Equity fund houses eye precision ag

Baring, BlackRock and Focus Investment Banking discuss the appeal of the precision agriculture sector and the limited opportunity in the listed market.

Precision agriculture and big data have been talking points for venture capitalists for some time as increasing numbers of VC funds invest in the growing sector. But the appeal is now spreading to the listed universe as equity fund houses position themselves to jump on the growing importance of this sector.

In the wake of falling agriculture commodity prices, the need for farmers to optimise their spending on inputs such as fertiliser, machinery and seeds will grow and with it the need for precision agriculture products, according to Desmond Cheung, fund manager of the BGF World Agriculture Fund at BlackRock. And James Govan, manager of the Baring Global Agriculture Fund agrees.

“Going forward, we expect precision agriculture will grow in importance, not solely for those companies with business units producing technology in this emerging niche, but for the industry as a whole,” said Govan. “Following recent trips in the agricultural heartlands of the US and Britain in Illinois and Lincolnshire, it is clear to us that precision agriculture is a theme becoming ever more important to the industry.”

But the availability of precision agriculture companies in the listed market is limited and fund houses such as Baring and BlackRock are currently playing the sector through holdings in large agribusinesses such as Monsanto, John Deere and Agrium that have precision agriculture products. And this opportunity is unlikely to increase any time soon.

“There are a lot of listed companies that offer some exposure to this theme but it is more as a value-added service to their customers, so there are not many listed companies that are a pure precision ag play,” said Cheung.

“I would be very pleased to see some precision agriculture companies come to the IPO market when they are more mature and investable. But I wouldn’t be entirely surprised if they were acquired by other agribusinesses with strong balance sheets and a better touch on available companies in the market; we have noticed a very strong trend for mergers and acquisitions in the agriculture sector over the past 12-18 months and think it’s likely this will continue.”

Eric Oganesoff, managing director at Focus Investment Banking, the middle market corporate finance and M&A-focused investment bank, has also noticed this activity and believes the IPO market for precision agriculture companies is unlikely to pick up for the next three to four years.

“Many precision agriculture companies just aren’t big enough to list yet; it will take a while for this sector to get there,” he told Agri Investor. “There could be some disruptive offerings in the biotech space that the market recognises such as improving resistance to disease. But generally, precision agriculture companies are too niche. Climate Corporation [the weather data company acquired by Monsanto for $1 billion last year] could have IPO’ed; it was big enough, but it will now go down quite a different path at Monsanto.”

In fact the industry might even be too small for the private equity industry, according to Oganesoff who gets several calls from private equity firms every day; these firms are looking to take a leading position in the next big thing in the industry.

“It is not only the listed equity guys that are going to have to wait; in many ways the private equity industry will have to wait before it can make a play,” he said.

But when the industry gets big enough and produces mature, investable companies, it can expect strong demand from these agriculture equities houses.

“We would certainly look at precision agriculture companies that are considering an IPO,” added Govan.