Homestead closes Fund III on $596m with mix of farmland vets and newcomers

Co-founder Gabe Santos says he hopes the fact many institutions 'don’t even have an allocation yet for farmland' means there is space for growing interest to turn into capital commitments.

San Francisco-headquartered Homestead Capital closed its third farmland fund on $596 million after drawing commitments from a mixture of foundations, endowments and pensions with varied levels of familiarity with the asset class, its co-founders said.

Gabe Santos, co-founder and co-chief executive, told Agri Investor: “Not all investors are the same. Many investors, by and large, across the industry are still heavily underweight agriculture. Over the last 10 years, that has been changing and in the next 10 years it will continue to change.”

He highlighted that many investors into Homestead Capital USA Farmland Fund III were making their first farmland investment, while the vehicle also attracted commitments from institutions with long histories in ag, such as the $15.3 billion Maine Public Employees Retirement System.

Though general awareness regarding farmland has matured significantly since the firm’s 2012 founding, said Santos, some investors are still making their way up the learning curve.

“Even though at the individual team level agriculture is interesting and farmland is interesting, many of these institutions in their investment policy statements don’t even have an allocation yet for farmland. We’re hopeful that will change over time and create even more interest and capital coming into the industry,” he said.

Clearing a higher bar

Homestead closed its second fund on $400 million in late 2016 after raising $173 million for its debut vehicle, which closed in July 2015.

The first fund had generated a 0.2 percent net internal rate or return and 1.01x net TVPI as of a January 2019 report by consultants TorreyCove Capital Partners to the $75.4 billion New Jersey Division of Investment. The report showed Homestead Capital USA Farmland Fund II had generated net IRR of -2 percent and a 0.99x net TVPI and was presented as part of its recommendation of an up to $100 million commitment to Fund III. The investment was NJDOI’s first in farmland.

“With the proliferation of strategies, the bar is continuing to be set higher for LPs to make investments and allocations to managers,” said Santos. “We’ve been fortunate to get the LP support that we have largely because we have a track record of executing against the strategy that we have identified.”

Fund III targets gross unlevered IRRs of between 11 percent and 13 percent through acquisition and management of between 35 and 45 farms, costing between $5 million and $30 million, during the vehicle’s 15-year term, according to investor meeting materials. Its strategy includes a focus on row and permanent crops assets across the Mountain West, Pacific, Midwest and Delta regions.

The vehicle has a 15 percent carry, a 6 percent hurdle rate and a 1.5 percent management fee, according to documents presented to NJDOI.

Commitments to Fund III have also included $35 million from the $8.5 billion District of Colombia Retirement Board, $25 million from the $8.5 billion Rhode Island State Treasury and $60 million from the $20.4 billion State Universities Retirement System of Illinois, which was also making its debut farmland investment.

Santos described the evolution of fundraising markets that have come to see not only a growing roster of dedicated farmland managers, but also more institutions investing directly through in-house teams, which he said has been a net positive for the firm.

“Frankly, we were in discussions with all of them, because for those institutional investors that are investing directly, they could actually be a great eventual buyer of some of our portfolios,” he said.

Homestead co-founder and co-chief executive Dan Little told Agri Investor the firm stays in continued communication with its investors to keep pace with their thinking about how best to approach farmland.

“It’s not as if we think there is a silver bullet to the right structure for the asset class,” Little said. “We think the structure and the needs of LPs will evolve and is evolving and we need to evolve with that.”