.