Great expectations

Private equity investors willing to let go of lofty goals and study the agriculture industry stand to benefit from steady, long-term returns.

When I came aboard as editor of Agri Investor last week, after previously heading the online coverage for PEI Media’s real estate finance publication, I knew I was in for a change.

That was clear when Bruce Kahn, of Sustainable Insight Capital Management, opened our annual Agri Investor forum in Chicago by joking that he had probably been selected as keynote speaker due to his claim to fame as one of the first people to put a GPS on a manure spreader.

Conference delegates and other industry players tell me that many private equity investors who moved into the agri sector several years ago had an equally jarring introduction to the industry after lofty goals based on peaking values led to disappointment. Many with great expectations experienced great failure, they said. 

Values, of course, have come down in recent years, and the good news is that many private equity investors have learned from past mistakes. They realise that the molds of the 2 and 20 fee structure and three to five year investment cycles don’t apply to agriculture – and double-digit returns are typically a long shot.

“Sanity is coming back to the marketplace,” Jeff Conrad, president and founder of AgIS Capital, told me this week.

Those who want to be successful will need to migrate towards a longer-term view. They need not only to be good at investing but also gain expert knowledge that has been lacking in the past, especially as new technologies sweep through the market.

The consensus at the Agri Investor forum was that a huge funding gap remains to be filled. Robert Hodgen, managing director with AMERRA Capital Management, noted that global agriculture, which now makes up about 10 percent (or $8 trillion) of global GDP, “continues to be underinvested”.

“Some farmers have nowhere to turn,” Curt Covington, Farmer Mac’s senior vice-president for agricultural finance, later told me, referring specifically to the ageing US farm population.

Thankfully, money is not the problem, and forum panellists said there is a place for the abundance of private equity capital looking to be deployed.

“In our space the trend is there are more people interested,” said James McCandless, head of global real estate-farmland with UBS Farmland Investors. “We are seeing more and more inquiries from very savvy folks.”

However, despite progress on the knowledge front, a large learning curve remains, many argued. One speaker said that private capital has a “massive disadvantage” in terms of understanding the industry. Another delegate told me that capital is “handicapped from being deployed” due to this same reason. “We don’t speak the PE language, and they don’t understand agriculture,” another quipped.

Investments in agriculture are in part a longer play simply because innovations take much longer to take hold, delegates said. Methods that are now commonplace – from drip irrigation to roundup weed-killing – took decades to permeate the industry; and so will newer innovations, from the latest gene editing to drones that analyse plant health.

But the opportunity for steady, stable returns is a near certainty. It may not be a quick cash machine, for instance, but farmland’s outperformance of stocks and bonds over the last several decades has swayed private capital in recent years and should continue to do so, McCandless argued.

Opportunities to capitalise on the inefficiencies that exist in the sector are also plentiful, particularly as the farming population grows old and could benefit from major value-add overhauls.

There is a near-infinite list of new technologies being implemented as well. But investors beware: as one speaker noted, a good idea isn’t always commercially viable, so many of these advancements could be attractive for opportunistic investors only – as, for instance, plopping a GPS on a manure truck must have been in its early days.

Those seeking private equity-like structures with lofty returns may as well search for magic beans. But knowledgeable private equity investors seeking steady returns over time will be greatly rewarded.