A doubling of potential deals over the past two years, albeit from a low base, has highlighted a nascent but exciting opportunity in agricultural secondaries, said the executive overseeing agriculture and natural resources at StepStone.
Ryan Ramsey, an Australia-based principal with the investment management and advisory firm, told Agri Investor the approximately 30 agricultural fund stakes trading in 2019 were made up of a mixture of farmland and agribusiness vehicles, and generalist funds with material exposure to the sector.
Though nearly as many generalist fund stakes can trade in an average week, Ramsey said recent growth suggests the market for agricultural fund stakes could follow a path already observed in other sectors like real estate, infrastructure and private equity.
“As the value and tenure of assets under management matures, we are now starting to see an increasing amount of dealflow,” Ramsey said of ag-focused secondaries. “In the last two years, the number of deals we have seen come across our desk has approximately doubled, so that really is starting to take shape [and] we think you can build a strategy around that dealflow and that is quite exciting.”
In May, StepStone acquired a stake in Acre Venture Partners Fund I from Campbell Soup Company in a secondary transaction that included investments in Farmer’s Business Network, food quality software provider Impact Vision and Flagship Pioneering-founded seed producer Inari, among others.
The investment drew from the private equity component of StepStone’s $2.1 billion secondaries fund. John Kettnich, a StepStone partner who helps lead its secondary investment team, told Agri Investor the firm’s close monitoring of agricultural secondaries also informs work with separately managed accounts investing alongside that vehicle.
“Like any one of the different private markets, as the market grows, there is some natural attrition of LPs that just need liquidity for whatever reason,” said Kettnich, a founding member of StepStone based in California. “We are trying to position ourselves to take advantage of that because there has been more and more capital raised and committed to funds in the ag space.”
Kettnich explained there are effectively two secondaries markets: one focused on the trading of fund stakes by LPs that need liquidity and a second in which GPs aim to reconstitute their own LP bases.
In the case of the Acre investment in May, a management change at Campbell Soup led to a decision to sell its stake in the Santa Monica, California headquartered firm’s debut fund, in which it had been the sole investor. That decision created an opportunity for StepStone to help reconstitute Acre’s investor base by presenting its LP advisory clients with a chance to back a firm straddling venture and growth markets, Kettnich explained.
He declined to comment on whether the reported approximately $40 million value of the transaction, which also included an agreement to invest in Acre’s second fund, was accurate. Kettnich said the deal came after nine months of research into Acre and its portfolio.
“In the end, we got comfortable and excited and think they are a very well-positioned team within this market. We’re excited about partnering with them on both Fund I and Fund II,” he said. “We look at a ton of these where that relationship between the seller and their motivations for why they are selling are not quite as strong as what we have here.”
Because agriculture is a nascent sector for institutional investment, Ramsey added, there are inevitably situations that involve funds experiencing challenging performance. The discounts and J-curve mitigation available, he added, can help make secondaries an attractive approach.
“With secondaries, you get what is available. It might be smaller than you want, it might be larger than you want but you have to work with whatever is available,” he said. “Those early [ag] funds, some of them have had some difficulties early on but when you look through to how they are preforming now on an underlying basis, they actually look quite attractive. That is where we are seeing quite a lot of volume of opportunity.”
Another source of opportunity in ag-related secondaries, said Ramsey, stems from the fact that the fairly limited pool of buyers is dominated by agriculture-focused investors. That limited group of buyers, he said, helps create instances where ag fund stakes are contained within larger portfolios whose buyers choose to exclude them.
“Because it is so nascent, not a lot of people understand it in the secondary market. Not a lot of people really know how to underwrite these assets,” Kettnich said. “Anytime there is not many people going after a certain market, you can argue there is inefficiency and can be a good way to make money.”
Comparatively low dealflow means secondaries will remain a fairly opportunistic component of StepStone’s wider effort to build out its agricultural unit, which also includes co-investments, said Kettnich. Because investors tend to sell fund stakes that are between five and 10 years old, he added, it will likely take between two and five years for recent years’ agricultural fundraising to be fully reflected in secondary markets.
“We are just starting to see that ramp in the market,” said Kettnich. “There really have not been buyers, in my opinion, who have reacted to it and have the ability to underwrite this new emerging space within ag.”