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Institutions eye Agcapita farmland portfolios

The Canadian farmland fund manager has been approached by at least two institutional investors interested in buying the assets of two of its existing retail funds.

Agcapita, the Canadian retail farmland fund house, is noticing a pick-up in interest from institutional investors for its farmland portfolios after a few investors approached the firm about buying the portfolio assets of Fund II and Fund III.

The firm successfully exited Fund I on C$19 million ($17 million; €12 million) earlier this year when a single family office bought the assets after a competitive bidding process with two other investors, according to Stephen Johnston, founder of Calgary-based Agcapita.

Johnston thinks that the entry of Canada’s largest pension fund, Canadian Pension Plan Investment Board (CPPIB), into the farmland investment market last year could be the reason for increased demand.

“It is a chicken and egg issue — now that CPPIB has bought farmland, investment consultants will recommend that other pension plans should too; we believe there will soon be a designated bucket for it,” said Johnston.

Agcapita is also in discussions internally about launching its own institutional investor fund or segregated management services to field the demand. Segregated mandates would need to be a minimum of C$10 million, added Johnston.

“We discuss launching an institutional fund all the time but it is about satisfying the rules and finding the right investors,” said Johnston. “Typically the investors that have expressed an interest so far want to internalise the management — pay C$20m and manage it themselves — but it is a lot more complex than they realise, so there is room for discussion.”

Agcapita’s Fund I raised C$10 million and exited at C$19 million in January. It managed 19,500 acres across Saskatchewan province. The fund returned an average of 12 percent every year before fees although it does not make distributions throughout the life of a fund, but reinvests the income from rents into new farmland purchases within the investment period of around three to four year, or keeps it as cash on the balance sheet in the final few years of a fund’s life.

The funds have a two-and-twenty fee structure  typical for private equity funds, charging a flat two percent management fee and 20 percent carried interest. Agcapita does not use any leverage in its farmland funds despite Johnston admitting leverage would improve overall returns.

“We adopt a highly conservative investment approach in all our funds and it is not in our ethos to use leverage as a core return driver,” he said.

“In my experience, leverage tends to disproportionately benefit managers in terms of carried interest but if returns do not materialize, obviously investors bear the bulk of the consequences. Retail investors are typically leveraged elsewhere in their lives so they are not looking for leverage returns or risk in a product like this. In addition, we find that our investors are highly focused on capital preservation which is another reason we do not use leverage in our current retail funds.”

Johnston added that any institutional fund was more likely to use leverage.

Agcapita currently manages around C$40 million in Fund II, III and IV and is set to launch Fund V in May after Fund IV is fully closed. Agcapita’s funds, all Registered Retirement Savings Plan (RSSP) funds, are distributed to investors by Exempt Market Dealers, Canadian financial advisors. It works with around five EMDs, according to Johnston.

Investors typically make investments of between C$20,000 and C$100,000, he added. All investors must be Canadian citizens to comply with regulations about farmland ownership in the country.

All its funds operate under a buy-and-lease structure.