The opportunity for funds of funds

As the diversity of agri funds grows, and the credibility of their management improves, there is an opportunity for a thriving fund of funds market to mobilise institutional investors.

Nearly every day I come across a new agri fund or investment opportunity offering something slightly different to the one before it. Whether it’s dairy farming in Australia, crop farms in Africa or coconuts in Brazil, there are unarguably many different ways to invest into agricultural land.

The wealth of different sector-specific agri funds on the market at the moment, and the inevitable supply of secondary agri investments, means there will be an attractive market for funds of funds to launch in the asset class.

Louisa Burwood-Taylor, Editor, Agri Investor
Louisa Burwood-Taylor, Editor, Agri Investor

And this is not only on the supply side – for many institutions that are unable or unwilling to develop an agri investment team in-house, the diversified play that a fund of funds would provide could be very appealing.

This week Agri Investor reported on the launch of Liquid Investments’ coconut and neem fund in Brazil. The fund is focusing on attracting family offices and high net worth individuals first, as many funds are, because these investors can be more nimble in their investment decisions and are more willing to take niche bets.

Institutional investors of the public pension ilk have many more boxes to tick however, and investing into such a specific play would be too risky unless they could pursue other sector-specific funds in their portfolio. But to develop an agri portfolio in-house requires experience and knowledge of the asset class. For many institutions it is too soon to go down this road – and some remain wary after having made lacklustre timber investments in years past.

A fund of funds makes the investment proposition much more a question of analysing the management firm rather than the agricultural product. And this is more familiar territory for many CIOs and their advisors.

“It is a bet on the selection process,” an investment banker told me this week. Rather than taking a specific view on coconuts you are taking a macro view of demand and supply fundamentals in agri, population growth, consumption trends and so on. “It’s a much easier approach,” he added.

Some of the more sophisticated investors will prefer to invest more directly, loathe to pay another layer of fees that a fund of funds will imply, a US placement agent told me. But for first-time institutions it’s a great place to start.

Insight Investment now runs a $100 million-plus globally diversified agri fund – another good option for first-time investors – but it started its agri life with a fund of funds that it launched marketing for a week before Lehman Brothers collapsed. This event allowed the firm to change tack as it had already come across problems in finding suitable funds – a common theme of conversations has been the dearth of “institutionally credible funds”, as the placement agent called them.

Until just recently many agriculture funds were managed by ex-bankers with no agriculture experience, trying to get in on the latest trend and charging high fees for the privilege, which has been partly responsible for the asset class’s stuttered existence.

But the agri fund market is becoming much more realistic. In most cases a finance professional is partnering with a farming professional and this marriage, or “common mistrust” to again use the placement agent’s words, is attractive.

A thriving fund of funds market will also create a bustling secondaries market that will in turn improve the chances of primary funds getting the exit that many investors worry about. The opportunity to buy a portfolio of developed agri assets will also mitigate the J-curve effect implicit in many greenfield, or transformative, agri strategies.

All in all, the development of an agri fund of funds market will be no bad thing and could perhaps help mobilise the asset class faster.