The $21 billion New Mexico State Investment Council (NMSIC) is a sovereign wealth fund established to help support education in the state of New Mexico. Below, NMSIC chief investment officer Vince Smith and analyst Melanie Dubin share with Agri Investor their views on the evolution of timber and ag investment vehicles, sustainability and more.
How have the timber opportunities presented to you evolved in recent years?
VS: When I first started investing in timber, we felt the best option was a separate account. Now I would say our best option is a long-term fund and, recently we are seeing an increase in the duration of some timber funds. Historically, a closed-end timber fund might run for 10 years, but we have seen some movement towards open-ended timber funds that would be theoretically perpetual. We definitely would like to see more of that to get long-term exposure.
Agricultural investments other than timber are new for NMSIC. How does that impact the selection process?
VS: Having good access to the top people in the manager’s organization and a good partnership where they can transfer knowledge to us is very important in this asset class. Generally in our newer investments, we need good partners to help us come up the curve because it takes a while to educate not only our investment staff but also our council members.
MD: Specifically, we look for education on underwriting for this particular asset class, because it is so different than our others.
How do you judge agricultural funds without a long history?
VS: It needs to be recognized that these are lower-risk, physical assets, in an industry that’s not particularly technology-driven. Comparing a permanent crop investment to a small-cap microprocessor company, the latter has a great deal of additional risk. We’re not getting a new technology cycle in permanent crops every three or four years like we do in the microprocessor industry. That leads us to have greater confidence in newer funds.
MD: Also, all of the ag investments we’ve made have been supported by really strong, long-dated platforms. So, we’re not going with small firms who have never done investment management before. Pair that with the teams they pick, and you have investment expertise from the platform and agricultural expertise from the management they bring in, some of whom have been working in ag for 30 years, so that builds our confidence.
Is sustainability an important consideration when determining which agriculture fund to invest with? If so, how do you look to measure that sustainability?
VS: We see sustainability as a key to success and our managers do, too. Measuring it is fund by fund. If you talk to ACM, for example, they’ll talk about how they think about sustainability in terms of water, because of where their assets are located. Brookfield would have a different view of what sustainable means in an area like Brazil, which has less of a water challenge.
MD: With ag, even in the US, labor relations are a big factor. We have spent a lot of time on the phone with people connected with our ag investments to make sure there is no violation of rules or best practices and to make sure there is a good relationship between the workers and the farm operators.
For the Brazil-focused investments, was ensuring the environmental, social and corporate governance aspects (ESG) particularly important?
MD: Yes, we spent time examining the land’s title due diligence and how they do unannounced audits to make sure labor conditions are appropriate. We’ve gotten some of our managers in Brazil to document that process more stringently so that we have written rules rather than just best practices. With regard to investments outside of the US in particular, ESG is extremely important.