What’s the best way to structure a strategy that will invest in agriculture? A fixed-term, closed-ended fund or a longer-term, revolving or evergreen vehicle?
This age-old question is worth another look, as agriculture shows its resilience throughout the covid-19 pandemic.
A source that describes themself as “agnostic” on the issue told Agri Investor that a differentiating factor could be the nature of the underlying asset being invested into.
“Let’s take a row-crop asset that is in maturity and is a stable going concern with recurring cash yields,” the source said. “Is there really a difference between today and five or six years from now because you’ll need to re-engineer? There’s not a lot of upside available.”
A brownfield permanent crop asset, however, which needs time to mature and may need add-ons – such as processing and storage facilities – is likely to benefit from a longer-term, open-ended structure, said the source. But it’s not a given.
“It is true that the more upstream and production exposure you have, the higher the risk of being forced to exit at the wrong time,” the source added. “Is it a reason to go for open-ended? Is this the only way to secure liquidity? I think you can have a debate around it.”
For Detlef Schoen, chief executive at recently-formed asset manager NewAg Partners, as long as the underlying asset is performing as expected and is delivering good cashflow, the nature of the asset class means there will always be demand for its produce. As such, funds should always be structured as long-term vehicles, regardless of whether they own permanent or row-crop assets.
“Given that investors are increasingly looking for regularised cash income, why would anyone walk away from an asset that is generating cashflow?” asked Schoen. As long as the asset class is the right one for the investor, an open-ended or revolving structure means they can avoid the costs associated with exiting and investing in new funds, as well as its due diligence headaches, he adds.
Early-stage investor engagement with the asset class perhaps meant the standard 10+2 PE structure was a way of offering some level of familiarity. The fixed term also meant that, come what may, an exit had been baked in, which is particularly important as you build a track record.
With the likes of Fiera Comox, Bonnefield, AgIs and Nuveen all launching open-ended funds in the last three years – with varying degrees of lock-up and liquidity windows built-in – the investor appetite is certainly there. Agri Investor understands Fiera’s vehicle has taken commitments from new and existing LPs during the pandemic. And Nuveen’s $2.4 billion vehicle is among the largest ag funds to come to market in recent years.
If they perform well and investors stick with them in the coming years, they may have a big say in whether long-term funds are the way forward.
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