The Rhode Island State Investment Commission has approved a $25 million commitment to a new farmland fund being raised by Homestead Capital, a private investment firm headquartered in San Francisco.
The pledge will come from the $8.3 billion pension’s infrastructure allocation, Rhode Island general treasurer director of communications Evan England told Agri Investor. That contrasts with the institution’s $50 million commitment to Paine Schwartz Partners’ $1.2 billion Food Chain Fund V earlier this year, made from an allocation to developed-world investments.
“We were looking to diversify within our 2 percent allocation to private infrastructure, farmland being a new component for us,” England said. “We were in four or five funds, with two or three managers, for infrastructure that was all energy-sector correlated. So we wanted to spread the risk, and farmland was that opportunity.”
Homestead Capital USA Farmland Fund III will have a 15 percent carry over a 6 percent preferred return, with payments delivered on a whole-fund, European-style waterfall, according to a presentation delivered at Rhode Island’s investment commission.
Structured as a 15-year fund with two possible one-year extensions, the vehicle has a target of between $600 million and $700 million. It carries a 1.5 percent management fee during the investment period and during every year unreturned capital is invested, budgeted, reserved or committed for investments, according to the presentation.
Homestead characterized its investment strategy as a “private equity” approach to value creation that covers capital investments such as improvements to irrigation systems and utilization of precision ag equipment. However, the strategy also targets lower-risk, cash-rent farms in the Midwest. The firm wrote that it will seek to back farmers looking to expand to neighboring parcels in an effort to invest in assets that can benefit from economies of scale.
In addition to capitalizing on its understanding of crop insurance and government-subsidy programs, Homestead wrote that the fund will also seek income through wetland mitigation banking, land conversion and efficient crop rotations.
“Most soils where row crops are produced are capable of growing various crop types,” Homestead explained. “This also presents good buying opportunities where there are farms that are not taking full advantage of the capability of the farm because they don’t have the expertise or knowledge of other crops.”
Farming and farm management on investments from the vehicle are to be carried out by Sauer Orchards and Silver K Farms, according to the presentation.
Crop conversion and acquisitive neighbors
To demonstrate its strategy, the presentation delivered to Rhode Island detailed two of Homestead’s existing transactions.
The first was a 389.5-acre property currently devoted to alfalfa, corn and wheat in central Washington that Homestead purchased in late 2016. The firm intends to convert the farm, in stages, to apple production while it continues to lease portions of the property to row-crop farmers.
“In fact, White Alpha II [the property] is one of the few remaining large tracts in the area that hasn’t yet been converted to an orchard,” wrote Homestead.
The second transaction was an Illinois corn and soybean farm consisting of one parcel of 246 acres and two small tracts of 120 acres each that was purchased in May 2016. Though the firm initially intended to sell the tracts separately, a neighboring farmer purchased the two smaller parcels at a price that resulted in a 15.5 percent total return on that acreage, according to Homestead.
“The seller was more concerned about speed and ease of the transaction versus price maximization. This is consistent with our experience that farmers are often willing to pay a premium for neighboring parcels, given the associated scale benefits and how infrequently such parcels come up for sale.”
Homestead’s Fund I, which held a first close in April 2014 and closed on $173 million, had achieved a 0.59 percent net fund IRR as of June through acquiring 19,181 acres across 11 states, according to the presentation. That vehicle’s successor fund, which launched in August 2016 and closed on $401.5 million, had achieved a net fund IRR of -2.25 percent as of June, acquiring 21,513 acres located in eight states.
A Homestead spokesman declined to comment further on the new fund and strategy.