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Investors benefit from generational change

Farmers are increasingly looking for investment from institutions and family offices to finance generational changes in farm ownership, according to a recent study by Aquila Capital.

Farmers are increasingly looking for investment from institutions and family offices to finance generational changes in farm ownership, according to a recent study by Aquila Capital, a Hamburg-based real assets management firm.

The survey reveals that less than half of farmers have identified someone to inherit their land and increasingly fewer children are willing to take over the family business, preferring alternative forms of employment in urbanised areas instead.

This shortage of successors has led to a surge in M&A activity in the agriculture sector but due to a lack of banks prepared to lend, finding third party investment is becoming increasingly popular among farmers. The desire to foster new relationships is mutual, as Jeffrey Eaton, Partner at placement agent Eaton Partners explains:

“Allocations that LPs are making to real assets are continuing to grow each year for a variety of reasons. One reason is that some buyers like the concept of owning something that has tangible value,” Eaton told Agri Investor. “For instance, even if the land loses value you will still have something you can use and potentially generate income from.”

In the US alone, investors believe that there is $1.8 trillion worth of farmland potentially up for grabs as demand heats up; TIAA-CREF, the jumbo US pension house, did not own any farms before 2007 but today it owns over 500, including 35,000 acres of California farmland; UBS Agrivest, the agriculture asset management arm of the Swiss bank, went from holding $192 million in net farm assets for 22 clients in 2010, to holding $415 million for 31 clients by 2013; and Hancock Agricultural Investment Group (HAIG), a division of Canadian insurance giant Manulife, has bought 290,000 acres of prime US farmland on behalf of its clients, plus 7,000 acres in Canada and Australia worth approximately $1.8 billion.

Some 23 percent of European and UK institutions expect to increase their exposure to agriculture over the next one to two years, according to Aquila Capital’s survey; just 2.3 percent expect to do the opposite. Of 71 institutional investors from the UK and Europe surveyed by Aquila Capital in October 2013, 17 per cent had farmland allocation and the average holding for those exposed to farmland was 1.3 per cent. Furthermore, 23 per cent expected to increase their exposure to agriculture over the next one or two years, while only 2.3 per cent expected to do the opposite. By far the most popular method among these investors for gaining farmland exposure is the use of specialist investment funds, with 53 per cent confirming a preference for them.

But so far, the majority of private equity type-investments in the agricultural sector have not lived up to the expectations of either farmers or investors. Fifty-seven percent of the institutional investors surveyed by Aquila were disappointed by the performance of closed-ended funds over the past decade, 42 percent were disappointed with specialist investment funds and 29 per cent were disappointed with club deals. Danica Pension’s alternative asset manager Danske Capital has even decided to stop investing into agriculture funds in favour of direct investment, officials told Agri Investor (see Adveq creates agriculture co-investment platform).

“The first wave of investors over the last 15 years was often left disappointed because they had the wrong managers in the wrong geographies with a misalignment of interests between asset managers and farmers. Many banks still demonstrate their ignorance of the fundamentals of profitable farming, making the mistake of treating farms as pieces of real estate rather than businesses, selecting poor projects, imposing bureaucratic and expensive administration and underestimating the complexities of farming,” wrote Detlef Schoen, managing partner at Aquila Capital in a statement.

Many farmers have felt equally disappointed with the system, as California farmer Willy Reid illustrates:

“When managed by people in offices who have no understanding of farming, you essentially have outsiders telling you what to do, putting business before natural systems and telling you when and when not to spread compost or order seeds.”

Now a general rethink is underway to harness the considerable potential presented by the emerging equity gap. One idea endorsed by Aquila Capital is the promotion of co-investment structures that give farmers a share in the operation to align investor and manager interests, rewarding good performance and allowing farmers access to capital. The UN’s Food and Agriculture Organisation estimates that $209 billion in private capital would be required annually to finance this fundamental restructuring; this ensures that both investors and farmers will have their work cut out for them.

Additional reporting by Louisa Burwood-Taylor.