Blend it like Beckham

Timber champions have demonstrated their interest in agri by building dedicated teams. It’s only a matter of time before they start mixing both asset classes in diversified vehicles.

Blended finance can be a confusing term. In its simplest definition, the term involves injecting development finance and philanthropic cash into projects to help attract commercial lending and institutional money. The “blended” quality of it, however, extends beyond the nature of the financiers: often a package will mix debt, equity and layers in between. MaryKate Bullen, an associate director at New Forests, recently told us that such arrangements were likely to gain prominence in 2018.

Market insiders, however, tell us “blended” is a term becoming increasingly popular among LPs – in a more concrete sense. Finding the division between timberland and agriculture needlessly clear-cut, some are starting to search for products that bring the two asset classes together in a single pool. Being a publication that covers both, we can only welcome such a trend. But there are also reasons to think that mixing the two makes objective sense.

Start with LPs. A large majority put agriculture and timberland in the same bucket, often as part of natural resources or real assets. In some cases, this is for matters of resource scarcity and convenience: institutional investors can rarely afford to allocate big teams to niche assets, so staffers might as well cover several of them. But from a portfolio construction standpoint, it seems logical to assign ag and timber to the same family as well: fund formation experts tend to see them as playing comparable functions.

“From what I’ve seen, yields, hurdles and terms are similar. But the way they get there is a bit different, and cashflows are a bit different. It will depend also if you’re talking about greenfield or brownfield,” says Luciana Aquino-Hagedorn, a partner at Goodwin.

The rationale also stacks up on the GP side, because a number of blue-chip timber firms have also formed ag-focused teams. Stafford Capital Partners, for example, is branching out into agriculture after deploying a suite of forestry vehicles. Hancock Natural Resources Group already does it. So it’s not such a drastic step for them to start marketing products blending both. Indeed, they’ve begun to do it: Stafford is investing its first dual separate account, and Hancock has raised more than $700 million for a blended vehicle.

They’re not the only ones. A mapping of the fundraising universe we carried out in collaboration with bfinance, to be published on our website later this week, shows that vehicles covering both sectors are looking to raise a combined $1.6 billion (out of about $15 billion targeted by ag and timber funds in total). The shift suggests a number of managers are hoping for a fresh wave of LP interest: newcomers being more likely to have a single ag and timber allocation, you might as well give them the means to achieve greater diversification straight away.

Such strategies won’t suit everyone, and may not always be easy to implement in practice. If the trend does pick up, however, it could be worth thinking of a new name for the combined asset class. “Timberture” sounds a little harsh. “Agriland” should be reserved for farm-focused theme parks.

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