Deal structures used for agri investments are almost as diverse as the sector as a whole. Across the various subsectors, from agtech to farmland investing, different investment and fund structures can make sense, but even within these subsectors we see a variety of instruments used to channel capital into the fledgling asset class.
This is not necessarily a problem, and asset managers are doing the right thing by offering investors flexibility in how they gain access to agri. But before the asset class can really develop and attract a broader range of investors, the industry will need to come up with some established structuring norms; currently there is too much choice for investors to get their heads around.
This will take some time, however, and depends upon larger institutions leading the way.
“I think it’s very helpful to have different structures on offer to investors,” an investment banker told me this week. “We are at a stage where there is still a lot of need for explanation and education. Once some of that has been done then we will see more of the large players get comfortable, and that’s when there will be a clearer trend and more transparency on what investors’ preferred access is.”
The private equity fund structure is the most popular across the various agri subsectors, ranging from farmland investing to agribusiness to agtech. Many investors are already familiar with it, although the typical fee structure – “2-and-20” or a variation thereof – is not always suited to the returns on offer. The seven-to-10-year time horizon is also too short for many own-and-operate farmland managers that want time to improve and develop the land.
These qualifiers are part of the reason why managers want to show flexibility to potential clients: “[I]nvestors will ultimately decide the final structure of a fund or an investment vehicle in agriculture,” Bernd Meissner, managing director at the placement agent Kronstein Alternative Investment Advisors told Agri Investor.
This can involve negotiating the term of a fund and the structure of an investor’s commitment to it. SLM Partners is currently negotiating a commitment from an institutional investor into the SLM Australia Livestock Fund, a typical 10-year PE fund with a 2-and-20 fee structure. The commitment is likely to be a hybrid of straight equity and convertible debt so as to make the investor, a first timer in agri, more comfortable. “The debt component makes it more familiar to them,” said Paul McMahon, SLM’s managing partner.
This week Mandala Capital’s Uday Garg told me about how its fund is getting creative with the way it structures deals on the other side of the table: with investee companies. Taking a similar approach to SLM’s potential investor, Mandala is also negotiating hybrid investments so as not to go “two feet into a company” and maintain some downside protection.
Again, this kind of structural experimentation is set to continue, which is a good thing at this stage of the asset class building its following. But in the long term, providing investment committees with such a huge amount of choice will likely be counterproductive and leave investors on the sidelines wondering which the best method of entry is. Ensuring there are some tried, tested and widely used routes will encourage greater comfort in the asset class more generally – and thus accelerate the capital formation within it.