Macquarie’s Hornibrook talks track record

Macquarie Agricultural Funds Management’s head Tim Hornibrook discusses the development of the agri-investment market and the importance of developing a track record.

How has demand for agriculture assets changed in the past few years?

I think the whole economic crisis provided people with the imperative to start looking outside the normal mix of assets for new sources of returns that would be uncorrelated to traditional assets.

There has definitely been a pickup in actual investment, albeit coming off a low base so it is not meaningful yet. The majority of interested investors are still sitting on the side-lines and will continue to do so until asset managers can demonstrate a track record in the asset class.

How long do you think this will take and what does a track record need to look like?

As a comparison – private equity first started to appear as an asset class in the 1970’s but really didn’t start to gain broader acceptance until the early to mid-2000s. In agri I think there are a handful of managers out there that are starting to build a track record, but the sector is still a few years away from a track record that will be accepted more broadly by institutional investors.

It definitely helps if you’ve managed more than one fund. Showing divestments also will assist because at this stage in the life cycle of the asset class, exits are mostly conceptional given most managers are relatively new to the sector.

How does the issue of asset class classification impact demand?

It is always easier to adopt a new idea when it fits neatly into an existing box. The ‘real asset’ bucket is a more recent creation that doesn’t feature in every institutional portfolio. Without a real assets sleeve investors will need to look at the asset manager’s strategy. Buy and lease investments are closer to real estate, whereas own and operate assets have elements of real estate, private equity, and natural resources or commodities. The investors in our Pastoral Fund which closed in 2011 tended not to have specific allocations to meet, but were looking for ideas that worked relative to the existing investments in their portfolios. Those investors would definitely be recognised as early adopters of new investment ideas.

Why have so few institutions committed to the asset class yet?

When an institution it trying to educate itself on a sector, anything that might seem unusual can be a reason not to go ahead, this includes ownership regulations, politics and potential reputation risk. But these are apparent in all asset classes within a portfolio, it’s a matter of understanding them in the context of each particularly asset class and jurisdiction. In mining for example, in Canada you cannot be a majority owner but foreign mining companies still invested there because the opportunity was attractive and they developed structures that gave with exposure. Understandably, when going into a new asset class investors want to avoid ‘red flags’. However, the supply / demand imbalance that exists in agriculture and the fact the sector needs to attract outside sources of capital to invest in productivity initiatives, combined with it being an under-invested asset class from an institutional stand-point, means agriculture is an attractive investment opportunity.

Agriculture fund offerings have been around for a few years with limited success – what’s changed?

It’s true that some funds have come and gone over the past few years. I think some investment managers got caught on the idea without really understanding what was required to manage assets in the sector or how difficult it would be to raise money for a new asset class. But thanks to ongoing education, there are a large number of investors that now have a better understanding of the sector, the associated risk and how those risks are managed, and the management firms who have endured are starting to build track records.