Best of 2014: agri investing needs realism

In July we spoke to Marcus Elgin, executive chairman of AAG Investment Management, the Australian agribusiness consultancy and asset management firm. Elgin talked to us about a disconnect between fund managers’ return projections and what can actually be achieved in agri investment, sparking a range of comments from readers. The original version can be found here.

What have been some of the issues in agriculture asset management in recent years?

Part of the problem has been a disconnect between what corporate or investment bankers think they know about agriculture and what they actually do know. Even when a banker partners with a farmer, in my experience the greed rubs off and one is no less greedy than the other. The farmer is driven by the banker who controls the gold and very soon it is back to the normal, unsatisfactory routine.

There have also been highly disconnected projections of returns and what is actually achievable. There is this idea that you can make private equity type returns but that is very rarely possible so the industry needs to employ some realism.

Another big issue is fund managers that charge fees from when they make a farm investment. This is nonsensical in farmland because you are not instantly buying wealth when you buy a farm; it incentivises the fund manager to buy fast, not well, which is obviously counter-intuitive for the investor.

What is the solution for fees then?

Unfortunately there is no one-size-fits-all answer. But for the most part, asset managers are too well paid and this isn’t helping performance at all. “2-and-20” is just extreme – it should even be less than 1 and 10 – if you look at what a family farm takes out of a business it is certainly not 2 percent every year.

Our standard fee is under 1 percent and 10 percent on out-performance in arrears (subject to continuing performance) in order to mirror the family farm.

How do you differentiate your offering? And what types of returns have you achieved recently?

We only offer private account options and we have been long term players in this sector with over 25 years’ experience and a proven business model. And our track record reflects this; we have returned over 10 percent compound annual growth rate over the last six years. This track record has also enabled us to be increasingly selective about who we want to do business with.