Coronavirus: Private creditor eyes ag debt opportunity

Placement agent First Point Equity is working with a US-based GP that is raising a private credit fund for farms with liquidity constraints caused by the pandemic.

Farmland’s ability to offer yield and real asset returns that have largely been resilient in the face of turmoil in several markets, could make the asset class an attractive destination for private lending.

The sector’s defensive characteristics have been borne out as segments of the ag space have experienced unprecedented demand from retail clients, as home food consumption has surged amid population lockdowns.

Farming businesses exposed to school and food service closures, however, have been scrambling to establish new supply chains to get their products to market, which could create liquidity constraints.

“What we find compelling about the credit opportunity in the US – keeping in mind the defensive nature of ag and the strong downside protection – is it’s a point in time when there is going to be volatility in the system,” said Craig Lewis, partner at placement agent First Point Equity.

“We think that will put certain producers who have established farming operations and strong underlying land positions, in a situation where they will experience a liquidity squeeze as a consequence of the factors we’re living through.”

First Point has “just signed up” with a US-based GP that has launched a fund focused on the agriculture credit market, confirmed co-founder Julian Pearson.

“The GP provides bespoke lending solutions to the ag space and has achieved super compelling uncorrelated returns. That fund is particularly well positioned to capitalize on the stress in the system and looks set to be an attractive and scalable deployment model within the agri space,” he said.

“If you can offer up something with bulletproof downside protection and a yield component underpinned by a strong real asset base, as you get with ag funds, that’s a very attractive product for the LPs right now,” Pearson added.

The asset class benefits from an additional layer of resiliency, said Lewis, due to the “robust safeguards” provided by USDA purchasing programmes and state aid initiatives.

The US government paid out around $28 billion to farmers between 2017-19 as compensation for the trade war with China, while a $19 billion covid-19 aid programme was launched for farmers on 27 April.

“As a strategy of capturing a yield-based return profile and achieving some upside potential through various structural features in secured loans, we think that equates to a situation where you could earn very interesting equity-like returns, but also take much more of a fixed income risk profile against some of those government safeguards,” explained Lewis.

“From a risk-return perspective, we think it ranks quite highly in comparison to anything else we’ve seen in the recent days of real asset strategies.”