Part one of this interview can be found here.
LGIAsuper holds a stake in Regional Livestock Exchanges, a network of seven livestock exchange facilities across Queensland, New South Wales and Victoria, through its A$449 million ($305 million; €277 million) investment in Palisade Investment Partners’ Diversified Infrastructure Fund.
While definitely an agriculture asset, it is held in an infrastructure fund and displays the classic characteristics of that type of asset, too.
“[The Diversified Infrastructure Fund contains] a wide variety of classic infrastructure businesses and we’re not trying to shoot the lights out with that relationship. We’re trying to generate acceptable returns with mid-risk assets,” says Troy Rieck, chief investment officer at LGIAsuper.
LGIAsuper’s third dedicated agriculture fund manager is Folium Capital, with whom it had committed A$36 million at June 30. Rieck says the fund is looking for “different return drivers” from this relationship.
“It’s the value-adding opportunities that we’re focused on here, things that require a little bit of extra work. That’s operational improvements, enhancement of the basic infrastructure like storage facilities or road access or water storage, or assets where we can change the use of the land over time and grow different crops.
“And these guys come with a very good pedigree out of the Harvard Management Company.”
Agriculture doesn’t sit within its own bucket at LGIAsuper and there is clear overlap with infrastructure for some, but not all, of its investments. But rigid asset class definitions are not of paramount importance.
“If you really want to stir up a hornet’s nest here in Australia, ask people what their definition of growth and defensive assets are, and people will go livid at you. I’ve got a simple answer for that one: I actually don’t care,” he says.
“I only care whether the portfolio is a good one for meeting member outcomes or not. These labels are shortcuts, and the problem you have when you take shortcuts is that sometimes you miss nuance.
“So, we certainly think that infrastructure, real estate and agriculture have both debt and equity characteristics, but they don’t fit naturally into that 100 percent growth or 100 percent defensive categorization. We talk about them as mid-risk assets, so we’d need three or four categorizations – or my preference would be to throw those categorizations away all together.”
Room to grow
Rieck says LGIAsuper has plans to deploy more capital in alternative assets but there are headwinds for some sectors.
“The real challenge we’re all trying to wrestle with is the low returns we’re getting from the defensive parts of the portfolio. Cash and bond returns are sub-1 percent,” he says.
“There’s another four-letter word that starts with F that we talk about all the time now, and that’s fees”
“A lot of our membership tends to have a higher-than-average balance compared to others in the industry, and they’re relatively conservative, so that low return from defensive assets is a huge challenge. One of the big things that sits on my radar here for the next three years is increasing the amount of sustainable-yield generation in the portfolio.”
Debt and credit strategies could form a vital part of this, including in agriculture.
“Debt fits very much in this mid-risk asset approach that we’ve taken historically, so it’s going to be useful for our pension members and it forms a core base for the accumulation and the defined benefit options as well,” he says. “We have a strategic allocation review coming up in the first half of next year and we’ll need to do some hard thinking. You may be able to express some of these ideas around infrastructure, real estate and agriculture through private debt as successfully as you can through private equity.”
In addition, Rieck says an increase in co-investments is worthy of consideration as the fund continues to grow.
“Co-investments aren’t straightforward, you do take additional risk. But if you’ve hired the right operators in the first place and you understand the risks, you can certainly get a better overall fee deal by making material co-investments alongside your fund investments,” he says.
This brings us neatly to another major consideration for LGIAsuper, as well as for most other Australian superfunds that Agri Investor speaks to.
“If you’ve spoken to Australians previously, you’ll know that we like four-letter words that start with F,” Rieck says. “And there’s another four-letter word that starts with F that we talk about all the time now, and that’s fees.
“I’ve got no problems paying for genuine value-add – nobody ever should. But when we go into a relationship here, we want to understand the economics of the deal. We look for alignment between ourselves and the manager. We want to know about the fee structure and you’re always looking for people with deep experience in the industry who’ve got an edge and who have built a process to exploit it.”
It is, though, “a fact of life” that pressure over fees is making things increasingly challenging for superfunds, Rieck says, with this now a practical constraint on what funds can do.
It’s also bound up in the increasing focus from Australian regulators on funds’ performance, which is leading to that “urge to merge” that Rieck mentioned.
“[As a sector], we want the scale benefits that come with being larger, but we don’t want to lose focus on our memberships,” he says. “It does change the investment strategy for a fund when you get to be really large.
“I think we’re big enough to matter and small enough to care. We’re not trying to be the solution for every person in Australia – we’re trying to be the best solution for the local government employees of Queensland.
“And that makes my socks roll up and down, quite frankly. I’m very pleased to be a small part of that.”
Part one of our interview with Troy Rieck can be found here.