Looking for lessons from a mammoth sale

In November, the Canada Pension Plan Investment Board disclosed that it had sold $520 million of US farmland during the previous quarter. Given the size of the portfolio, that development was enough in itself to feed a lot of market chatter. If, as more than 10 sources have since suggested to us, the buyer turns out to have been related to Microsoft founder Bill Gates, then the transaction is an even more significant watershed – implying a shift in thinking among two key investor types.

Exit signal

Given its reputation as a forward-looking, savvy investor, CPPIB’s entry into farmland in 2012 was greeted as an important milestone for the asset class. Yet CPPIB, which declined to comment for this story, quickly ran into controversy when Saskatchewan provincial regulators argued that the $257 billion pension’s entry into their market would bring land prices out of local farmers’ reach.

While this experience no doubt shaped the institution’s appreciation of the importance of public perception in managing farmland investments – a concern that could be the topic of a letter in itself – sources we spoke to framed the November announcement’s significance largely in terms of dynamics particular to CPPIB.

There might have been differences of opinion as to how important it was for the pension to maintain a local presence in markets where they purchased farmland, sources noted. But most were keener to stress the challenges of building scale. They said that given CPPIB’s penchant for managing their own investments in-house, the exit could indicate that it had found it difficult to run the portfolio at a decent profit while assuming associated costs.

The November sale of its US farmland portfolio does not necessarily mean CPPIB has completely abandoned the asset class (indeed, a source familiar with the institution says it remains interested in farmland). Rather, the episode suggests large pensions are still working out the best model for building a dedicated program. Peers are likely to take note.

Opening the food gates

An even larger number of questions surround the buyer of CPPIB’s US farmland. The degree of uncertainty in the market surrounding the motivation for Gates’ alleged investment, in particular, is striking. Doubts had arisen as to whether he purchased the portfolio as a pure financial investment, or whether he intends to use it as part of one of the agriculture-related poverty alleviation efforts he supports.

In the 2012 edition of Global Trends, a quadrennial report designed to guide US policymakers’ thinking about social change in the international system, the National Intelligence Council highlighted “individual empowerment” – driven by greater access to technology, education and healthcare – as the most important trend. While we have become increasingly accustomed to how this dynamic plays out from the bottom up, it is no less potent at the top end of society, where such empowerment translates to enhanced influence and social impact.

Bill Gates is the epitome of the highly-empowered individuals highlighted by the NIC. If the purchase of CPPIB’s US farmland had been at least partly premised on philanthropic motives, that too might be a strategy his (admittedly few) peers are likely to take note of.

This week, a spokesman for Bill and Melinda Gates Investments and Cascade Investments, an asset management firm owned by Gates, told us that any farmland investments those entities make are entirely unconnected to Mr. Gates’ philanthropy ventures. Still, the fact that so many professionals were left scratching their heads in the immediate aftermath CPPIB’s November announcement suggests reasons for acquiring farmland may not be as one-dimensional as they used to be.

It also makes it hard for market observers to draw appropriate lessons, both on how farmland can mature as an asset class and how it can help further broader motives. Heightened sensitivities surrounding farmland constitute a risk that’s quite unique in the world of alternatives; that feeds temptations of secrecy. But we think the asset class would instead benefit more from greater transparency.

Write to the author at chris.j@peimedia.com