Farmland’s awkward fit into traditional fund structures has played a big role in the market’s development.
In the early years of last decade, managers sought to deliver an asset class that best displayed its benefits over the long term to institutions still requiring familiar closed-end avenues into farmland markets still considered niche by many. The years since have seen some of the market’s pioneering LPs move toward varying degrees of direct farmland ownership. Others have filled their allocations to farmland or expanded focus on other segments of the supply chain.
The investment structures underlying institutional farmland markets have, in turn, increased in length to serve the needs of a new breed of investors. These LPs’ approach to farmland comes amid a growing focus on ESG across markets and early steps toward shepherding in more retail capital.
As the market’s largest manager with an $8.2 billion portfolio of more than 2 million acres stretching across seven countries, TIAA-affiliate Nuveen’s dedicated farmland manager Westchester Group Asset Management has been at the heart of the farmland market’s evolution.
Westchester chief executive Martin Davies told Agri Investor of how the shifting profile of investors active in farmland has influenced the market’s move from closed-end funds toward open-ended structures and permanent capital vehicles.
“We can talk about funds, but essentially what is a fund? It’s a company that investors commit capital to,” said Davies, who joined Westchester as chief executive of Europe in 2014 after prior stints with Strutt & Parker, Insight Investment and others. “We think farmland works best with a structure where you have multiple investors in that structure, you can diversify what you do in that structure and you have good scale to achieve that diversification.”
More of an investor club
The unit that would eventually come to be known as Westchester began by gathering farmland into what amounts to a separate account for TIAA between 2007 and 2010. The business also had five US retirement scheme clients prior to 2010, for which Westchester has gradually assumed management.
Its first fund came in 2011, when the $2 billion TIAA-CREFF Global Agriculture vehicle brought together institutions from Germany, Sweden, South Korea, Canada and elsewhere who had identified the global farmland market’s potential for steady income and inflation protection as a good match to their long-dated portfolios.
There was some thinking around the design there that a shorter-term structure offered more of an opportunistic approach
The structure of that initial fund and the $3 billion TCGA II that followed, said Davies, included a 10- to 15-year term, which was among the features designed to account for years of development necessary for institutionalizing newly acquired farmland properties during early stages of the market’s development.
“In some ways, you can consider that it was more of an investor club, which at that time was led by TIAA,” Davies said. “A lot of those early allocators, they’ve either filled up their farmland allocation or have taken a different view on things.”
TCGA II brought some repeat investors from the first fund together with a broader array of institutions that included US and UK pensions, financial firms and others, but the structure remained largely the same. The elongated term of the fund, he added, was also well suited to the profile of investors making very large allocations.
Although many of the LPs in TCGA I and II would have preferred to be investing directly even in 2010 and 2011, few felt confident enough in their internal expertise. Davies stresses that at the time, there was not yet the network of consultants, appraisers and advisors catering to institutional investors that has since helped change the nature of demand for farmland fund exposure.
Many of the deals supported by those early vehicles were acquisitions of large properties concentrated in core markets of the US, Brazil and Australia. While European markets had been intended to be among targets for investment from TCGA II, Davies said the fact that Westchester was not formally established as a business in Europe until the end of 2014 made the timing impossible.
After collecting commitments from a subset of TCGA II investors with interest in European farmland within a separate vehicle called TIAA European Farmland Fund in 2016, Westchester also took over a set of assets previously managed by Rabobank in 2017. The Ziema fund that supported those largely Romanian farmland assets had been established in 2009 by a group of investors utilizing a similar structure to that used on the TCGA I and II, albeit a slightly shorter one of 10 years.
“There was some thinking around the design there that a shorter-term structure offered more of an opportunistic approach from a growth point of view,” explained Davies. “One of the things that we see in the European market is that capital growth has been a bigger proportion historically of the return component than the income.”
All of Westchester’s funds have been supported by is its parent TIAA, which Davies said allocates 85 percent of its capital to fixed income investments. Because farmland offers a way to help TIAA produce the 3 percent income required to meet the needs of its 5 million beneficiaries, the insurance company has served as anchor and seed investor in Westchester’s vehicles, and is likely to continue doing so.
“It’s highly likely in the future that if we launch new strategies, because TIAA has continued desire to invest in the farmland space, they, potentially, will be a cornerstone seed investor in new structures,” he added. “Of course, there’s no guarantees on that.”
In through the open-ended door
Currently, Westchester is fundraising for and investing from its open-ended Nuveen Global Farmland Fund, which was launched in November 2019. It is currently targeting $2.4 billion and had raised $535.6 million from 12 LPs as of late January, according to a regulatory filing. The vehicle has semi-annual subscriptions and quarterly capital calls.
Davies said that whereas Europe, Canada and the United States have been the most important sources of LP interest in farmland over much of the past 15 years, demand of late has become more diverse.
“We are seeing different types of investors from different locations who have come to the asset class later,” he said. “Currently, we see quite a lot of interest in the Asia-Pacific where maybe there hasn’t been the same amount of interest previously.”
Like all pensions, many of the institutions now entering farmland have their own well-established processes for adopting new ideas, and the length of time required to bring in an LP new to farmland can vary significantly.
The last thing you want to do is be in a situation where you are in a significant queue and wait to get capital drawn down
Just as the first iterations of the TCGA vehicle were designed to support development of large-scale agricultural properties coming into institutional ownership for the first time, he said, the Global Farmland Fund’s focus on deals between $25 million and $50 million is a good match with the market’s current state of development.
Such deals are not only large enough to justify Westchester’s due diligence, Davies said, but they also help offer the firm flexibility in managing other parts of its portfolio by allowing for grouped or individualized asset sales while meeting investor demands for liquidity.
“If you are a smaller-scale pension fund investor who wants to make an allocation to the asset class and get the capital drawn down quickly, the last thing you want to do is be in a situation where you are in a significant queue and wait to get capital drawn down,” he said.
“Our ambition for any open-ended vehicle is that we have a queue of investors that want to come into the structure. The preferred route to look at if there was a redemption would be to service that liquidity requirement by an investor wanting to come into the structure.”
Davies says as banks and other fund aggregators continue to launch real asset strategies that include farmland for qualified investors, Westchester also watches closely to judge the potential for retail investor capital to play a bigger role in farmland markets. “I fully expect we are going to see a significant increase in that [retail investor capital] over the next five or 10 years, which in many respects, would really mirror what’s happened with other real asset classes and their maturity has advanced.”