An opening for open-ended funds

Novel asset classes must start somewhere, and often they start with private equity-like structures. Agriculture is no exception: most managers offer closed-ended funds, or are seeking to raise one. Over the last couple of weeks, however, two firms went on the record about launching open-ended vehicles. Coincidence or something more?

Yesterday, we reported that Milltrust was mulling an open-ended fund targeting Latin America, following on from buy-and-lease farmland products focused on Australasia. Griff Williams and Alexander Kalis, two senior execs at the firm, told us the structure allowed them to incorporate a development component in a strategy largely dedicated to generating income – something harder to do when assets have a sell-by date.

Last week, it also emerged that London-based Insight Investment had hired Detlef Schoen, an ag investment veteran, to help it launch an open-ended fund targeting European institutions. The move aims to mimic a structure long used in real estate; it follows a similar endeavor by Fiera Comox, which reached a C$200 million ($156 million; €132 million) first close on its open-ended fund in August. Schoen is a firm believer in the approach: “An open-ended structure with a five-year lockup and a liquidity window every two years thereafter is more attractive to investors,” he told us.

If he is right, however, why are open-ended structures becoming popular only now? First, a qualifier: open-ended funds are not actually rare. A manager search recently conducted by bfinance, the UK-based advisory firm, found they represented a little more than 20 percent of the agri universe. “It is a bigger number than what most people would think,” says senior associate Guy Hopgood.

Still, he reckons constraints on liquidity have so far held the structure back. Compared with infrastructure or real estate, he argues, agriculture typically displays less yield security: there might be years where asset owners suffer from a bad crop or can’t sell their trees. How is a manager to meet investor redemptions during such lean periods?

“They won’t want to have to sell their assets and then repurchase in what could be a market which is more richly priced”
Guy Hopgood, bfinance

This problem has been particularly prevalent because the asset class has not yet matured. “In infrastructure and real estate, you have such a deep investor base you can typically pay redemptions from a queue of investors waiting to come into the fund or the underlying contracted cashflows,” Hopgood says. “Agriculture is not at the same level of institutionalization yet. How do you manage your payback if too few investors are willing to allocate or you cannot guarantee the yield?”

As agriculture got started, having captive capital made life easier for most managers. But there were already signs some institutional investors favored more flexible tenures. It did not take long for managers to offer separate accounts, which rarely have a fixed term. And many more vehicles are now moving from a “pure” closed-ended model to funds that can be extended at the end of their lives. “Most agriculture funds are longer-term than closed-ended real estate funds – 10-15 years rather than 7-9 years – and a number of these vehicles have the ability to become longer-dated, or even evergreen over time,” Hopgood notes.

As the asset class institutionalizes, the move toward more flexible tenures makes sense. That’s especially true of timberland, where the lifecycle of trees spans decades. But it also applies to agri per se, where the real-assets features of core investments mean LPs will often want to hold on to them. “They won’t want to have to sell their assets and then repurchase in what could be a market which is more richly priced and offering lower yields.”

Investors active in other corners of the real assets universe will be familiar with such reasoning. In future, core agriculture is likely to look much more like infrastructure than private equity.

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