Debt’s role in agri

Agri Partners and Caribbean Sustainable Agriculture are making use of debt – should more firms follow their lead?

Debt’s been on my mind recently, thanks to recent news from Agri Partners about its UK lending offering and the first close of Caribbean Sustainable Agriculture’s equity offering last week, a project employing a 50:50 debt-to-equity ratio.

‘Leverage’ isn’t a word you hear very often in conversations with agri investment professionals; indeed, many of them pride themselves on the fact they don’t use any debt to secure large deals and/or enhance returns. While over-reliance on debt has come under fire post-Lehman Brothers, its pragmatic use has long been considered a core tool for fund managers across other alternative asset classes, including private equity and infrastructure.

And in the case of CSA it looks like it could play an important role in enabling the project to continue its investment programme, while rewarding investors for their commitment in a shorter space of time – it is promising to return investors 96 percent of their capital, plus 8 percent, after four years.

A pension fund manager I spoke to last week, who has researched a lot of ways for building agri exposure over the past 12 months, but has yet to commit to the asset class, complained that all options offering high teen returns – his particular sweet spot – required a long capital lock up period before seeing any meaningful returns. This was due to the acquisition of assets, their improvement, and low operating profits. “The kicker comes in the exit, but this is still unknown, so the whole prospect is too risky,” he told me.

Equally, Agri Partners’ offering presents an interesting case on the other side of the table: providing debt for farming operations. Northland Securities in the US has a land mortgages investment initiative, but other than these two offerings, I am unaware of many other dedicated agri debt investment opportunities. Is the market missing a trick here?

Some sources have implied that agri fund managers would do well to steer clear of debt, but on the other hand it seems it could be the answer to some investors’ desires. What are your views? Does leverage suit the agri investment market? Is it appropriate only for certain types of investments?