Hamilton Lane: Alpha search drives ag/infra convergence

Managing director Brent Burnett says branching out into 'farm-to-market' infrastructure has proved attractive for managers of both agriculture and infrastructure-focused funds.

Farmland managers’ move into related downstream sub-sectors has helped attract select infrastructure managers into similar investments, suggesting some degree of convergence between the two markets, according to a Hamilton Lane managing director.

Echoing a trend highlighted recently by Farmer Mac chief executive Brad Nordholm, Brent Burnett told Agri Investor of recent moves by both GPs and LPs that have contributed to a growing overlap between the private agriculture and infrastructure markets.

Many agricultural investment managers, Burnett said, have moved towards vertical integration strategies that have expanded their focus beyond traditional real asset farmland investments. The institutional investors backing these managers, according to Burnett, are increasingly interested in strategies that can supplement the 6 to 8 percent return expected on farmland through ownership and operation of farm-related infrastructure.

“Even though they [LPs] are willing to undertake a little bit more operating risk in those strategies, if they can undertake a little bit more operating risk in exchange for 200, 300 or 400 basis points more return, that could be an attractive alpha generator to their ag portfolio,” Burnett explained.

In addition, Burnett said, some infrastructure managers have identified agricultural sub-sectors like grain storage, wastewater recycling and barge infrastructure investments that are well-suited to their skill sets.

“They [infrastructure-focused GPs] have said: ‘Look, these are not that different from pipeline companies or other infrastructure where you are trying to secure off-take agreements with good counter-parties, you are trying to be in areas that are the lowest cost producers of these agricultural commodities. If we can own the farm-to-market infrastructure, we can clip a nice coupon for those assets without taking direct commodity price risk or land risk in this strategy’,” Burnett said.

Demonstrating the demand helping to bring these infrastructure-focused investors into the market for ag-related assets, Agri Investor sister publication Infrastructure Investor reported late last year that a survey of institutional investors found water and waste-to-water projects to be the most sought-after among those looking for sustainable alternative assets.

One firm with investments that reflect the overlap between agriculture and infrastructure is Equilibrium Capital, co-founder of permanent crop-focused Agriculture Capital.

Late last year, a regulatory filing revealed Equilibrium to be raising $300 million for its second Water and Wastewater Opportunity Fund. That vehicle’s predecessor, which closed on $184 million in 2016, pursued a strategy devoted to construction of a portfolio of anaerobic digesters using agricultural and food waste, in addition to municipal wastewater, to produce methane gas. That gas is then sold to power producers on contracts with terms as long as 20 years, according to a memo from the $8.5 billion Contra Costa County Employees Retirement Association.

In an email to Agri Investor earlier this month, Equilibrium principal Dave Chen characterized another of the firm’s recent investments – its acquisition of greenhouse facilities from Houweling’s Group – as also reflecting how the drive to increase sustainability in food production is helping bring the worlds and agriculture and infrastructure together.

Chen said that convergence can be seen in infrastructure managers’ growing interest in large water treatment and desalination facilities and is being propelled in part by the scale of capital and infrastructure necessary for investments in agricultural sub-sectors like indoor agriculture.

“Ag is becoming an infrastructure sector as we move to new forms of production,” Chen wrote. “You are going to see ag convert from a land and tractor industry into an infrastructure, automation, controls and cap-ex sector.”