Agriculture and timber have seen big increases in investor demand over the past three years as LPs have developed a more sophisticated understanding of real assets at large, according to consultancy bfinance.
As financial markets enter a late-cycle phase, many investors have adopted a more holistic portfolio design focused less on asset categories than on the function specific investments will serve in their portfolio, the London-based firm said in a report released this week.
Drawn from its work helping pension funds, foundations and other clients in global real asset searches over the past year, the paper also provides an overview of how asset management firms have responded to demand for a wider variety of real asset exposure, mentioning Hamilton Lane’s acquisition of RAPM among key developments.
“Holistic approaches have facilitated diversification into niche sectors that may not sit within the old buckets, such as agriculture,” the firm said. “Pricing pressure has spilled into the niches and ‘uncharted territory’ is ever-more elusive.”
Name your target return
Guy Hopgood, senior associate for private markets at bfinance, told Agri Investor that the move among LPs into more specialized real asset categories mirrors developments within the more established asset classes of real estate and infrastructure.
Just as investors in those categories have evolved from a focus on the highest-profile cities and assets towards investments in smaller cities and specialized markets, such as social infrastructure, LPs have also become increasingly open to diversifying within real assets. Investors typically begin with an idea of an asset they would like to gain exposure to, according to Hopgood. Where exactly, within niche sub-sectors, they end up investing depends largely on return expectations, he added.
“Just because an investor wants, say, 8 percent, doesn’t mean that they can’t look at some of these sectors,” said Hopgood, in reference to ag, real estate and infrastructure. “Likewise, if the number is 12 or 15 [percent], in each of those sub-sectors, there are some strategies that ultimately would be suitable.”
For example, Hopgood said his firm has of late been having more conversations with European investors about the possibility of timber commitments.
“Typically, what we see with the majority of investors is that there is a form of domestic bias, or at least home continent bias. That probably has had, in the past, an impact as to why investors within Europe haven’t necessarily looked at timber in the US.”
In a tactical bind
Managers who have built teams with capabilities across multiple real asset categories have started to develop multi-real asset investment strategies, according to the paper, which discusses the use of traditional pooled funds, funds of funds and “funds of in-house funds” focused on real assets. Agriculture often forms only a small portion of the multi-real asset strategies in which they are included, according to Hopgood.
In the paper, bfinance wrote that few of the managers with capabilities across multiple real asset sub-sectors take the kind of “tactical” view that would allow them to benefit from changes in pricing or market dynamics. Hopgood explained that such managers often passively divide the focus of their real asset programs into even portions in a way that does not take into account the current slate of opportunities.
“You’re gaining the exposure, but there’s no ability, on more of a tactical basis, to change those allocations regularly, let’s say year-to-year, rather than every four or five.”
“It’s not even about the money necessarily, it’s about the local networks”
Guy Hopgood, bfinance
bfinance’s paper also mentions that some institutional investors have chosen to go direct. Hopgood cautioned that, given these investors are often driven by the need for scale, specific lessons from these early efforts apply only to the largest investors, though their experience does highlight some of agriculture’s peculiar traits as an asset class.
“One that is very clear is that it’s not even about the money necessarily, it’s about the local networks,” Hopgood said, referencing to the tendency for farmland properties to trade between farmers.
“Being in those local regions is very important and that’s something that, purely from a resource perspective, is very difficult for a lot of investors to go it alone. Where we have seen some of those investors try to do it, it’s been much more been co-investments and joint ventures with asset managers and operating partners.”