Laguna Bay: ‘Traditional fund structures don’t work with agriculture’

Australian agri-focused fund manager Laguna Bay Pastoral held a first close on its first co-mingled investment fund on A$280 million ($208 million; €183 million) earlier this month. With an opportunistic strategy focusing mainly on Australia and New Zealand, we ask chief executive Tim McGavin about structures, the US institutional investors the fund targeted and its 20 percent southern hemisphere allocation.

What investment models work well in agriculture?

For me, traditional fund structures and management styles just don’t work with agriculture. We have very much structured a hybrid fund model. An open-ended fund structure resonates with me with agriculture, but constant liquidity doesn’t.

You have to have manager discretion to get liquidity when it is required and have managers aligned to that process. These are big assets in an illiquid market. It’s prudent to pay managers to be patient and folly to incentivise them just to deploy capital in a short period of time.

We also found that sophisticated fund investors don’t want forced liquidation in a fund investing long-term capital [so they favour manager discretion].

Are direct investments appropriate for agriculture?

The direct model of investment is going to become very challenging as more people like us get discretionary funding. It has worked okay because so far discretionary funds haven’t had money to deploy. The governance structures around direct deals are very challenging for this asset class. They have had no option but to give a purchaser a long period of due diligence, and optionality around when they are trying to raise the capital.

What do pensions want from Australian agri?

We have North American pensions looking for southern hemisphere exposure, [many of them] targeting long-term investments in agriculture and timberland. They want a no-nonsense approach. Everyone is tired of people running around with a product with great numbers on them that aren’t backed up by actual results. We have been perpetual under-promisers and over-deliverers. Track record is important because of the long nature of this asset class. Getting alignment in the investor mix is also important, not just from a governance and mandate perspective but also just culturally.

Why have you carved out a 20 percent allocation in your fund to the rest of the southern hemisphere?

Depending on solving supply chain issues for people, we would reluctantly look outside Australia and New Zealand. We have tenants and relationships with people with assets around the world including Latin America. Whatever we touch, we have to make sure that we have a sustainable comparative advantage and can withstand competition.

Our job is to look out for the disruptors globally and I think agtech is also going to be a big part of that in areas in Australia where we haven’t had a natural competitive advantage because of the labour component. You have computers now that can go down a row and pick weeds or pick strawberries, whichever you want picked, 24/7. So there is huge disruption coming and when technologies are commercialised and proven we will be very early adopters of them on our farmland investments.