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Debating 2-and-20 in California

Investors and fund managers are starting to look for innovative ways to construct agri portfolios.

What’s the right private investment fund structure for institutional investors to gain agriculture and agribusiness exposure? Is the 10-year, 2-and-20-style fund ‘dead’?

That’s not a new topic, per se – we covered the issue recently, in fact – but it’s clearly a crucial one and was one of the hot panels this week at Equilibrium Capital’s real assets and sustainability forum in Sausalito, California.

Louisa Burwood-Taylor, Editor, Agri Investor
Louisa Burwood-Taylor, Editor, Agri Investor

Most speakers and delegates seemed to think the market was moving on with good reason from the standard private investment fund structure popularised by private equity fund managers.

“Why should I spend time accumulating a valuable portfolio of assets only to liquidate them 10 years later and start again?” remarked Hamid Moghadam, chief executive of real estate fund manager Prologis. He noted it was impossible to build and adequately scale agri-related businesses in the time frame demanded by a 10-year fund.

Buy-and-lease farmland, for example, involves long-term relationships with tenants and requires continuity. Moghadam argued that by selling all your assets, and therefore ending those relationships, you are damaging your customer base and ultimately the scalability of your operation.

Liquidity can be created without going in and out of business, he argued – pointing to the REIT industry as an example. Accessing agri via REITS is also being touted as a solution by John Baker, chief executive of First Agriculture Holdings and previously the Asia head of food and agribusiness research and advisory at Rabobank.

Building in extensions and flexibility to terms and conditions may also assuage concerns over holding periods and scalability, fund managers tell me.

Meanwhile, some investors feel a totally different fund and fee structure is appropriate, particularly if their expectations for agri and its role in an institutional portfolio are more in line with infrastructure-style returns as opposed to private equity-style returns.

Majken Hauge Johansen of Danske Capital’s alternative investments team said during a panel that the alternatives manager always negotiates fee structures and rarely pays a 2 percent management fee; 2-and-20 is a huge fee drag on real assets performance that ranges between 10 percent and 12 percent, she said. Furthermore, in order to find more attractive returns in these asset classes, Danske plans to engage in more co-investments, which generally have better terms for investors.

A lack of in-house resources and expertise prevents many institutional investors from doing direct deals themselves, but that, too, may be changing. I sat next to an academic at the conference, for example, who was setting up a consultancy firm to help large-scale institutional investors incorporate socially responsible, sophisticated and sustainable practices across their portfolios with a focus on direct investment, thereby cutting out the fund manager(s).

What’s your view? Are 10-year funds with classic 2-and-20 fee structures becoming obsolete in the agri investment world? Let us know in the comments below.