Farmland investors eye PE-style funds

Large investors are increasingly interested in own-and-operate strategies, according to placement agents.

Own-and-operate farmland investments are growing in popularity, particularly among larger LPs, according to Bernd Meissner, managing director at Kronstein Alternative Investment Advisors, the consultant and placement agent.

“The larger LPs are starting to diversify their agriculture portfolios increasingly into farmland operating funds,” he told Agri Investor. “They are keeping the existing buy-and-lease fund holdings to maintain diversity in their portfolios but the yield spread between those and an own-and-operate fund is significant.”

Jeffrey Eaton at the Houston-based placement agency Eaton Partners is also noticing a pick-up in demand for these higher yielding private equity-style agriculture assets.

“Agribusiness and real asset strategies that have a private equity component to them, such as own-and-operate, target higher returns and this is one reason why we are seeing this trend as risk appetite returns in the aftermath of the global financial crisis,” he said. “But some investors don’t want the additional risk that strategies like this take on and are very happy with a core timber investment, for example.”

But some fund managers believe there is still a lot of room for buy-and-lease farmland investment such as Bonnefield’s Tom Eisenhauer, president of the Canadian farmland fund house. Bonnefield recently closed its third buy-and-lease fund on $261 million.

“From an investor perspective it is the lowest risk way to invest in farmland because there is little-to-no commodity risk and we see a great need in the agriculture community for more buy-and-leaseback type arrangements,” said Eisenhauer. “The Canada market is also very mature so we already have very good operators here and we don’t want to cruise around in suits telling them how to do their job.”

It is also important to match the risk return profile of the investment to the investor. The type of agri investments that LPs are looking for depends on the kind of earnings profile they want and the yield they are looking for, argued Meissner.

“As we learned from the private equity scene, when investors initially chose to invest into funds of funds over single funds, it is important to know why LPs are investing in agriculture. And then an appropriate investment match can be found,” said Meissner.

Regulations and taxation rules on foreign investment into various areas of agriculture will also impact the type of fund an investor is interested in, he added.

“Foreign investment can be restricted or limited which will define an investor’s level of engagement in a project. Getting involved in the operating company may be difficult but equally buying land directly can be prohibited,” said Meissner.

Management firms are responding to increased demand for own-and-operate funds and increasingly offering funds that give investors exposure to the operation of land as well as the real asset itself. Aquila Capital Farms, Rabo Farm, Macquarie Agricultural Funds Management, InvestAg and Agro-Ecological Investment Management are just some of the fund managers doing this.