NMSIC advised to move away from ag funds, focus on co-investments

Townsend is calling on the endowment – an LP in ag vehicles run by Brookfield, Agriculture Capital and others – to turn its attention to 'unique situations' such as secondaries.

Additions to New Mexico State Investment Council’s existing agriculture and timber investments are more likely to come in the form of secondaries or co-investments than additional fund commitments, according to meeting materials.

The $24.3 billion endowment’s ag and forestry holdings are housed within a real-return portfolio designed to provide inflation protection and extra return through allocations to energy, infrastructure and other tangible assets.

The institution is today considering a set of changes to the policy that governs that portfolio recommended by its real-return portfolio advisor, the Townsend Group.

According to meeting materials posted on NMSIC’s website, Townsend advised a 5 percent adjustment to the balance between the “real” and “financial” assets held within the real-return portfolio. The firm recommended that NMSIC lower the interim target for its real-return financial assets to 20 percent from 25 percent, and that the real asset portion’s target allocation be raised from 75 to 80 percent.

In addition to a refinement of selection criteria for eligible assets, Townsend also suggested adjustments to the allocations guiding specific asset categories within the real asset portion of NMSIC’s real-return portfolio. Whereas current policy devotes between 0 and 40 percent to energy, infrastructure and timber evenly, the recommendations call for the target range on energy and infrastructure to be widened to between 0 and 50 percent, at the expense of timber’s range, which would be capped at 20 percent.

While the energy and infrastructure sub-sectors of the real-return portfolio has produced 13.7 percent and 15.3 percent returns since inception, according to Townsend, agriculture and timber have lagged throughout.

Echoing comments NMSIC chief investment officer Vince Smith (pictured) made to sister publication Infrastructure Investor in August, Townsend suggested a near-term focus on infrastructure commitments, highlighting that limited opportunities currently exist in the agriculture and timber markets. The advisor said NMSIC should continue to monitor the agriculture market and “tactically seek new investment opportunities where embedded value may exist.”

“The investible opportunity sets of both energy and infrastructure dwarf the investible opportunity sets for agriculture and timberland,” Townsend said.  “Given limited new capital to invest in these sectors, focus more on evaluating unique situations (co-investments, secondary sales, etc.) as opportunities are presented and less on fund investment opportunities.”

The materials show that as at the end of September, NMSIC’s $375 million in ag investments had a net asset value of $147.6 million, noting that the J-Curve effect had adversely impacted returns on the “relatively young” portfolio.

Townsend also highlighted the J-Curve effect in a note coming with its January 2017 recommendation that NMSIC make a $50 million commitment to Agriculture Capital’s Fund II, which surpassed an initial target of $400 million before closing on $548 million in October.

NMSIC typically makes fund commitments of between $50 million and $100 million. In addition to ACFII, these have included a $50 million investment in NGP Agribusiness Follow-on Fund in 2014 as well as commitments of $75 million to Brookfield Brazil Agriculture Fund II and $200 million to TIAA-CREF Global Agriculture II in 2015.