Open Prairie, an Illinois-headquartered private equity firm, has reached a $55 million first close on a food- and agriculture-focused vehicle seeking $100 million.
Additional closings are expected in the first half of 2018 for the Open Prairie Rural Opportunity Fund, which will make both debt and equity investments in late-stage companies across the grain and protein value chains. Open Prairie wrote that the sectors it will look to invest in through the vehicle include crop protection, ingredients, processing, storage, data management and logistics.
“There have been a lot of fund managers that have put money into agtech and they don’t understand the channels”
Jim Schultz, Open Prairie
The firm said lead investors into the fund include institutions within the Farm Credit System, commercial and community banks, family offices and farm organizations.
Open Prairie founder and managing partner Jim Schultz told Agri Investor that about 15 percent of the fund’s capital thus far has been provided by family offices with connections to rural communities. Schultz said fundraising began in the third quarter of 2016 and that the Rural Opportunities Fund targets a 15 percent IRR.
Following the suggestion of its partnering ag banks, Schultz said, the firm has applied for and received USDA approval to become a Rural Business Investment Company.
He explained that the decision to employ both debt and equity in investments from the Rural Opportunity Fund came after feedback from company executives reluctant to give up much equity despite significant capital needs. In instances when the firm chooses to invest in the form of mezzanine debt, Schultz said, Open Prairie will offer loans with interest rates of between 10 and 15 percent, with working capital and other covenants designed to mimic those offered by existing creditors.
Founded in 1997, Open Prairie has combined assets of $190 million including a $40 million fund devoted to early-stage companies across sectors and a $30 million vehicle that has invested in seven early-stage companies in ag tech and medical technology.
Though the Rural Opportunity Fund will consider branded food opportunities, Schultz said, its focus on upstream protein and grain opportunities comes after a determination that agtech has become “a little bit over-invested” and that the market has begun to mirror conditions in the tech market of the late 1990s.
Shultz highlighted a 437 percent increase in agtech investment when comparing fundraising totals for 2011 through 2013 with capital invested in the sub-sector between 2014 and 2016. That increase outpaced the 391 percent jump seen in tech investment when comparing 1995 through 1997 and 1998 through 2000, according to Schultz. This suggests a market correction similar to that which ended the dotcom bubble in March 2000 could be in the offing for agtech, he said.
“There have been a lot of fund managers that have put money into agtech and they don’t understand the channels, nor do they understand what it takes to build these businesses. A lot of money was made after the dotcom bubble crashed in March 2000. It took a couple of years to sort itself out and we think a similar phenomenon will happen in the agtech sector.”
An even earlier experience has influenced Open Prairie’s move to sharpen its focus on agriculture, according to Schultz, who said he invested successfully in farmland immediately following the market crash of the late 1980s.
“In many ways, I think today’s ag economy is very similar [to the late 1980s],” Schultz said. “With the consolidation happening, and with the four years of consecutive break-even or loss years for ag production, I think it’s a contrarian call that we’re in the midst of.”