In the wake of a wave of direct investments in the sector, a September editor’s letter focused on the opportunity for ambidextrous firms to offer a range of services aside from raising and investing third party funds. It was the best read editor letter on the site. A few sources, including Laguna Bay’s Tim McGavin, have since argued that the case for direct investing is now less valid as there is going to be an increasing need to deploy capital more quickly. It will be interesting to see how the direct investment trend develops in 2015.
Last week was a big week for direct investment into agriculture.
In the US, Agri Investor revealed that AP2 had committed $750 million to TIAA-CREF’s new direct investment club. In Europe, AP3 told us that it was now pursuing a more direct route in timberland. And in Australia, a Scandinavian pension fund was reported locally to have invested $20 million with Murray Goulburn, the dairy operator, in a buy-and-lease arrangement. The latter deal was particularly notable since there are at least two dairy-focused funds in the region – from Aquila Capital and Craigmore Sustainables – that would have provided an alternative means to gain exposure to the sector.
Some institutional investors are clearly adjusting their strategy to focus more on direct investing. AP3 told Agri Investor as much this week, while in the US, Utah Retirement Systems this year hired Robert Cowan as director of agriculture and timber to build a direct investment portfolio. As we’ve seen in other areas of the alternative investment world, it can have obvious advantages: notably lower fees, more flexible terms and a bigger share of the upside.
But this does not necessarily threaten the investment management industry because there are other ways in which investment professionals can get involved, away from the traditional fund management model.
For a start, there are varying degrees of ‘direct investment’, and not all of them mean cutting out the third-party manager completely.
TIAA-CREF’s ‘direct’ investment pool will still use Westchester – the agricultural asset manager – to originate and manage its investments (the main attraction for AP2 was really the potential to hold onto the investments over a very long time frame). And the Murray Goulburn investment was sourced and arranged by Marcus Elgin, executive chairman of AAG Corporation, the Australian agribusiness consultancy and asset management firm.
In fact, in Australia, there is a growing universe of firms and individuals – calling themselves agribusiness consultants or land agents – that source deals for investors wanting to go direct, a particularly popular method of channeling capital from the Middle East and China. In many ways they act much like an investment banker or broker would, although the lines blur at the management of those assets and the level of involvement these parties have with the farm operators.
In some cases, this approach could be a stepping stone for newer firms and individuals to raise a more traditional fund – since, as one agri asset manager told me, arranging deals like this is a great way to build a track record. “Currently we do bespoke and tailored mandate solutions; but once we have a track record and coverage across enough geographies, we could launch a fund product that will make sense for smaller institutions that cannot write the larger tickets usually involved in direct deals.”
And of course, some investors looking to increase their direct exposure will prefer to do it through co-investment – which relies on asset managers to source and arrange deals (and co-investments do not always come for free, my sources tell me). Swiss fund of funds house Adveq and emerging markets asset management firm Milltrust International are among the asset managers offering co-investment opportunities.
So yes, the rise of direct investing is likely to change the agri investment market and impact fundraising levels. But it won’t necessarily squeeze the investment professionals out; for those that are flexible with the products and services they offer, this burgeoning trend could end up being an opportunity rather than a threat. Watch this space.
We will be talking about direct investing and hearing from URS’s Robert Cowan among other institutional investors at Agri Investor’s inaugural conference in Chicago in November. Find details of the agenda and how to register here.