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LPs: How to make a start in agri

Venturing into new asset classes can be daunting for the wisest investor, but a global and diversified model can help reduce the risk, writes Peter Roney, CIO of Aqueduct Investment Partners.

 

From recurrent yield to strong macro fundamentals, the case for investing in agriculture is well known. For LPs, global exposure to the asset class can bring higher real income compared with government bonds, boost risk-adjusted net returns within an 8-15 percent range and lower correlations with other asset classes – while bolstering global populations’ food and water supplies.

The current impediments to investment

Given these benefits, one could reasonably expect virtually all institutional portfolios to have an allocation to global agriculture. However, the fact is most have no exposure at all.

The key reasons for this are:

  • Reliable track records for agriculture investment vehicles are few and far between;
  • The small number of current investors tend, in the main, to be very large with experienced internal teams – outside of the scope and capability of most investing institutions;
  • The vast majority of current agriculture investment vehicles are relatively small, highly specialized and restricted to one or two geographical areas, involving high specific risk and difficult for most institutions to ‘fit’ into their portfolios;
  • Single-digit, and often illiquid, farmland returns are a turn-off for many institutions;
  • Agriculture is a complicated value chain so that for most institutions, the task of investing is too challenging and seemingly insufficiently rewarding to contemplate;
  • Investment consultants have been slow to consider agriculture as a component of a natural resources/real assets portfolios, and as such have not championed its cause to their clients.

The new model

The need for agriculture investment is too critical to ignore, and the benefits for institutions are too great to ‘throw in the towel.’ There is a way for all institutions to get involved, but it requires a new model of agriculture investment from that which we have seen to date.

The key elements of this model should include:

  1. Global perspective – agriculture commodities are produced locally, but are very often traded and priced globally. Trade and prices are materially impacted by competitive advantages of global production and distribution and this should be reflected in the investment portfolio, which few current investment vehicles offer;
  2. Portfolio construction skill – a portfolio of global agriculture exposures is preferred both to drive returns and manage risk. Investing in a single geography or just a part of the agriculture value chain – the typical vehicle – is a high specific risk strategy;
  3. In-depth due diligence capability – the agriculture portfolio manager needs to be able to evaluate the capability of the individual investment vehicles and their underlying agriculture operators in order to deliver the promised risk-adjusted returns. Most of the current vehicles do this for specific sectors or geographies, but not globally or fully across the agriculture value chain;
  4. Open architecture – agriculture is global and local. No single operator can be a top-quartile performer in all geographies and in all parts of the agriculture value chain. The portfolio should include different world-class operators in multiple vehicles exposed to different geographies and verticals of the land-based, agribusiness and agriculture technology sectors of the value chain. This is a key deficiency with nearly all the investment vehicles currently in the marketplace;
  5. Scale and scalability – the investment opportunity should be large enough to ‘move the dial,’ and, very importantly, should have the potential to offer further investment opportunities. Few current offerings have this capability;
  6. Diversified and diversifying impact – portfolio diversification should take place in a number of dimensions: enduring themes; geography; verticals – land-based, agribusiness and agriculture technology; vehicles – private equity, co-investments and secondary investments; diversifying in relation to any existing real assets allocation and the overall institutional portfolio;
  7. Competitive investment performance – ideally mid-teen net IRRs are required to compete with other illiquid asset classes in the institutional portfolio given that most agriculture investment opportunities sit within a private equity structure;
  8. Institutional Quality Governance – essential to meet the fiduciary responsibility of institutional trustees and to satisfy their investment consultants.

A meaningful first step

This article has tried to summarize the benefits to investors in agriculture, why so few have made the leap to date and, most importantly, the practical things they should look to incorporate in their investments to ally their concerns.

Doing something ‘new’ can be exciting but also daunting. However, progress invariably involves a willingness to consider alternative perspectives. The ultimate objective is to see global agriculture as a core component of every institutional portfolio, not for the sake of agriculture investment managers, but for the needs of the growing global population and the real benefits that can accrue to institutional investors.

Hopefully this will be a catalyst for further consideration and debate and will help all institutions to make a meaningful start to invest in agriculture. To this end, please let us have your reactions and ideas.