The last time Agri Investor spoke to Detlef Schoen, it was November 2017 and the former Cargill, Nidera and Aquila Capital Farms executive had just been appointed head of real assets by Insight Investment.
Schoen had been brought in to structure an open-ended fund to succeed the firm’s debut 2011-vintage Global Farmland Fund – a successor vehicle which, as fate would have it, would never take off. Agri Investor learned this February the firm had instead chosen to wind up its solitary vehicle and exit the asset class altogether.
Schoen refuses to be drawn on the details of everything that happened behind the scenes, but says he “doesn’t blame” Insight for exiting a space that struggled to fit in with the rest of its offering. The firm had $845 billion of total assets under management as at Q1 2020, with risk management solutions accounting for $618.1 billion of its AUM, followed by fixed income ($169.9 billion) and currency management ($51.5 billion) as the second- and third-largest segments of its AUM.
“It always has been, and increasingly was, quite an alien franchise given their core DNA,” Schoen says of the $230 million Global Farmland Fund’s place at Insight.
The ag veteran left the firm in August 2019, at which point he took the open-ended strategy he had been developing for two years under his wing, and established NewAg Partners to execute it. “What I’m doing now is what I would have continued to do at Insight if the company would have been interested in staying in the universe,” he explains.
In a wide-ranging discussion, Schoen explains why he believes NewAg will be able to deliver IRRs in excess of 12 percent – the type of return figure which, he admits, he has previously told investors to be wary of when they encounter it in the ag space – the acquisition opportunities being created by closed-ended funds nearing the end of their terms and tentative plans for farmland green bonds.
‘Not a 10-year drop-dead PE structure’
Rather unsurprisingly, Schoen remains a man resolutely against using a typical 10-year, fixed-term fund to invest in agriculture.
“As long as you stay in the fund context, the only way to successfully raise money for and manage an agriculture fund is with a very long term,” he says. “Be it 15 years revolving, preferably evergreen, preferably open-ended, but certainly not a 10-year drop-dead private equity structure.”
One of the more interesting opportunities in NewAg’s $2.5 billion pipeline is a property being disposed of by a fixed-term fund, which, according to Schoen, is leaving upside on the table because it has run out of time to properly monetize natural capital such as water, and other benefits unique to the asset.
Had it not been for the coronavirus pandemic, NewAg would have launched an evergreen fund to execute its strategy, confirmed Schoen. The firm has instead carved up the opportunities in its pipeline and pivoted to a managed account approach to get around the “box-ticking obstacles” that have now become far more pronounced for first time funds.
“We believe the most attractive propositions are still a series of permanent crop opportunities in the US”
NewAg will form joint venture management companies with its local managers to oversee assets, giving investors a single entity that manages assets and charges fees – something that has resonated well with investors, he says.
The firm has struck such a partnership and established a “corporation” with Kachina, a US-based local asset manager specializing in permanent crops that operates in the western coastal states of California, Oregon and Washington.
Pipeline and strategy
NewAg’s pipeline is made up of assets – bar one smaller unspecified prospect – that vary in value from $100 million to $600 million. It will naturally target “the usual suspects” of institutional investors, large family offices and endowments as result, explains Schoen.
The firm will initially concentrate on opportunities in the US, which currently represents 50 percent of its $2.5 billion pipeline, and is roughly two months away from having the capital to seal its first acquisition – a $150 million US permanent crop asset.
Other geographies on its hit list include properties in Australia, Portugal and Uruguay, with medium-term targets including Chile, Romania, New Zealand and Canada. The firm recently partnered with African agtech investor C Change Group, whose co-founder and group managing director Russell Read has become chairman of NewAg’s investment committee. C Change will also offer expertise on the African agricultural market, should any of NewAg’s investors be keen on the geography.
A key credential that all of NewAg’s prospective assets must have, says Schoen, is the potential to achieve “environmental returns and demonstrate climate positive farming” through regenerative practices, for example, although all assets were initially ranked on a risk adjusted financial return basis.
“And on that basis, we believe the most attractive propositions are still a series of permanent crop opportunities in the US,” he says. “Special situations aside, we find row crops in the US heartland very unappealing. There are row crop opportunities in Australia we believe, but right now, our focus is more on permanent crops.”
The firm has identified “special crop opportunities in special situations” in the permanent crop space, he explained, capable of generating unlevered post-fee but pre-tax IRRs of “anywhere between 12-15 percent, whereas normally I was always cautioning and saying be very wary when someone sells you a double digit IRR in farming,” he explains.
Schoen says his change in outlook has been prompted by the convergence of several issues, including the US-China trade war, the lack of a successor generation willing to take over family farms and a limited number of lenders willing to extend affordable credit to farmers.
“Rather than just raising equity to buy farms or co-invest in farms… we are also looking at ways to refinance that equity by issuing a green bond”
“All of that combined is creating some significant opportunities – recapitalizing an equity starved farming business and just doing [some of] the right things and getting rid of expensive debt is already adding a couple of percent to your IRR. So for steady state cash returns, we’re talking anything from seven to above 10 percent right now, as long as we’re in the permanent crop space.
“But even row crops can give you IRRs well in excess of 10 percent if there’s a strong element of water supply, recapitalisation including investing in water, and putting water the to its best use.”
Across NewAg’s whole pipeline, the IRR average is likely to be somewhere between 10 to 12 percent, he adds.
Another opportunity NewAg is looking at is securitization of assets, potentially through the use of green bonds. This would make investing more attractive from a capital treatment point of view, says Schoen, as well as “from a bucket allocation point of view for a number of large investors and would unlock the much larger public market.”
“Rather than just raising equity to buy farms or co-invest in farms… we are also looking at ways to refinance that equity by issuing a green bond, which, if you have a large enough volume, allows you to rate a bond and create the conditions to have a security that you can place in the public market,” he explains.
A regeneratively farmed food production asset could easily underpin a green bond, says Schoen, because it would be able to clearly evidence its green credentials by measuring and showcasing the incremental amount of carbon that has been stored in the soil.
“What can be greener than a bond issued by a farming enterprise which, let’s say is starting with a soil carbon average of 1.8 percent and by the time we’re done, is hitting 4 or 5 percent? As a result, we’re sequestering so many giga tonnes of CO2. That is definitely green,” he says.
“If you then top it up, you’re getting an extra return which you can use for whatever purpose in the form of carbon credits or carbon credit equivalents.”
Schoen adds that none of NewAg’s models depend on green or carbon credits as a source of monetization. Nevertheless, he’s convinced that over the next five years, there will be significant opportunities to monetize natural capital through areas such as biodiversity, carbon and water, among others.
“You’ll be able to monetize that simply because society will need to incentivize farmers to ‘detox’ farming and improve natural capital,” he says.
New firm, new team: Who’s who at NewAg Partners?
James P. Cain – Chairman
Russell Read – Chairman of the investment committee
Detlef Schoen – Chief executive officer
Markus Wignell – Chief operating officer
Carl-Frederik Wachtmeister – Chief agricultural officer